The blockchain revolution is currently underway, with a slew of interesting and potentially disruptive use cases for this decentralized technology above and beyond the original use case of Bitcoin. One of the most novel and potentially disruptive applications of blockchain technology could be what is known as decentralized autonomous organizations (DAOs). The idea of a DAO was first proposed by Vitalik Buterin in a 2014 blog post, who then went on to create the Ethereum​ blockchain protocol, a prime environment for DAOs to be created and thrive.

Smart Contracts

Blockchain is at its core a distributed, digital ledger shared by the nodes on a network. Not just for digital currencies such as Bitcoin, this sort of ledger technology can be used to represent all sorts of transactions, financial or otherwise. For example, so-called "smart property" can represent financial securities such as stocks and bonds, derivative contracts, title of ownership for real estate or other property, and intellectual property rights, just to name a few. When coupled with an internal scripting language to run logic-based programs on top of a blockchain, "smart contracts" are also possible. A smart contract is an agreement between two or more parties, which automatically executes given some preapproved guidelines and criteria. (For more, see: How Will Bitcoin 2.0 Change the World.)

An example of a smart contract could be a financial derivative such as an options contract: a call option that gives the owner of the contract the right to buy X at a specified price before a specified date from the seller of the contract could be programmed as an entry in a blockchain, and which will automatically execute at expiration given the final price of X.

Such a contract can exist and be fully enforceable without the need for a securities exchange, a clearing house, a broker or even a legal system. Other examples could be employment contracts for freelancers, rental or lease agreements to unlock a property or vehicle, or copyrights which will automatically pay out royalties due. Any contract that can be executed today on paper could, conceivably, have a blockchain-based digital counterpart.

Decentralized Autonomous Organizations

Corporations are, if you strip everything away to the bare bones, a complex set of contracts and agreements. Most simplistically, employment contracts set the terms for workers pay, duties and responsibilities. Contracts with vendors and customers ensure supply chains are established and maintained. Lease agreements cover office space, vehicles, large machinery and rights to intellectual property. Corporate debt are bond indentures, and equity shares give owners rights to vote and a share of profits. On top of this, there are other and more sophisticated sorts of agreements that exist. On top of this web of contracts is a bureaucratic, social, political and legal system that serves to enforce breaches of these contracts. (For related reading, see: Bitcoin 2.0 Applications.)

Smart contracts exist without the need for those institutional layers. An organization can be built where all of these agreements are replaced by such smart contracts, and in essence the corporation will exist entirely as an entity on a blockchain. As such it will be a decentralized organization, existing across all the nodes of the network. Although the use of artificial intelligence could augment the abilities of such an organization, AI is not a necessary requirement for a decentralized autonomous organization to function.

A DAO would be in the business of generating economic profits if it were structured as a corporation (DAC), and it could raise capital through crowdsales of tokens directly to the blockchain, akin to shares in a public company. Tokenholders would be entitled to their share of profits in the form of dividends, and could vote on the direction of the company. Those tokens could also trade on a secondary market (also on the blockchain) for people to buy and sell them at will.

What a DAO Looks Like

Bitcoin core developer Mike Hearn has envisioned a future populated by DAOs. In his vision, driverless cars will pick up passengers (who pay it in digital currency) and then the car goes and fills up gas spending digital currency from its own wallet. The car can hire a person to change its oil or fix a flat tire, and could even hire a developer to improve its software code. The question becomes: who owns the car? In this scenario, the car owns itself; it is effectively a DAO. Because it uses a digital currency like Bitcoin, it can open a 'bank account' without a social security number, drivers license or any other credential that a person is required to today.

When this happens, machines (hardware and software) become peers in the economy rather than mere tools. Imagine a world where drones that own themselves make deliveries, where autonomous software applications engage in virtual business such as buying and selling server time, or even buying and selling stocks and bonds. One day, you may just be hired by a machine, as a one-time gig, or perhaps even for full-time employment. 

While this all may seem like science fiction, DAOs are already beginning to crop up on the Ethereum network. Slock.it is a company that blends blockchain with the Internet of things (IoT) creating a secure, decentralized way for renters and owners to pay for and gain access to whatever is being rented. An Internet-connected piece of hardware is retrofitted to a door lock, locker, lawnmower or car and only unlocks when paid for. Deposits are also collected, as well as insurance premiums, and the owner is paid the rental fee – all without any intermediary. Rather than the Slock Corporation owning this business, however, it will be crowdfunded​ and set up as a DAO.

The Bottom Line

There are other examples of DAOs such as Storj – a blockchain-based cloud storage company – but it is still early days yet. Questions are likely to arise over whether or not DAOs as corporations have the legal standing as a "person" the way today's corporations do. Property rights, employment disputes and taxation are all likely to be issues that come up and confront politicians as these potentially disruptive organizational forms become a reality. What happens if a driverless car that owns itself runs somebody over? If you work for a DAO does it need to buy your health insurance? If DAOs don't have traditional bank and asset accounts how will they be taxed? 

Regardless of these considerations, decentralized autonomous organizations that exist on blockchain technology are a very real, and interesting possibility.