DAOs Vs. Traditional Organizations: A Detailed Comparison

• Blockchain Council
• October 27, 2022

For years, we have witnessed traditional organization management being used abundantly worldwide. Although these organizations have ruled for years, people have come across several challenges in traditional organizations and finally felt the requirement of upgradation from the traditional organization to the modern system popularly termed as Decentralized Autonomous Organizations or DAOs for short. 

Since not all people are ready for the modification, a conflict arises about which is better than the other. People tend to argue which system is more suitable. So, keeping the same thing in mind, here is a little comparison of the standard and DAO. This article covers most things that comparison requires, like advantages, disadvantages, and, most importantly, a concise and direct differentiation.

Defining DAO

An innovative new sort of ruling jurisdiction is called a Decentralized Autonomous Organization (DAO). In the lack of central ruling authorities, each associate of a DAO frequently combines to accomplish a common goal and seizes the chance to engage in the company’s greatest advantage. DAOs are frequently utilized to make those choices in a bottoms-up form of administration and have grown in favor amongst supporters of distributed ledger technology and cryptocurrencies.

Among several main features of blockchain and digital currency is its decentralized structure. This implies they aren’t governed by a singular body like the main bank or the regime but rather shared above a multitude of computers, systems, as well as sites. Virtual currencies often make use of this decentralized structure to attain standards of security and confidentiality that appear to be generally inaccessible or impossible for dealings involving the normal currency.

What Problems Do DAOs Solve? 

Given below are some problems that DAO has solved.

– Cryptocurrency DAOs have aided in monetary asset protection. Hacking assaults would have been far more frequent now if not for all the advances.

– DAOs produced permissionless finance, AKA decentralized finance (DeFi). In addition to protecting DeFi platforms, they also give members incentives for taking part. In reality, when one takes a currency for passive income, they are giving other DAO members access to their privileges.

– DAOs’ versatility makes blockchains better. For instance, the Ethereum blockchain platform elected to create a brand-new ETH chain following the 2016 cyber attack, whereas those who opposed it chose to stick with the old one (renamed to Ethereum Classic, ETC). ETC continued to experience cyber attacks that had a significant effect on investors.

Advantages And Disadvantages Of DAO 

Any corporate structure can never be said to be perfect or without defects. We cannot dispute that practically everything in the world, whether it be a human being or one of their products, has always encountered some problems. They can only be fixed gradually. Everything around the world does have some drawbacks as well as some advantages. Similar to this, DAO has various drawbacks and advantages.

Despite the numerous issues that DAO can solve, DAO still generates plenty of issues. Listed here are just some DAO drawbacks and advantages.

Advantages

Decentralization: Rather than a centralized authority frequently massively outmatched by its colleagues, a team of people makes judgments that affect the organization. A DAO could decentralize power over a far wider range of individuals than a single person (CEO) or a small group of people (Board of Directors) could.

Participation: People might become more influential and committed to the organization when people play a significant role in decision-making and are directly involved in all concerns. While it’s possible that these individuals don’t have much sway, a DAO encourages token holders to engage, destroy tokens, or take other activities they feel would benefit the organization.

Community: People from around the world are motivated by the concept of a DAO to collaborate covertly and silently to reach a broad interpretation. Anyone who owns a token can communicate to certain every other token holders from just about any location around the planet by merely being online.

Publicity: Voting inside a DAO is carried out on blockchain technology and is available to the general masses. Individuals are compelled to act in accordance with their beliefs by the fact that their votes, as well as decisions, will indeed be widely broadcast. This promotes activities that will enrich voters’ prestige and discourage wrongdoing opposing the community.

Disadvantages

Security: Every digital infrastructure using blockchain-enabled products has a security concern. A DAO requires deep practical understanding to execute; or else, decisions or voting cannot be considered legitimate. Individuals could lose trust and also leave the business if they can’t just respect the structure. Although the use of multi-sig or cold wallets, DAOs can still be misused, treasury reserves can still be seized, and vaults can still be emptied.

Education: A DAO’s job is to inform a bigger public about impending organizational productivity. A sole CEO makes it far easier to stay up to date on business operations than a group of people who have a token in a decentralized autonomous organization (DAO), who may possess various degrees of expertise, grasp of operations, objectives, or resources at their disposal. While DAOs bring together a wide range of people, one of their key difficulties is that they require this wide range of people to comprehend well how to organize, coordinate, and communicate as a single entity.

