This is part IV of our series to explore and understand the concept of Decentralized Autonomous Organizations (DAO). As we said previously in our piece about DAO as an Investment Vehicle, based on Headline Asia’s research, there are about 240 active DAOs worldwide, which is a 100 percent increase from 2020. Ideally, DAO could be a perfect substitution for all the existing organizational structures.
The Principal-Agent Problem
But before we get ahead of ourselves, there are a few matters to confront first, such as the principal-agent problem. In an organization, there are priority conflicts between an organization (the “Principal”) and the representative authorized to act on their behalf (the “Agent”). An agent may act in a way that is contrary to the best interests of the principal, and may instead maximize his/her own personal gain. For example, a company might be facing a cash flow problem, and it would be in its best interest to reduce cost, however, the board of directors might want to maximize their own gain, increasing their salary drastically.
DAO could be an effective solution to this hierarchy problem, as it exists in organizations all over the world. Contrary to traditional organizations, in DAO an “Agent” doesn’t exist as there isn’t a small group of people that can make decisions on behalf of the entire organization. Conceptually, even if someone wants to act in a way that is contrary to the best interests of the DAO, they can’t unless they are able to persuade other members of the DAO to vote for them.