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DAO – Blockchain Based Companies

Decentralized Autonomous Organizations (DAO) are relatively new, and it is difficult to write about them with precision, for their fast paced evolution as we write.

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Decentralized Autonomous Organization

Decentralized Autonomous Organizations (DAO) are relatively new, and it is difficult to write about them with precision, for their fast paced evolution as we write.

The concept of DAOs has been around since 2014, and the first real example was “The DAO“, the largest crowdfunding project in history. It was a completely decentralized organization with those funding the organization possessing full right to management. No bureaucracy, no centralized authority, no third parties. Just peer to peer funding. Unfortunately, technical problems ultimately led to the project’s failure, but the idea of DAOs continued to develop and improve. Since then, several DAOs have been launched, and the concept has gained in popularity.

To understand what a DAO is, several other concepts must be understood first: 1. Blockchain, 2. Ethereum platform 3. Smart Contracts

1. Blockchain

Blockchain is a technology that tries to solve the problem of centralization. In everyday life we use central authority to issue and validate information. Banks validate transactions, states issue documents, notaries validate documents, Uber validates my request for a taxi, and so on and so forth. State, Banks, Uber, and Notaries are all centralized authorities. Even sending email to a friend is impossible without centralized servers owned by the third parties such as Google. 

Blockchain is a record keeping system that removes the middle man, the central authority, where the validation is carried out by all the computers in the network, spread around the world.

Bitcoin is the first use case of blockchain applied in the financial industry. Blockchain’s possible applications, however, reach far beyond the financial industry.

2. Ethereum Network

Having a smartphone and only using it as a calculator is how Ethereum Platform Founder Vitalik Buterin defined what bitcoin was missing and Ethereum introduced.

Ethereum is a blockchain computer program similar to Bitcoin, which can be used additionally to create automated contracts.

Buterin’s idea was that blockchain technology (The idea of decentralization) could be applied beyond Bitcoin. So he created an open source platform for decentralized applications, a Do-It-Yourself platform for decentralized applications.

Today, Ethereum Network is run by thousands of computers all over the world and is truly decentralized, controlled by no single entity. The programming language used to write the so called Smart Contracts, needed to run the decentralized applications, is called Solidity (created by Vitalik Buterin).

3. Smart Contracts

Have you ever come across the paid elevators in Tbilisi, Georgia? Yes, you need to drop coins into the box installed in the elevator, otherwise they won’t take you up. The elevator moves only if you drop a 10 cents coin into its black box. This is a form of encoded contract, which we can call also Smart Contract.

A smart contract is a computer program, intended to automatically execute, control or document events and actions according to the terms of a contract or an agreement.

A contract always uses “If” and “Then” to define a certain rule of action. Take the example of the contractual interaction between a taxi driver and his customer: If you pay me USD 15, then I will take you to the airport

Obviously, Smart Contracts used in the Ethereum platform are far more complex. Smart Contracts may define rules for peer to peer interaction without third parties in many industries beyond the financial sector. For example, if you have free storage on your computer hard drive, instead of using Dropbox or Google Drive, you can rent it to someone and the Smart Contract will regulate the contract between you and the renter.

So, what are DAOs?

Now, the combination of Blockchain, the Ethereum Network, and Smart Contracts have enabled the creation of Decentralized Autonomous Organizations. The Complex Smart Contracts enabled on the Ethereum platform using Blockchain technology define the conditions that enable DAOs to function.

In simple terms:

A Decentralized Autonomous Organization is a smart contract with an intelligent algorithm capable of running an organization and making decisions based on the encoded information without the involvement of management.

As the name suggests, a DAO is decentralized and autonomous. One of the main problems of a traditional organization addressed by a DAO is that of Trust between stakeholders. DAOs offer open space for cooperation. This system allows physical or legal entities to collaborate with high efficiency and without the need to build trust. There is no simply need for trust.

Using Blockchain technology ensures decentralization. In fact, no single party can initiate or enforce any decision without the common consensus of all members. This data cannot be corrupted or modified, and the rules can be changed only with the consent of all interested parties in the network.

In a sense, the DAO works similarly to a corporation, though it does so in a more decentralized way and does not employ traditional hierarchical, bureaucratic rules. Another important problem that the DAO resolves is that of bringing into line the interests of the organization with those of its members.

The so-called principal-agent problems that organizations face are easily handled by the DAO. The transparency that a DAO brings with it resolves problems with information asymmetry and moral hazard in the principal-agent problem.

Gartner’s Emerging Technologies report

Decentralized Autonomous Organizations are in the middle to peak of the Gartner Hype Cycle for Emerging Technologies, 2019 curve and are expected to plateau in 5-10 years (just imagine how difficult it was to explain in simple terms Peak and Plateau in 2019 and how easy it is in 2020). In 5-10 years, we should have a clearer picture of what DAO-related expectations were realistic and which were not. I will nevertheless attempt at the end of this article to predict where DAOs could be in 5-10 years from now.


The real-life applications of DAOs today encompass profit and nonprofit organizations alike as well as large and small projects. Bitcoin, Dash, MetaCartelPanvala, and Commons Stack are a few real examples of DAOs today.

Technical and moral implications of DAOs

DAOs are still in their initial phase, and as such, unsolved problems still remain. The future of DAOs will be determined by how these problems are resolved. Two major problems are the technical and moral aspects.

Technical implications

The problem with integrating DAOs into the legal environment persists. The complexity of the technology is an obstacle to its own regulation. The unregulated nature of DAOs gives rise to a great many questions. For instance, if we don’t agree with something a DAO has done, who do we enter into litigation with? How and where does a DAO pay taxes? How is it held accountable? And most importantly: If the Smart Contracts that run our DAO turn out to possess a loophole of some kind, and hackers end up stealing all the DAO’s money, who will be held responsible?  

A few promising steps have been taken by several jurisdictions in regulating DAOs. The US State of Vermont, for example, has introduced a so-called Blockchain Based Limited Liability Company whose structure is examined before its registration along with the code that runs the organization. This seems like a really promising development and could potentially solve the problem with regulation.

Moral implications

The second problem is of moral nature. Is it a good idea to put the majority at the wheel? Does the majority make the best decision? Is the majority always right? Or as Tedex speaker Paul Rulkens asks: is the majority always wrong? Do we get better results by fully decentralizing organizations?

Personally, I think the answer is Yes and No.

In organizations where expertise in a certain field is valued (such as the medical industry, for example), we should not trust the majority. But there are organizations where the collective mind makes better decision (such as a charity) we should.


In my opinion, in 5-10 years, we will have an advanced blockchain network that will allow for extremely advanced smart contracts, and give us a clear picture of the fields where a decentralized autonomous organization is more expedient than traditional central authorities. And at this point, DAOs and Traditional organizations will coexist in peace. 

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