Decentralized autonomous organizations are the next frontier in corporate governance---effective blockchain is key.

1. The emergence of decentralized autonomous organizations (DAOs)

Decentralized autonomous organizations (DAOs) are blockchain-native, decentralized organizations that are collectively owned and managed by their members via smart contracts. DAOs represent a new organizational model that has the potential to fundamentally change how organizations operate. Organizational innovations associated with the rise of DAOs are enabled by a novel technological infrastructure. Blockchain technology serves as the platform on which DAOs are set up. Blockchain technology refers to a distributed and digital ledger that records transactions in a transparent and immutable way (Nakamoto, 2008). The advent of blockchain technology had a major impact on the business world and is one of the major pillars of the movement towards a decentralized economy (e.g., Yermack, 2017; Chawla, 2020; Sydow et al., 2020) and a decentralized financial system (e.g., Chen and Bellavitis, 2020; Cumming et al., 2022), partly driven by new ventures’ tokenizations through initial coin offerings (ICOs) (e.g., Bellavitis et al., 2021; Fisch, 2019).

The blockchain based-nature of DAOs has several implications that distinguish DAOs from traditional organizations. First, the organizational governance is significantly different from current, more traditional forms of governance in organizations. While traditional organizations are driven by top-down, private and centralized decision-making, DAOs operate through public and distributed decision-making, in which any DAO member can typically put forward proposals for any type of corporate decision and vote on them. This framework facilitates collaboration and community engagement among all members of the DAO that share common goals and ideals. These goals are diverse and codified in DAOs’ underlying smart contracts. For example, DAOs can set out to raise and distribute donations or can collect and invest funds in promising venture projects (e.g., Bove, 2022). DAOs typically possess treasuries that can only be accessed with members’ approval. The funding of DAOs is often based on token sales, such as ICOs (e.g., Bellavitis et al., 2021; Fisch, 2019; Momtaz, 2020) or non- fungible token (NFT) auctions (e.g., Chalmers et al., 2022). These token sales enable ventures to raise substantial amounts of funding from a crowd of investors in exchange for tokens that can carry, for example, voting rights (Fisch et al., 2020).

Second, the decentralized nature of DAOs enables new business models that are catalysts for further disintermediation. As of 2022, some of the most successful organizations are inter- mediated platforms, such as Amazon. DAOs have begun to disrupt intermediated business models and industries in which such platforms are dominant through disintermediation. At the core of the movement toward greater disintermediation is the promise of more favorable rent sharing, as entrepreneurs and investors or sellers and buyers get to share the transaction surplus exclusively, without the need to pay for intermediation services thanks to smart contract technology (Momtaz, 2022). In principle, markets, industries, and entire economies could be governed by smart contracts, powered by robotics, and independently regulated by the DAOs’ members. Consider the example of Amazon: Today Jeff Bezos is the main shareholder of Amazon, Amazon’s CEO is the manager, and Amazon sellers are the service providers. Through a DAO, Amazon sellers could cooperate and share decision making and a DAO could allow every Amazon seller to be a shareholder, manager and service provider at the same time.

The number of DAOs and their impact is rapidly increasing. The raising impact is evidenced by headline-grabbing stories, such as a Constitution DAO’s $40 million bid on an original copy of the U.S. constitution in 2021 (Bove, 2022). Similarly, as we outline below, the number and value of DAOs have exploded since 2019. Against this background, this study aims to provide an initial description of DAOs. Specifically, we aim to outline the promises of DAOs as a new organizational form, offer an initial empirical glimpse at the prevalence and functioning of DAOs, and discuss some of their limitations. By this, we seek to provide an early introductory view on DAOs that future research can base on to develop novel research questions to fully explore DAOs and their underlying mechanisms.

2. The promises of DAOs

Because of their decentralized nature, DAOs offer transparent, distributed, and decentralized decision-making that increases disintermediation not only within organizations, but also at the market, industry, and economy levels. The distinction between shareholders, managers, and other stakeholders, such as industry participants, is blurred, giving rise to numerous benefits (and challenges).

2.1 Decentralized governance: agency, transaction costs, and wisdom of the crowd

In traditional corporations, the literature on corporate governance has long emphasized potential agency costs associated with conflicts of interests between managers and shareholders (e.g., Jensen and Meckling, 1976). In DAOs, however, agency costs could be dramatically reduced because the roles of principals and agents overlap.

While conventional organizations are hierarchically governed by executives that take top-down decisions, DAOs follow a decentralized bottom-up approach. That is, members can submit proposals, which are then voted on by all members of the organization. DAO members are typically identified via tokens, which represent digital voting rights that entitle the token holder to participate in decision-making (e.g., one token, one vote), thereby coordinating DAO governance. The possession of more tokens typically increases voting power, and sometimes token ownership thresholds exist for submitting proposals. The decentralized voting-based governance process reduces the need for hierarchy and bureaucracy, decreasing the need for human managers (e.g., Hackl, 2021; Morrison et al., 2020). Also, while decision-making in traditional organizations is private, decisions made in DAOs are transparent and publicly visible on the blockchain. Thus, which decisions were taken, and how the DAO members reached these decisions, is public knowledge.

