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DAOs vs LLCs (traditional organizations)



DAOs are having their time under the sun and the talk is that they’ll replace The traditional Organization but will they? Well in our opinion, No, they won’t instead DAOs will be a Whole new system, then it’ll be the choice of companies if to go the DAO route or go the Traditional Organization route.

 

Formation


Both DAOs and Traditional organizations need an initial founding team, the first set of people to come up with the idea and kickstart building. For the most part the founders are the ones who “lead” the DAO pack at its early days till the community is ready to take full ownership. 


Photo by Adam Smotkin on Unsplash


Forming an LLC would require a ton of paper work and approval from the State but its completely opposite for a DAO. 

DAOs currently require much less formal processes. Technically, there is no paperwork necessary to form a DAO, although some DAOs might choose to incorporate as LLCs to further protect their members. This is becoming increasingly easy as states like Wyoming move to recognize DAOs as new forms of LLCs.

To form a DAO you mainly need a group chat, preferably discord, a website stating what the goal of the DAO is, for the early stages that’s it. As you grow you’ll need to get into the nit and grit of governance and snapshot voting, But we won’t discuss all those here.


Raising Capital


Photo by Anne Nygård on Unsplash


Funding an LLC mainly comes from the initial founders, family members, friends, Kickstarter campaigns, investors, firms or the company getting profitable. If the company decides to take in outside investment ,which most companies will decide to do, An ownership stake in the company will be taken by the investors depending on the amount raised and terms. When an outside investor puts money into your new business, they are surely expecting a return on that investment. This most times lead to misalignment of incentives. Where employees probably want the company to grow in userbase, so does the founder and users want the product to be better (and maybe get rewarded, it depends) but the investors want to make their money back. 


DAOs on the other hand raise the ICO way (initial coin offering). Back in 2016, The DAO took the idea of crowdfunding to a whole new level. In exchange for a financial contribution to The DAO, investors received tokens that represented both their financial stake and governance over The DAO. Essentially, The DAOs’s investors became its owners and operators. All eleven thousand of them. While The DAO hit a bit of a snag and went defunct shortly after it began, it did manage to create a new blueprint for funding organizations.


Funding your DAO starts with creating your own token, which can be done through dapps like the aforementioned Aragon. You then make your DAO token available for purchase by the public, similar to launching a Kickstarter project for donations. By purchasing these tokens, new members receive a financial stake in the DAO, along with voting rights, and your DAO receives funds in its treasury..

In the case of protocol DAOs like Uniswap and SuperRare, many of the members are also users of the protocol itself. Who better to shepherd an application than the very individuals who use it? Unlike the world of traditional corporations, the idea of owners and investors exploiting their users and employees becomes ridiculous, as they are often one in the same.

This distinction is where things start getting interesting.


Structure


Organizations are like Jenga towers. The stability of any organization, be it a global corporation, local coffee shop, or DAOs relies on all of its pieces working together properly. If one of those pieces gets too far out of line, the entire tower is at risk of tumbling. A traditional organization keeps its Jenga tower standing through a hierarchical structure, organizing its managers and employees in a pyramid. Those at the top make decisions, and those at the bottom carry out the tasks necessary to bring those decisions to life. With the rise of DAOs and remote work can traditional hierarchies adapt?

Photo by Alain Pham on Unsplash


Traditional Hierarchies


Let’s start with the pros. Through their tiered, top-down approach, hierarchies at least let everyone know where they stand and what their roles are. This can be very advantageous, if not necessary, in big companies with hundreds of employees. Everyone knows what they’re responsible for, who to go to for questions and guidance, and can easily understand where they fit in the grand scheme of things. While hierarchies can seem limiting, they can also be a great way to organize very large teams. If everyone at Coca-Cola was trying to make decisions for themselves, we’d probably all be drinking Pepsi.

However, these hierarchical systems are prone to some downsides that most people are familiar with. In a business with little two-way communication, where commands simply trickle down from the top, employees can feel insignificant and unheard. Not only does this negatively affect their mental health, but it stifles creativity, innovation, collaboration, and ultimately, success. Throw in a boss or middle manager with a swelling ego, and you’ve got yourself a miserable workplace. ( Src: unstoppable domains)


DAOs are Flat


DAOs are still very much experimenting with structures , but in general, they are very flat relative to traditional organizations. There are no CEOs calling the shots, and a noticeable lack of middle managers. In their place is a system where all members have the ability to propose and vote on changes to the DAO. This is made possible through smart contracts.

This bottom-up approach makes for organizations where collaboration across traditional verticals is not only possible, but encouraged. DAOs benefit from their open dialogue, usually taking place on Discord and Telegram, and enjoy a level of transparency that few traditional organizations offer.

While flatter organizations might facilitate more collaborative workforces, they are not without their issues. Organizing a crew can be difficult, even with a strong leader steering the ship. When you remove that leader and leave the crew to their own devices, things can get a little messy. For this reason, it is crucial for DAO members to communicate constantly and be honest with each other, as there are likely fewer checks and balances in place relative to a traditional corporation. This might lead to DAO members operating in small teams, with a core group of organizers at the center. This way, they can forgo the traditional hierarchical pyramid and still maintain a level of organization. (SRC: unstoppable domains

Photo by Tim Mossholder on Unsplash


DAOs do have their pitfalls as addressed in previous Course articles but there’s room to fix them and make DAOs the dream working/ contributing conditions. We definitely still have a very very long way to go before achieving DAO Nevada. 

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