Owned By The Community, DAOs - A Mechanism To Implement A Co-Op Businesses

Blockchain For Company Structure

The immutable, trustless and decentralised nature of the blockchain has allowed us to reinvent a number of models that we have previously adopted in order to make the world work. Where that process has threatened entrenched centralised systems is where blockchain (broadly) presents a 10x faster, cheaper or more secure use case. We’ve seen that success in systems where non-fungibility is core such as payments, authentication of digital assets (tokenisation) and systems where there needs to be a transparent and trustless execution of logic (smart contracts).

Decentralised Autonomous Organisations (DAOs) have come into the public focus in the past couple of months in a big way, such as through the attempt to buy the US constitution. Like a lot of blockchain concepts they’re still trying to find their feet and demonstrate their utility over their more traditional centralised counterparts but do potentially present an extremely neat potential alternative to traditional incorporated structures.

Putting aside the lack of legal recognition of DAOs, not allowing them to enter into legal contracts or provide limited liability to their members, they broadly mimic their traditionally incorporated counterparts. Both limited companies and DAOs have rules by which they’re governed (articles of association vs an underlying smart contract), fractional ownership (shares vs tokens), and present a vehicle to raise capital and deploy it towards a specific purpose. Where they differ is the ease of administration, flexibility and the extent of the barrier to entry.

A fractured cap table is a nightmare for a private company, as the number of people on your cap table increases so does the legal cost and administrative burden. This often results in a minimum cheque size that increases as a company progresses through subsequent rounds of funding. In a DAO that legal cost is synonymous to a gas fee which, depending on the network, can be many thousands of times cheaper and voting can be built in to the initial smart contract. Additionally, incentives can be built into the governing structure in a codified and easily transparent way, flexibility which enables a wealth of new structures.

Using a DAO To Structure A Co-Op

Cooperatives (businesses that are controlled and run by their members) are a pre-blockchain ideal that are inline with how crypto-advocates think. However, that model sits in a traditional legal structure. Cooperatives are incorporated in a traditional company structure but with a central constitution that lay out their differences. Forcing a square peg in a round hole makes them a nightmare to administer. A very real technical and administrative cost exists in guaranteeing that a LTD company runs as a cooperative is doing so.

DAOs perfectly mimic a cooperative structure in real life. A low cost of entry, in-built voting mechanisms and central smart contract make DAOs a very interesting potential alternative to traditional incorporation. The ease of administering a DAO promotes a much wider form of decentralised ownership, allowing a wider cross-section of businesses to be owned by their customers.

Using DAOs To Reform Subscription Business As Cooperatives

Competitive advantages are hard to find. Businesses owned by their customers have exactly that. Rewarding support with ownership, a founding principle behind the whole crypto ecosystem, presents an incredible way to retain customers. This is evidenced both digitally (in the crypto boom over the last ten years) and physically (with twice the number of co-operatives (80%) surviving their first five years compared with other business ownership models (41%)).

Whilst digital communities have woken up to the power of decentralised ownership and trustless systems by refactoring many current web 2 services as web 3 structures, we haven’t yet seen physical businesses take the same leap. Although clunky cooperatives have existed for hundreds of years, DAOs present a low-cost way of building physical businesses as a product of the community they come from. Creating the potential for your local coffee shop or gym to give you ownership and a say in how it’s run in return for supporting it.