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Understanding the role of DAOs in decentralized finance

DAOs, or decentralized autonomous organizations, are systems of governance that operate on blockchain technology, allowing collective decision-making without centralized control. In decentralized finance (DeFi), the promise of DAOs is to democratize access to financial services and to promote financial inclusion. But how can they fulfill such an ambitious promise?

Exploring the transformative potential of DAOs

In a qualitative study spanning 23 months, this research found that skin in the game in DAOs was crucial for advancing organizational mission. The fact that participants were granted tokens that both had financial value and gave them the power to vote on key decisions in the DAO kept them interested and engaged in investing and improving the organization. Simultaneously, the execution of blockchain technology embedded in the DAO provided the necessary infrastructure for the ongoing stability of the organization. These human and technological elements combined created collective action in a novel way, ensuring continuous community participation and effective management of digital commons. This study focuses on MakerDAO, a prominent DAO in the DeFi space, to illustrate these dynamics.

Key research findings

• Technology is essential in managing DAOs as a new form of organizing, bringing participants together first as co-investors, then as a community, and finally as a functioning organization.
• An intricate set of interlocking mechanisms, sustained participation, collective direction, and scaled organizing both promote voluntary cooperation and provide the flexible governance structure that are essential for managing digital commons within DAOs.
• Polycentric governance in DAOs balances centralized and fully decentralized governance, involving processes that are highly social in human forums as well as deeply embedded in blockchain-based smart contract functions.

The future of DAO research

This study highlights DAOs as a fast-moving and transformative new form of organizing that can potentially connect people in a shared purpose.

"DAOs have the potential to revolutionize not just finance but any sector where collective action and resource management are crucial," says Dr. Eleunthia Ellinger, the study’s lead author. "In fact, there are DAOs for collectively investing in artists and for grassroots, community-based grants. These examples are relatively simple initiatives, but someday, could the power of DAOs be applied more broadly to corporate governance or even civic governance? By democratizing governance and leveraging blockchain technology, DAOs can empower communities and drive innovation in ways we are only beginning to understand."

Meet the researchers

• Eleunthia Wong Ellinger: House of Innovation, Stockholm School of Economics
• Robert Wayne Gregory: Miami Herbert Business School, University of Miami
• Tobias Mini: School of Business, Economics, and Information Systems, University of Passau
• Thomas Widjaja: School of Business, Economics, and Information Systems, University of Passau
• Ola Henfridsson: Miami Herbert Business School, University of Miami