In 2023, business is evolving. Remote work is on the rise, compared to the pre-pandemic times, and thanks to various macroeconomic factors, many industries aren’t offering the competitive wages or benefits they used to. This has led to a reevaluation of individual attitudes towards work by millennials and Gen Z, who have largely replaced the traditional 9-to-5 with freelancing and the gig economy. 

This shift may be understandable, but it comes with its own issues. For one, business models based on remote freelancing often don’t offer much room for employees to move up, and they still struggle with exploitation and under-compensation. Fortunately, a new type of organizational structure is emerging in the form of the decentralized autonomous organization, or DAO. When built correctly with the company’s needs in mind, DAOs can revolutionize how businesses are run to improve the lives of all employees, maximize productivity and returns, and keep bad management — such as what has been happening to Twitter — in check.

DAOs for business governance

Traditional business models offer a hierarchy of authority. Typically, the CEO holds the highest position, alongside other top executives and sometimes a board of directors. The CEO is primarily responsible for making major decisions, and despite taking input from others, only a few dozen individuals hold the power to influence potentially thousands or even millions of others, depending on the scale of the business.

DAOs decentralize this hierarchy. In the DAO model, every member is a co-owner and employee simultaneously. All participants act as decision-makers and potential contributors, and their investment in the organization generally determines their voting weight, usually determined by how many “governance tokens” they hold. 

Known as “tokenized governance,” this approach offers various advantages to businesses. One of the most noteworthy is its potential to entice and retain essential personnel, external collaborators, partners and investors. By enabling stakeholders to have a voice in the business’s trajectory, tokenized governance fosters a feeling of ownership and responsibility that can inspire stakeholders to dedicate their time, energy, and assets to the enterprise. This, in turn, can help to retain vital employees who may be more inclined to stay with an organization that recognizes their contributions and offers them a stake in the company’s prosperity.

Indeed it’s been shown that workplaces where employees feel they are being heard and treated fairly perform 26% better and have 27% higher retention than those in which they do not.

Tokenized governance also has the potential to enhance the efficiency of decision-making. By distributing decision-making power across stakeholders, tokenized governance can prevent crucial business decisions from being influenced by a single, centralized authority.

Decentralized research, product development, marketing and fundraising are all possible through DAOs, bringing more equity in both control and remuneration for everyone within the organization. Indeed, employee compensation is also proportional to stake in the operation. Wages aren’t determined by the whims of the company heads but rather by the guidelines of the entire DAO, which are defined and voted on by all members.

Another key benefit that DAOs can bring to businesses is the fact that virtually anyone from anywhere on the planet can participate in them. All a potential member needs is a working internet connection. This has important implications for expanding the potential workforce and promoting diversity. Studies show that ethnically diverse organizations are 36% more likely to perform better, on average, than less diverse counterparts. 

Lastly, DAOs offer a high degree of transparency, which breeds trust. The importance of trust for employees, customers and investors cannot be understated, as it defines the relationship these entities have with the company.

There is no better modern example of this than what has been unfolding with social media giant Twitter. After Elon Musk famously bought the company in late 2022, Twitter has seen a long list of technical issues, mass layoffs and confusing policy changes that all seem to stem from the whims of its new owner. Meanwhile, the company appears to have completely stopped releasing transparency reports as of January, meaning the view into this massive service has become exceedingly opaque from the outside. 

Alternatively, if Twitter were being run by a DAO, these issues couldn’t really exist. Even if Elon Musk were the majority owner, the voices of everyone else in the company (and potentially the user base) would still hold weight over decision-making. It couldn’t be a one-person show. Changes to the code base, employee lineup and service policy would all need to be voted on by the whole, and the entire system could be built to be wholly auditable and transparent.

Even within Web3, projects are often not governed in a truly decentralized manner. For example, recently The Arbitrum Foundation began selling their ARB tokens even before the governance community of token holders had finalized the organization’s nearly US$1 billion budget. This caused widespread backlash in the community and saw the price of ARB fall 9% in the following 24 hours. If this decision had been made in a decentralized fashion via a DAO, it would have been impossible to do anything without community approval.

Current reality of DAOs

While DAOs offer exciting possibilities for both startups and existing brands, some kinks still need to be worked out. For one, the type of DAO structure so far described is called “flat.” Even before DAOs, companies have tried building architecture that did away with traditional hierarchy, often with poor results. Major names like Medium and Zappos have had publicly documented issues and have had to abandon their flat business models outright. 

This is due to the fact that in such a model, there are many elements of running a business that simply doesn’t get done. Who manages employee benefits? Who oversees key performance indicators and enforces that they are met? The list goes on. While everyone is free to make proposals and vote on these issues, it isn’t specifically anyone’s assigned job, and so many things go undone.

When applied to DAOs, there are also problems with how power dynamics play out in practice. If voting is simply weighted by the number of governance tokens held, then majorities or alliances can still form that will effectively control the project and silence any opposition. If the DAO offers the ability for investors to get more tokens, then those with deeper pockets will invariably hold the most sway.

But those challenges could be overcome through better DAO design.

Making DAOs work

DAOs can be designed with a wide array of roles and incentives built in, emulating the best working elements of traditional companies. Instead of asset-weighted voting, influence can be assigned through meritocracy and past contributions. Fortunately, there are already some examples like this being developed. OpenChat is one such application, as it is a fully decentralized chat app governed by the users themselves. Voting power is based on a more complex system that accounts for not only assets held but how long they have been staked. This gives every member a real incentive to participate without simply putting all the power into the hands of the wealthiest. 

Implementing such an approach stands to be a powerful tool for transforming business across almost all industries. The potential that DAOs offer has even been noted and explored by the World Economic Forum, which agrees that this technology stands to overhaul how collaboration is going to work in the future of the digital business. DAOs may even pose a threat to existing large corporations that are slow to change. Customers may quickly pivot to companies run by corporate models that focus on their community, not their CEOs and shareholders. The key to unlocking all of this will be to build them properly and balance equity, responsibility, and compensation. 

The bottom line is that some form of decentralized governance is the future of business. The potential benefits for both employees and the company as a whole are too great to ignore. While there will need to be meticulous thought put into the structure of these organizations, once accounted for, this model could become the standard in many industries. The companies that embrace this change could be the leaders of the next generation of services that define our world, and the ones that don’t may see their workforce begin to abandon ship.