photo: 3D rendering of the homonymous Dao, the single edged Chinese sword.

DAOs are currently the hottest phenomenon of the web3 world. Many participants don’t realize they are the latest wave of the larger self-organization movement.

Author’s note: Self-Organization and Self-Management are two very similar terms that often get swapped around. Self-Organization could be seen as more about forming and Self-Management more about operations going forward after formation.

DAO Defined

DAO stands for "Decentralized Autonomous Organization".

Decentralized: Control and decision-making power held by a distributed network of individuals or entities.

Autonomous: Having the right or power of self-government. Undertaken or carried on without outside control.

Organization: An administrative and functional structure (such as a business or a political party)

So what are they really?

The simplest description I’ve heard is “a group of people who share a bank account (which is actually a crypto wallet).”  You might expand that to “a group of people who share a bank account and a trusted voting machine.” You can reasonably add “who are aligned toward a shared purpose.”

DAO: A group of people who share a bank account and a trusted voting mechanism who are aligned toward a shared purpose.

From that starting point, all sorts of organizational magic is possible but these two elements (bank account & voting machine) are the bare essentials of a DAO.

DAOs organize to do all kinds of things

They build software, create art, make video games, try to buy the US Constitution, support other DAOs and even brew beer. They use blockchain, smart contracts and tokens as tools to help people organize around a purpose.

(side note: if the idea of tokens, cryptocurrencies or NFTs confuse you, think about them like markers and symbols you might use in a board game like Monopoly. They help you track a shared state in a shared conceptual space - a useful concept in both gaming and business.)

DAOs are kind of like a high-tech traffic light system placed at the intersection of well trodden self-organization avenues like “purpose-driven organizations”, “self-managed organizations” and “workplace democracies”

DAO founders and contributors are bringing the next generation’s attention, enthusiasm and most notably technical innovation and technical acumen into the wide world of self-organization.

DAO vs DAO-tech

While getting my head around DAOs, I found it useful to distinguish the people from the technical systems they are using to self-organize.

To do that I'll use the term DAO-tech to describe the bundle of web3 tools that DAOs are built around.

DAO-tech helps a team implement and keep track of many processes which are typically concealed behind the veil of corporate authority. Account balances, deposit and withdrawal history, contributor compensation distributions, member share ledgers and proposal and voting history are all handled by smart contracts with a history accessible on the blockchain.

DAO-tech does this by allowing individual members to submit proposals to the DAO member body to be voted upon. It provides the voting mechanism (of which there are many options) to approve or decline a proposal.

A proposal can (but doesn’t have to) include code to initiate token allocations, member additions or removals or smart contract function executions that will happen automatically if the proposal passes. A proposal can also be a simple signaling proposal that doesn’t result in any code execution.

A DAO, on the other hand, is a group of people using DAO-tech to help them self-organize and self-manage. Since every group is different it's hard to say much more about the people side of DAOs in general. They usually have a self-organized feel that eschews traditional hierarchy, are usually anti-oligarchy and the culture is usually very open and encouraging of new ideas, but these are not givens.

Sometimes people use the term DAO (group of people) to mean DAO-tech (cluster of smart contracts). I’ll be conflating the two at times throughout this article for convenience, using DAO to mean DAO + DAO-tech, and you’ll often encounter DAO used in this way in common parlance.

The transparency, automation and permanency granted by the blockchain are key.

These systems allow threads of trust to be woven into an organization’s foundation by systematizing many aspects of the traditionally sticky areas of governance and financial oversight.

DAOs are not Magical Automated Business Machines

Autonomous means “having the freedom to govern itself or control its own affairs.”  This promise is being kept through an automated system that precludes a centralized power structure.

Complete automation may be a dream for some DAOs, but what we ended up with is a set of tools and concepts superbly suited to help humans better organize and collaborate.

While the smart-contract technology behind DAOs gets most of the accolades, they still have a very thick human layer in their technical stack. In a DAO, instead of humans organizing around traditional legal employment contracts or contractual service agreements you have digital proposals, smart contracts and token governance rulesets.

