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What You Need to Know Before You Decide to Create a Decentralized Autonomous Organization

A decentralized autonomous organization has created new corporate structures. In the past, a corporation was limited by its corporate governance rules and jurisdiction. This is why a decentralized autonomous organization looks at a global idea that incorporates a flat hierarchy. Because a smart contract is self-executing, it removes human problems to some extent and helps the democratization of a business

Decentralized Autonomous Organization

A Decentralized Autonomous Organization can also make it pretty easy to gather resources worldwide and collaborate without compromising the trust of individuals involved. No doubt, the future lies with advanced collaborations and decentralized ecosystems. Therefore, businesses must recognize the potential of decentralized autonomous organizations because they can change the system and tend to be one of the recent great discoveries. This page discusses what you need to know before you decide to create a decentralized autonomous organization.

Understanding a decentralized autonomous organization 

A decentralized autonomous organization refers to a blockchain-based system that can help people to govern and coordinate themselves. In the process, there are a set of self-executing rules that are deployed to mediate. Also, its governance is decentralized, and it is an organization that runs using a transparent set of software protocols. It’s worth noting that these protocols can allow a group of people or even entities to decide on behalf of the decentralized autonomous organization.

The decentralized autonomous organization’s governance rules can be maintained and even executed on a blockchain utilizing distributed ledger technology. Because of this, a  decentralized autonomous organization can work on a distributed basis and doesn’t need a decision-maker or central authority. Decentralized autonomous organizations have now become the most common concept when it comes to the digital consensus sector.

For instance, you can look at a decentralized autonomous organization as a business that operates a chain of stores. The business can have three categories of members that include employees, investors, and customers. And, the membership rule that applies to investors is a fixed size of the virtual property until they decide to sell their shares. On the other hand, employees have to be hired by other employees or the investors that are authorized by other investors. And, the customers can be open to be involved by interacting with any store.

Decentralized autonomous organizations can change the same business to a centralized one. Therefore, rather than having a hierarchical structure that is managed by several people controlling and interacting physically through a legal system, a decentralized autonomous organization has several people interacting with one another depending on a protocol that is specified in code and enforced on the blockchain membership. 

Keep in mind that membership to a decentralized autonomous organization can be done in two ways. There is a token-based membership system that allows some tokens to be given to members. These members can have the voting rights depending on their token holdings. This means any member can be given tokens in a decentralized autonomous organization when they invest in a coin offering or if the person offers liquidity or even if a person has any proof of work. Remember that these can be automatic membership and don’t require any permission. And, it’s easy for the members to leave the decentralized autonomous organization because they only have to sell their tokens on the market. 

Another type of membership is called shared based membership. This concept is quite new and not common on the market. It requires a person to offer a proposal that gives tribute when it comes to work or money. Like the shares that are in a traditional business, shares can represent the ownership and voting power in the business. In shared based membership, shares can be redeemed when a member decides to exit and chooses to get the proportionate number of shares of the treasury. 

Creating the decentralized autonomous organization

As explained earlier, a decentralized autonomous organization is a complete decentralized organization and is not based on hierarchical management structures. In other words, a decentralized autonomous organization doesn’t follow the corporate structure that includes a corporate executives and board of directors and employees. With traditional entities like a corporation, you need to have promoters, incorporators, articles of incorporation, board of directors, and many more. This is called a centralized management system. Also, many corporations tend to be private entities.

On the other hand, a decentralized autonomous organization has a structure that involves a series of codes or smart contracts on the blockchain. These can automatically execute the decisions of the entity. This means no single person or group of people controls or owns a decentralized autonomous organization. This is because a decentralized autonomous organization uses blockchain technology, so this makes them transparent to the public. As you can see, this is a completely decentralized management system. 

While the decentralized autonomous organization has no hierarchy, it can still succeed and make significant decisions on behalf of its members. Therefore, if a member doesn’t have an operational or management idea, it can be easier to get the idea heard compared with a traditional corporate entity. With a decentralized autonomous organization, the member just needs to tell other members this idea, and every person can then consider and vote on the idea democratically.  

Many decentralized autonomous organizations may not have their members when it comes to limited liability. The decentralized autonomous organization members don’t usually have the general protection against liability as their corporate shareholders do. This is because a decentralized autonomous organization is not usually created as an LLC or corporation. Hence, the liability of each decentralized autonomous organization member is unlimited.

A corporation was established so that it can do its business without each person exposing themselves to personal and unlimited liability. Therefore, the members in an LLC or shareholders in a corporation can only risk their capital. In other words, they can only be liable for the amount of funds they are entitled to or contributed.  

A decentralized autonomous organization doesn’t follow this pattern. This is an unincorporated entity, so they don’t have to follow any legal processes of incorporation like bylaws, registration, and contracts. Therefore, a decentralized autonomous organization is considered to be an unincorporated partnership. It’s worth noting that in a partnership, each person can have unlimited liability. 

Hence, if the decentralized autonomous organization is declared bankrupt or hacked, each member can be exposed to liability of their amount of money. If a lawsuit follows and a person can’t recover all their funds from the decentralized autonomous organization partners, the plaintiff can go for their personal assets until the claim is satisfied. This is the reason why decentralized autonomous organizations need to be registered and recognized as legal entities with limited liabilities.  

Decentralized autonomous organization members are responsible for decision making. You should note that decision-making in a decentralized autonomous organization can be made from the bottom-up. This means each member has the ability and right to give their ideas or provide a proposal about the governance or management of the decentralized autonomous organization.

Besides, every member who has an interest in the decentralized autonomous organization can vote on the proposal. And, voting tends to depend on the governance tokens of the decentralized autonomous organization, which is the cryptocurrency for the specific decentralized autonomous organization project at hand. Simply put, every member of the decentralized autonomous organization can influence the future of the organization by deciding to vote on a proposal raised by another member or even initiating a new management or governance proposal. This is different to traditional organizations which have the decision-making authority that is based on position and voting is done with major changes.

Further, the financial resources of a decentralized autonomous organization are better utilized and well-protected than traditional organizations. Their funds are usually accessible only when approved by the decentralized autonomous organization members. As a result, this makes the decentralized autonomous organization less susceptible to financial abuses  because there is no single person or a group of people who can access these financial resources. 

Most of the states in the United States don’t recognize a decentralized autonomous organization as a legal entity. Therefore, without legal recognition, a decentralized autonomous organization doesn’t need to comply with the registration provisions of a state. Because of this, a decentralized autonomous organization cannot get any of the corporate benefits like limited liability that is available to traditional entities. Also, besides the chance of unlimited liability a decentralized autonomous organization lacks legal status, so this prevents it from getting into certain business contracts with other businesses or with the government. This can reduce the type of businesses the decentralized autonomous organization can do and prevents them from achieving their full growth potential.

In conclusion,  the decentralized autonomous organizations can be considered to be the next generation of business and financial innovation. These organizations offer various advantages compared to traditional companies. This includes decentralization, automatic code execution through smart contracts, member-empowered decision-making and voting, pooling of funds and resources, and many more. That said, the decentralized autonomous organizations also face some challenges, such as lack of legal status that makes them not to be recognized  as a legal entity.

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