Speed: Whenever a CEO runs a publicly owned firm, then a single vote might be required to decide on a certain decision or course of action for the corporation. A DAO gives each person the option to elect. This implies a considerably taking large amount of time in election procedure when consideration is given to time zones as well as commitments outside of the DAO.

Inefficiency: DAOs are likely to fail to achieve their goals. It’s indeed easier for DAO to spend lots of time thinking about betterment than actually implementing it, particularly when a person thinks about how much time it takes to educate voters, communicate proposals, define strategy, and sign up new members. A DAO may get bogged down in useless daily responsibilities since it must substantially manage numerous individuals.

Traditional Organizations VS. DAOs

Formation 

DAOs and conventional organizations both necessitate a founder or cluster of founders to strike the very first pitch. In a conventional business, an entrepreneur who identifies a business need as well as seeks to supply it with a fresh product or service can play such a function. Similarly to this, a DAO might well be created by a group that seeks to benefit a specific community by launching a brand-new system, business, or operation.

Structure

Companies constructed resemble Jenga towers. Any institution’s structure relies on each component’s functioning effectively, whether it’s a large enterprise, a neighborhood sandwich shop, or a DAO that gathers computer-generated squiggles. The complete building runs the danger of collapsing if any of those sections veers too far from the rest. 

A conventional business maintains its Jenga tower through a pyramid-shaped management structure that groups its management and workers. Judgments are made at the top, and duties are completed at the bottom to execute those judgments. The reputation of traditional hierarchies has suffered due to the emergence of DAOs and virtual labor.

On the other hand, DAOs lack leaders, managers, and CEOs. Instead, each member may engage with smart contracts in order to vote on how things should work. DAOs also benefit from smart contracts, which eliminate human error and bad performance.

Finance

An LLC’s first funding is typically provided through invested capital from the initial partners and members. Such fundings often constitute a portion of the company’s equity as well as pay for startup expenses. In the future, if an LLC requires more cash flow, its members may seek funding from venture capitalists (VCs) and investors or obtain company credit. In this instance, every investment deprives the first investors of a piece of ownership.

However, that’s not what happens on DAO. In the case of DAO, the organization takes a step to align financial contributions with governance rights so that it can facilitate investors to become both workers as well as owners of the organization. 

Legal Definition

A typical organization has a centralized legal entity, but a DAO does not. Simply put, authorities have yet to make a judgment on the legal status of DAOs. The lawmakers refer to DAOs and their investors as “generic partnerships.” This makes any stakeholder, investor, or person who has DAO tokens accountable for any debts or legal proceedings that the DAO confronts.

As a result, DAO currently has two disadvantages. You can’t describe DAO without considering the opposite side of the coin. 

Will DAOs Replace Traditional Organizations?

For the expansion of DAOs, there is no easy solution. Will decentralized finance eventually replace the current system? Decentralized applications, or dApps, will they revolutionize the Internet? Will flat organizations replace hierarchical hierarchies?

These are the three main drawbacks of DAOs. They can indeed be reduced but just not eliminated. They come as a result of decentralization and are blockchain platforms, naturally. But do these advantages outweigh these drawbacks?

Traditional groups will continue to rule until that point, particularly in the financial sector, where people are taking a chance with millions of investors’ money. The Uniswap DEX platform, which has over 300,000 participants and almost $2 billion in reserves, is currently the largest DAO.

We can’t say anything about the replacement since there are many things that DAO lacks, and without those things, it is not a good decision to change. Also, in a similar manner, traditional organizations will be altered to DAO. Still, there is a need for time to let DAO transform to a certain level so that it becomes usable for the welfare of the people right now, even though it is still usable. Still, it can cause some major problems if it opts to replace the traditional organization. 

Conclusion

From the above, all we can say is even after the traditional system of organizations has so many problems. Yet, it is still preferred by many businesses since people can rely on it as they have used it for years and are very familiar with it, unlike Decentralized Autonomous Organizations. Even after having so many advantages and all this style of management isn’t welcomed by many people since being very technical, people who want to use it must first discover how to utilize it to its full extent. So we can say that people require time to fully adopt the DAO. And till that time, the traditional framework is used and also sufficient.