These mechanisms are not only largely automated, but they exist on the blockchain, so they are transparent and visible to anybody. Approved proposals distribute funds, add or remove members, execute code or simply signal support for an initiative that may be funded and executed later.

A DAO could conceivably be configured such that a centralized power structure emerges anyway (a danger heightened by poorly configured quorum voting), but this would be considered a form of “capture.” Capture can be subtle and does require some vigilance to avoid.

The anticapture conversation starts there.

Given proper configuration, sound founding principles and processes, and a group of culturally compatible people aligned on a purpose - the DAO movement begins to look like a tech-enabled offshoot of the more mature self-organization and self-management movement.

Where do DAOs sit within Self-Management?

You've probably encountered the realm of self-managed organizations already.

Self-Organization and Self-Management are umbrella terms that cover many related concepts. These include self-organization in nature, teal organizations (see Frederic Laloux’s 2014 groundbreaking book, Reinventing Organizations), game-b, post-bureaucratic organizations, organizational design, flat orgs, platform cooperativism, structural benevolence, purpose-driven orgs, humanistic management and organizational democracy.

There are various social technologies and software tools that support this realm like Holacracy (and the corresponding Glassfrog web tool), sociocracy, Morningstar's Colleague Letters of Understanding (CLOU), Quaker business practices, the slicing pie dynamic equity model, co-op ownership structures and now DAO tools like DAOhaus, DAOstack, Aragon, Orca Protocol and many more.

Methodologies like Six Sigma, Lean Startup, Agile and Scrum have a place in this conversation because of their contributions to the realm of project management. Skillful project management is perhaps the most important factor determining the success of any product-centered organization, especially self-managed organizations.

Studying these domains can give DAOists fundamental building blocks for making better decisions and forming more cohesive, adaptable and reliable teams.

I go into more detail on some of these below.

Self-Managed DAOs

Even though DAOs are automating some of the most tricky and sticky realms of organizational management (governance and finance), they still face most of the challenges that a typical self-managed organization will face (how do we get work done?) and may find themselves struggling to succeed beyond a certain organization size when consensus becomes infeasible.

DAO-tech does not provide a comprehensive self-management system. The design of DAO precludes an automatic oligarchy from forming like with traditional ownership structures, but it’s still pretty open as to what kind of business system a particular DAO will land on. This system has to be chosen, designed or freestyled on the daily internally by the DAOists.

There is a learning curve to both self-management and DAO life, but I think it will be more challenging to persuade a DAO to adopt a new self-management system and the corresponding cultural shifts required than it will be to persuade an existing self-managed work-culture to adopt a new governance/finance technology stack.

I predict some of the most successful DAOs will be self-managed orgs running org-tech like Holacracy that then decide to adopt a DAO-tech.

Deciding How to Make Decisions: Power to the System

One of the biggest decisions to make within a self-managed organization is to decide “how do we make decisions”. It makes sense to delegate decision making authority to a clearly-defined system that all members can engage with transparently.

The following methodologies all establish principles and processes. By operating on principles within clearly defined processes, an organization can become self-managed. Once these are agreed upon by the whole organization work becomes much more efficient.

Oligarchy is giving a small group the power to make decisions and finding many other people who will follow their instructions. Any internal structure or decision making processes are chosen or designed up front by the few in power, who usually retain sole authority to modify them. There are many variations possible here with the best being a subcategory of “benevolent dictatorships” and the worst being authoritarian nightmares. In this atmosphere, permission seeking is common and bold initiative is rare. This is how most modern companies operate. See also: Feudalism

Consensus is trying to get everybody to agree about everything before making a decision. This could include agreeing to grant some people the authority to decide certain things without consensus. Consensus is not nimble.

