Source: AdobeStock / Andrii Yalanskyi
‘Redmption’ is the community foreman at decentralized finance (DeFi) project Harvest Finance.
Decentralized autonomous organizations (DAOs) have become a buzzword in the cryptocurrency industry and are garnering much wider mainstream coverage as the world gradually learns about the benefits of decentralization and why it may very well be the future. While decentralized organizations are not a novel notion, there is still much that is unknown about them and how they operate.
Recently, reports emerged that one DAO spent USD 4 million for a one-of-a-kind Wu-Tang Clan album – an incredible sum of money for a CD by any standard. This raises questions about the financial structures of decentralized organizations and how a community – each member having an equal share and liability in the company – could ever raise the funds necessary to purchase such a costly equipment.
For generations, organizations have relied on traditional treasury management systems that work in a centralized fashion, with one person or a small group of people exercising authority over organizational finances. However, by teaching people about the benefits of decentralization and why today’s centralized organizational model is obsolete, the crypto sector can help foster a more democratic structural approach to how firms manage their finances.
Traditional treasuries – what’s the problem?
There are numerous issues now plaguing the operations of traditional treasuries inside centralized corporations. It’s something that’s becoming more apparent as we continue to bandage the cultural and economic wounds left by COVID-19 – a pandemic that crippled practically every industry. However, this situation gives an opportunity for firms to rethink their financial processes.
One of the critical concerns is the principal-agent dilemma, which occurs when a firm owner does not act in accordance with the stakeholders’ aims. This can result in an asymmetric split of corporate capital, which, if managed by a single or small group of individuals, can result in losses.
Fundamentally, humans make mistakes and the less people involved in the decision making processes of the treasury, the greater the risk of poor decisions being made.
Additionally, when business operations become more complex, it becomes more difficult to handle money effectively. Treasurers’ responsibilities are increasing as a result of technological improvements, new data systems, and an ever-expanding work force.
Traditional treasuries rely on manual processing, which makes them vulnerable to manipulation by rogue personnel, particularly those with sole control of the company’s funds.
So how do DAOs make their money?
It’s natural to be first perplexed about how a decentralized organization makes money, given that they are community-led. However, there are numerous ways for a DAO to raise money in an efficient and risk-free manner to fund company activities.
The protocol with which the DAO is affiliated may issue funds to the DAO as part of its operating structure, or the protocol may be configured in such a way that the DAO benefits from its performance. Additionally, some DAOs may offer membership passes that provide access to airdrops and gifts such as limited edition non-fungible tokens (NFTs).
DAOs can also be funded via crowdsourcing via the issuance of new tokens. Tokens provide voting rights to holders, and the more tokens a holder owns, the more authority they have over the operation’s regulations. DAOs can also use lending platforms to avoid profiting from the sale of their token.
Incentives are also important for DAO governance, which ensure the continued success of any DAO. Incentives include profit sharing, growth incentives and yield farming, which can attract business. Internal incentives may include rewards for token holders, attracting more people to invest in the DAO therefore increasing the treasury balance.
This approach to organizational financing is democratic and empowers the community, which should result in fewer errors and poor decision-making. Traditional treasuries are inefficient and out of date, but DAO treasuries enable businesses to reclaim control of their finances.
What does the future hold for group finance?
There is still some debate about how far a decentralized approach to finance may go in terms of organizational reorganization and how far specifically it could go. It would be difficult for all enterprises to adopt a completely decentralized strategy in terms of organizational structure, but corporations should still examine the impact that taking a centralized approach to treasury management can have on their business demands.
Traditional treasuries manage their finances in a very different way than decentralized autonomous organizations (DAOs), but in a world where decentralization is becoming increasingly crucial, DAOs are leveling the playing field. It is no longer acceptable to consider decentralized firms to be a part of crypto’s wild west, and they are continuing to demonstrate that there is room for this type of organizational structure in mainstream enterprises – potentially even in some of the world’s largest multinational conglomerates.
DAOs are reshaping the idea of governance by ensuring everyone involved has a say as to how things are run or changed with no one single leader – something which a treasury could significantly benefit from.
The more the world understands what decentralization means and how this can apply to the structure of an organization, the better we may have answers to financial issues. SEO