Cover Story - The Rise of the DAOs

The Rise of the DAOs

The Future of Investments and Corporate Governance

Filippo Buzzi

Partner, Head of Blockchain Desk, Fidinam Hong Kong

Filippo Buzzi is Head of Blockchain Desk and Partner at Fidinam Hong Kong. He has fourteen years of experience at the international level in the fields of accounting, taxation and finance. Within Fidinam, he has founded a team that focuses on consulting in the cryptocurrency sector.

What is a DAO

For those not familiar with the acronym, DAOs are described as Decentralized Autonomous Organizations.

Imagine a world where you meet inspiring and business savvy individuals online. You decide to start investing or running a business together without knowing each other, thanks to a decentralized system. Such a system is based on blockchain smart contracts (software) that allow you and your peers to make decisions autonomously, while providing governance outcomes.

The first-ever DAO (The DAO) was born as a form of investor-directed venture capital fund. It had an objective to provide a new decentralized business model for organizing both commercial and nonprofit enterprises*. Despite being a pioneering and forward-looking project, the DAO shortly collapsed after its inception due to the vulnerability of its code, when attacked by hackers.

Since then, blockchain technology has advanced and security issues have been addressed: this has led to the creation of many successful projects that are shaping the new digital economy. DAOs’ activities span from investing and collecting digital art, collectibles and in-game assets (aka NFTs – see Flamingo DAO https://flamingodao.xyz/ ) to operating as VC for decentralized finance project (aka as DeFi – Maker DAO https://makerdao.com/en/ ).

*https://en.wikipedia.org/wiki/The_DAO_(organization)

Why DAO?

Different from companies, associations and other entities, DAOs are transparent, incorruptible and immutable. Their functioning is trust-less as the law is replaced by code. There is no need for decision-makers as governance is executed by smart contracts, so that human input is reduced for simple tasks.

Does a DAO really work or is it a fantasy?

As they are described, DAOs could be perceived as organizations operating in a distant future, science-fiction alike world. The reality is that DAOs have been now operating for years (making quietly their way in a new dimension of venture capital), generating tangible returns for their members. As an example, DAOMaker, a SaaS solution for nascentand growing crypto DAOs, hasfacilitated dozens of projects thathave generated an average ROI of 656% and an ATH ROI of 4472%*.

*https://medium.com/daomaker/meet-dao-maker-ateth-denver-b8419596a84a

Endless applications – the real economy

Applications of DAO-alike models are endless. Other than investments entities, for example, a Pizzeria could be organized as a DAO. Its operating system (smart contracts) would keep its inventory tracked on a blockchain ledger, that can automatically create orders for suppliers based on historical customer orders demand (certainly with a peak of demand on Friday’s eves!). The smart contract would automatically create an invoice for the store’s supplier, send it and specify the date of delivery. Once the order is delivered the smart contract would be notified by bar code scanners and this would trigger an automatic payment from crypto wallets of hungry customers. These are only some of the processes that can be automated thanks to blockchain technology.

Legal implications for DAOs

At the time of writing, it is not yet clear about applicable legal structures for DAOs, as lawmakers have not yet passed laws that can apply to such concepts. It is important to note that an exception is provided by the Marshall Islands, the first sovereign nation to recognize DAOs as legal entities, thanks to the amendment of its Non-Profit Entity Act.

Forward-thinking projects led by legal professionals, such as Openlaw.io are working around the clock to find solutions to accommodate decentralized systems in existing regulatory frameworks, most common examples are DAOs organized in Delaware as LLC organizations or Cayman foundations managed by regulated trustees.

What’s next for DAOs – the future of the internet

In our view, the rise of the DAOs is all about public, decentralized ownership, as opposed to existing tech giants that centralize enormous resources and profits (think about Facebook, Instagram, Tik Tok and others). DAOs, Web3 and Metaverses will create autonomous eco-systems that will help to manage social networks, search engines, marketplaces and more in general businesses without giving up to the overlords of the Web2 internet, finally coming back to the envisioned project of the Web1, the real information democratization.