Pros: Super easy to implement without any documentation. Cons: Wildly inefficient over a certain team size, can lead to power silos, watered down creativity, gridlock, and the most vocal or persuasive individuals deciding most courses of action. Often devolves into oligarchy. See also: Anarchy

Quaker Business Practices are the closest thing you’ll see to “consensus that (usually) works”. Quakers do this by holding meetings where they attempt to discern God’s will. They do this by looking for the “sense of the meeting” which is defined as “God’s way, God’s will, for this group, on this issue, at this time”. This level of spiritual attunement may not be available to most teams and a more structured system may be required. Quakers also have guidelines for the role of human leadership, the role of written minutes and attitudes that should be held by the membership.

Propose and Vote is available if you do not have the spiritual acumen of a Quaker, and provides an incremental yet substantial improvement to consensus-driven decision making. Propose and vote is just like it sounds. Proposals are made and voted upon by the group. Robert’s Rules of Order detail parliamentary procedure for public meetings. These were designed out of necessity by army officer Maryn Robert when he was asked to oversee a public meeting. He described what he saw as “parliamentary anarchy” and his rules of order were his solution and are in use widely today. DAO voting processes can adopt practices from Robert’s Rules of Order, such as requiring a motion to be seconded before a vote or voting with a quorum.

Dynamic Equity is a fluid system for managing ownership of a company. Contributions made over time are rewarded with ownership shares, proportional to the total contributions of individual stakeholders. Companies are traditionally founded with static equity, where the company ownership is divvied up equally between a few people. This can lead to all sorts of problems as the ongoing contributions of those people are rarely consistently equal and can lead to coups, forced buy-out drama, power plays or freeloading or simple resentment. Implementing a dynamic equity system allows ownership to contract and expand dynamically as contributions are made (or not made) through approved channels. The Slicing Pie dynamic equity model is a good example of this kind of model. DAO-tech provides this kind of model automatically.

Cooperative Ownership became popular in the 60s as a model for communities to own businesses, particularly grocery stores. The International Co-Operative Alliance defines a co-op as “an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically controlled enterprise.” Unlike dynamic equity systems where a person’s ownership stake and influence can increase or decrease based on their contributions of time and money, co-ops generally insist that each member-owner of a co-op gets one and only one vote. The idea is that no co-op member is more important than another co-op member. This model may be appropriate for many communities but it is limited by design and struggles to reward investment, usually instead relying on a culture of volunteerism.

DAOs are smart-contract voting systems that support dynamic equity principles. They provide automated processes for a configurable Propose and Vote system. Services like DAOhaus operate like DAO factories that instantiate a DAO with a configurable set of rules such as voting periods, voting methodologies and which chain the contracts live on. When a proposal passes, smart contract function calls can be triggered automatically allowing fund disbursals, member additions or other blockchain and code centered actions.

While this might seem like simply a software-enabled Propose and Vote system, the addition of tailored currencies and the resulting tokenomics bring a whole realm of possibility for incentivisation and fundraising.

Because DAOs live on the blockchain, they come along with immutable record keeping on vote history and fund transfers. This gives a high level of accountability that is not a given with a “paper system”. DAOs also have the option to create subdaos or “minions” and assign them funds, which can then operate like a separate semi-autonomous DAO. This works pretty well most of the time, at least for “grand initiative” style proposals, but is not applicable for behind-the-scenes micro decisions that need to be made each day. Proposals are used generally to delegate power to a smaller group that will then need another, more nimble decision making process to operate day-to-day.

Sociocracy is an organizational system often used for communal living situations and is inspired by Quaker business practice. It adds the concepts of Circles, and subcircles and provides processes for holding meetings. It’s a good upgrade from “just consensus” but still can end up with gridlock when there is a disagreement. Sociocracy values “minority opinions” and takes pains to make sure all opinions are integrated. This is a “consent based” system, which means that major decisions within a circle can’t be made without the consent of everybody in that circle. If a member has an objection, the meeting will strive to integrate each objection. This carries the potential for gridlock which is not feasible for many organizations.