Further, blockchain technology shapes the governance of DAOs, which is fundamentally different from traditional organizations. These organizations are governed by the blockchain code which is public and easily accessible. The DAOs’ initial smart contracts, which outline the goals and governance framework, are hardly reversible. Any decisions taken in the DAO comply with this smart contract and changes to the smart contract require a voting process. Decisions are distributed and mostly based on codifiable information. Hence, the characteristics of DAOs – the overlap between principals and agents, as well as strong transparency – significantly reduce conflict of interests and moral hazard in this type of organization. This governance process could constitute a paradigm shift when it comes to transparency and agency costs (Lumineau et al., 2021). As such, governance and decision-making in DAOs could dramatically reduce transaction costs because smart contracts define the rules of the game and govern the decision-making process, but executing a smart contract is significantly less costly than the costs associated with corporate board meetings, corporate bottom-up decision-making, the involvement of labor unions, and so forth.

Finally, because decision-making power is distributed across members of the DAO, distributed and decentralized organizations like DAOs can benefit from “wisdom of the crowd”. The importance of crowd-based decision-making is increasingly relevant in various fields, ranging from the development of new products (Afuah and Tucci, 2012, Poetz and Schreier, 2012), the funding of technology-based start-ups (Mollick, 2014), and scientific research (Franzoni and Sauermann, 2014). It has been found that crowds can predict events very efficiently (e.g. U.S. Presidential elections) (Ray, 2006) and operate differently compared to experts (Mol- lick and Nanda, 2015). Thus, DAOs represent the natural evolution of crowd-based decision- making platforms.

2.2 Disintermediation: from centralized to decentralized platforms

DAOs not only disintermediate and decentralize decision-making within organizations, but also within markets, industries, and economies. As discussed above, the distinction between principals, agents, and other stakeholders, such as industry participants, overlaps to some ex- tent in DAOs. Therefore, DAOs are the next evolutionary step toward platform-based markets, industries, and economies.

Not long ago, technological advances such as internet and smartphones have powered a wave of new business models based on centralized platforms. Before the advent of these technologies, many industries were governed by large conglomerates at the center of industries. Nowadays, many industries such as movies (e.g., Netflix), retail (e.g., Amazon), music (e.g., Spotify), mobile applications (e.g., iTunes), have been disrupted by centralized platforms. The rise of platforms has concentrated market and economic power in the hand of a few companies. As soon as these platforms gain network economies, their behavior becomes less supportive toward complementors and suppliers (Rietveld et al., 2020). An example is Etsy, a platform for creatives. The platform started with fees of 3.5% in 2018, raised to 5% in 2018, and in 2022 raised again to 6.5%. These developments pushed regulators to consider breaking up large platforms1, or fine them for unfair market practices.2 Similar dynamics have existed in financial markets for centuries. Financial institutions act as intermediaries between savers and borrowers that would otherwise struggle to transact independently (Cumming et al., 2022; Momtaz, 2022). Therefore, although platforms and intermediaries help reduce transaction costs, allowing transactions to be carried out efficiently, they gain significant (market) power, financial resources, and increase market concentration (Chen and Bellavitis, 2020).

As decentralized platforms, DAOs have the potential to reshape markets, industries, and entire economies and shift power to members of the different ecosystems such as Amazon sellers, Spotify artists, and Etsy creators. By reducing the involvement of centralized platforms, DAOs can reduce transaction costs and create network effects without incurring monopoly costs (Catalini and Gans, 2019). If an industry is dominated by a DAO, no single entity will accumulate monopoly power, allowing all DAO members to benefit from the network effects to enlarge transaction possibilities, cooperation, and community building with the outcome of enhanced innovativeness and efficiency.

Several studies discuss the benefits of cooperation to increase innovation. The entire open innovation literature is centered around the idea that firms should leverage cooperation with external firms to innovate (Chesbrough, 2004). Cooperating, rather than competing with other firms, allows partners to access complementary resources that can contribute to the development of innovation (e.g. De Faria et al., 2010). Extending these concepts to individuals, DAOs allow a multitude of members to contribute toward innovative goals and projects, sharing knowledge, resources, and ideas. By distributing the power and decision-making within an organization, DAOs emphasize and promote community building which is crucial in creating sustainable ecosystems. Distributed organizations based on large communities such as Wikipedia or Anonymous (hackers) have existed for several years. However, the implementation of a DAO facilitates interaction, alignment of interests, trust, and transparency in a way that was not possible before (Momtaz, 2021a; Fisch and Momtaz, 2020). A DAO does not necessarily have a controlling party and, therefore, allows for open access and permissionless innovation—that is, developers can experiment with new products and ideas without fearing repercussions from a central governing entity (Chen and Bellavitis, 2020). By facilitating permissionless innovation and community building, decentralized organizations empower developers, allowing them to contribute to the DAO in original and unexpected ways.

Further, DAOs can increase organizational and industry efficiency. A longstanding literature argues that firms internalize transactions to reduce transaction costs that would otherwise occur in the open market, the so-called “make or buy dilemma” (Williamson, 1978). DAOs take advantage of modern technologies like smart contracts, robotics, and remote tracking to automate the entire transaction process, across multiple unrelated parties, potentially located in different parts of the world. These technologies increase efficiency, reduce transaction costs and decision-making time (Momtaz, 2022). As a consequence, DAOs can significantly reshape our understanding of organizations and the benefits of internalization as well as different organization structures.