Holacracy is a well-established and branded self-management system (HolacracyOne was founded in 2007) that does not require consensus or even consent to get things done. Instead, it uses a governance system that initially encourages every participant to do anything they feel is aligned with the organization’s purpose

Taking action leads to inevitable tensions which are used as raw material to guide an organization’s governance. Freedom remains the default, but by processing tensions through a clearly defined governance process (defined by the Holacracy constitution), proposals are made, objections are integrated and changes are made based on the maxim “is it safe enough to try?” This leads to organically arising rules and guidelines only as they are needed - a sharp contrast to the typical seek-permission cultures common in oligarchies.

Like sociocracy, Holacracy has channels of expression for “minority voices” but do not allow these voices to stop progress entirely. It distinguishes the “role from the soul” which reminds us that roles are granted with authority rather than individuals, and individuals wield authority only by energizing a role that has it. Freedom can be limited within domains (e.g. not just anybody can update the public website) or opened by policy (e.g. anybody can modify the website if they submit a pull request and it is approved.)

By consistently processing tensions and changing governance based on them, a Holacracy-powered organization takes on an evolutionary tack, making small changes over time, resulting ideally in an organization perfectly suited for the actual present reality of their business climate. This results in nimble, always-working governance, reminiscent of Agile methodology in software development and project management.

Not every team is ready for Holacracy - it takes significant effort and maturity to implement properly - but it does not suffer from the gridlock problem or the up-front design problem. Even if you don’t implement Holacracy, it has many useful distinctions that apply to every organization and is worth studying.

Teal is a term coined by Frederick Laloux’s groundbreaking book “Reinventing Organizations.” Laloux’s is one of several models, most notably Integral Theory and Spiral Dynamics, that color codes human cultural stages of development.

Infrared and red lie at one end representing stages of tribalism and ritualistic practices. This progresses to amber, orange and green where ethnocentricity, traditional hierarchies and meritocracies appear along with civil rights, pluralism and equality. Teal “transcends and includes” these previous stages, allowing a flexible culture that makes use of ritual, hierarchy, meritocracy and pluralism as needed and appropriate without being attached to any particular way of operating.

The “transcend and include” insight is a key takeaway from these bodies of work. These stages of development are not seen as obsolete when a society transcends them. Instead they are included into the next evolution, each stage including and building new systems on top of the progress of the previous stage. A society at the red level whose pinnacle social technology is “ritual” will operate very differently from one who has amber’s values, roles and discipline available to it and still uses ritual to practice and reinforce those values.

Self-management philosophy is often simplified as “beyond hierarchy” or “flat orgs”. But a Teal culture that has transcended and included the previous stages sees that hierarchy and egalitarianism are both valuable tools that can be leveraged to great effect in different contexts.

Because of the broad definition and no specific formal systems or processes, it can be hard to tell if an organization is “doing Teal right.” Self-styled Teal organizations spend a lot of time and energy discussing this very question, but somewhere in this realm is the holy grail of self management - the emergence of “synarchy” and “harmonious rule”.

Of Mice and Manifestos (and Constitutions)

One thing successful self-managed organizations have in common is a set of documents that serve as manifestos or a constitution. This gives the agents within the culture shared principles and procedural rulesets to operate within. This is a huge time saver and provides a basis for healthy conflict. Without documents like these we end up like mice: We are constantly smelling and feeling out the social environment to see if our value assumptions are valid within the shifting social contexts.

Here are some examples:

The Morningstar Colleague Letters of Understanding are an example of a founding document that gives a principled common ground from which to make decisions. Developed within the Morningstar Food Company, these letters had each employee craft a mission statement for their work within the company, define the key activities that support that mission, choose key measures by which their performance could be measured and specify a time commitment and the specific colleagues to whom these commitments were made.

This came along with an organization-wide commitment to a non-coercive environment (you can persuade, but never threaten or coerce someone to do what you want) and integrity (always do what you say you’ll do).

These types of agreement among colleagues, combined with clear processes for governance and financial distribution are key components of a successful self-managed organization.

The Holacracy Constitution v4.1 specifies the processes that must be adopted by all members to practice Holacracy. It provides several key distinctions and a vocabulary to talk about work and decision making. It leaves plenty of room for an organization to decide on its principles in a manifesto of its own.

The DAOhaus Manifesto was created by the core members of the DAOhaus DAO. This is an example of a document that specifies principles, but no processes.

The Manifesto for Agile Software Development and the 12 Principles behind the Agile Manifesto. Most software developers are familiar with Agile processes like sprints and frequent delivery of working software. But did you know all those practices were grounded on a manifesto? It is short and sweet and worth a read. Developers may notice: oligarchy and up-front org design looks a lot like the Waterfall method, and Self-Management systems more resembles Agile.

Why are DAOs taking off?

One major hurdle to achieving self-management bliss is the pain of adopting these systems. Culturally, we are used to hierarchy. It’s familiar if not comfortable. Adopting alternative systems takes time, training and practice.

The adoption challenge leads most organizations to just choose oligarchy. “Who’s in charge around here?”

If you want an alternative you have to choose or design it then you have to study it like you were learning a super-complicated board game and repeat yourself over and over until everybody understands how to behave and make decisions. This requires consensus (see above), and in the end it’s a lot of work and it costs a lot of time and money.

DAO-tech shines because so much is automated enforced by immutable code on the blockchain. Chaincode, unlike humans, is reliable, consistent and persistent to a fault. Using a trusted DAO-tech stack provides a layer of trust and guiderails out of the box.

Bringing Order to the Galaxy. Final examples.

Imagine a peaceful group of tech workers in a wi-fi enabled meadow, collaborating efficiently and consistently for years on end, producing great products and making lots of money without anybody taking charge or any kind of system to rely on.

Imagine a similar crowd with a similar vision in a similar meadow, descending into conflict and inefficiency with high turnover, duplicated work, plenty of freeloading and dominant personalities claiming intellectual property and hoarding income - eventually leading to dissolution or transition to oligarchy.

Which seems more likely to you?

Mind over Masters

Successful self-management all depends on the ordering system the people are holding in their minds. And in the case of DAO, the contracts held in the blockchain.

Hierarchical is the “default” system that we learn early and often at home, in public school and at our first job. But out in the meadow, if no powerful or charismatic leader emerges, the group will probably fail to do anything useful. Simple hierarchy is instinctual and has a long cultural history.

The typical argument against self-management systems is based on simple incredulity: "How could that possibly work? Without a boss bossing everybody around, how would we know what to do?”  They are imagining that self-management means anarchy.

Cities are an example of self-management at work. A few people enforce some simple rules (police and lawmakers and law-abiding citizens) and everybody else operates just fine within that system without a city-boss following them around and telling them how to get to work or what to buy at the grocery store.

In the case of a DAO, many rules are enforced by smart contracts, shared agreements and social norms instead of police and politicians. The additional shared agreements, principles, processes and social norms are where DAOs can pull greedily from the more mature self-management movement.

Building Trust within a DAO

Just like there are many ways to organize traditional hierarchical organizations, there are many ways for an organization to self-manage as well. Forming a DAO is a good start, but DAO-tech only addresses a subset of the challenges faced by self-managed orgs.

The issues DAO-tech addresses happen to be ones that impact trust and fairness most directly.  DAOs are instances of smart contract clusters designed to make businesses work well.

This means that a quality DAO smart contract cluster can provide a key layer of trust required for any business to succeed. Using a “DAO factory” like DAOhaus gives potential investors assurance that your DAO-tech and therefore the governance and financial mechanisms are sound.  That trust gets baked right into the foundation of the organization.

With that solid layer of trust firmly established, DAOists are free to try new ways of working together. What will they be?

Keep an eye on DAOs this year. Soon we’ll see which ones learn to self-manage to outcompete their web 2.0 counterparts.