The emergence of blockchain technology has brought with it not only new forms of money, like Bitcoin and Ethereum, new forms of capital raising like ICOs but also new forms of organization or new ways to organize human and financial capital. Among the most ambitious and controversial of these is the Decentralized Autonomous Organizations, or DAOs. A DAO is an attempt to reimagine the way humans coordinate, fund, and govern enterprises by shifting the trust from human hierarchies to immutable code. To understand why DAOs matter, and why they provoke such heated debate, one must place them in the broader history of why firms exist, how corporate governance functions, what edge do corporations have and what role law and economics play in shaping organizations.
Limited Liability Corporations
For most of human history, going into business meant putting your entire fortune and reputation on the line. In ancient partnerships and medieval trading ventures, owners were jointly and severally liable: if the business failed, creditors could seize not only the firm’s assets but also personal property. A single partner’s misjudgment could bankrupt everyone involved. The risks were enormous, and so businesses tended to remain small and local. Few people were willing to stake family estates and generational wealth on ventures that could collapse with one storm, one bad harvest, or one dishonest associate. The breakthrough came in the seventeenth century with the rise of joint-stock companies such as the Dutch and English East India Companies. Investors could buy shares and enjoy profits without exposing their homes or personal property to creditors. For the first time, liability was capped at the amount invested. This innovation fueled global empires, financed voyages across oceans, and enabled unprecedented accumulation of capital. But limited liability remained an exclusive privilege, reserved for chartered companies backed by monarchs. Ordinary merchants still bore the full burden of loss.
It was only in the nineteenth century that limited liability became broadly accessible. Britain’s Limited Liability Act of 1855 and the Joint Stock Companies Act of 1856 established a framework where shareholders were protected from debts beyond their investment. The United States followed gradually, with general incorporation and limited liability spreading after the Civil War. This transformed business. Before these reforms, investing in a railroad or textile mill meant risking personal bankruptcy. Afterward, investors knew their maximum loss was the capital they contributed, nothing more. The Limited Liability Company (LLC) is an even more recent creation. First legislated in Wyoming in 1977 and Florida in 1982, it combined the protection of a corporation with the tax flexibility and informality of a partnership. By the 1990s, LLCs had exploded in popularity, becoming the standard structure for small and medium-sized firms in the United States. Today, the LLC is often the default for entrepreneurs: simple, protective, and adaptable.
What limited liability enabled was transformative. It gave entrepreneurs the courage to dream, knowing failure did not mean personal ruin. It allowed capital to scale, as thousands of small investors could pool money without fear of losing more than their stake. It democratized investment, opening stock markets to ordinary citizens. Critics warned this shield might encourage reckless risk-taking, and indeed corporate scandals and financial crises have at times exploited it. Yet without limited liability, modern capitalism with its multinationals, public markets, venture capital, and startups would be unimaginable. This legal shield even explains cultural differences in attitudes toward entrepreneurship. In the United States, failure is survivable, so starting a business is encouraged. In countries like India, where historically creditors could harass entire families, parents discouraged their children from venturing into business, preferring the safety of salaried jobs. Limited liability, then, was not only a legal innovation but also a cultural revolution, one of the quiet foundations of the modern economy.
Coase’s Theory of the Firm and the Edge of Corporations
In 1937, economist Ronald Coase posed a question that has since shaped the way we think about business: why do firms exist at all? If markets are efficient at allocating resources and prices already communicate necessary information, then why not let every exchange take place through contracts between individuals? Why build large, hierarchical corporations? Coase’s answer was transaction costs. Every market exchange involves negotiation, enforcement, and monitoring. Imagine a factory that had to negotiate a new contract with independent workers for every task, or a retailer forced to renegotiate with farmers for every delivery. The endless bargaining would make production impossible. By forming a firm, these exchanges are internalized: managers direct employees, authority replaces haggling, and coordination becomes cheaper. The corporation’s true edge lies in reducing the friction of constant market transactions.
This explains how firms were able to scale during the industrial age. A company like Ford could vertically integrate by owning steel mills, parts factories, and assembly lines, because coordinating them internally was more efficient than dealing with countless outside suppliers. Global corporations, too, could manage vast supply chains across continents because the corporate form smoothed over the inefficiencies of fragmented contracting. Yet Coase also emphasized that firms cannot grow without limit. As organizations expand, internal costs, bureaucracy, coordination problems, agency conflicts rise. At some point, these outweigh the benefits of internalization. A firm will expand so long as it is cheaper to bring an activity inside than to contract it out, and it will outsource or stop growing when the reverse becomes true. Thus, the boundaries of firms are not fixed, but constantly shaped by the balance of internal and external costs.
Coase’s insight reframes corporations as contingent solutions rather than inevitable fixtures. Firms dominate when transaction costs in the market are high; markets dominate when those costs are low. Today, with digital platforms, global networks, and blockchain-based DAOs, the boundaries Coase described are being tested again. Just as limited liability laws once transformed the scale of business, decentralized technologies may lower transaction costs further, opening the door to new ways of organizing human and financial capital. Coase showed that the corporation’s edge is not mystical but practical: it reduces friction, imposes structure where markets falter, and enables collective goals at scale.
A DAO: What is it?
A Decentralized Autonomous Organization (DAO) is a collective whose rules are embedded in smart contracts on a blockchain. A smart contract is code that executes agreements automatically, without requiring human intervention. Members participate by holding tokens, which serve both as a financial stake and as voting power. Unlike traditional companies where authority rests with executives and boards, a DAO operates through rules that are transparent, verifiable, and enforced by code. Anyone can join by acquiring tokens, and decisions about spending or governance are made through open proposals and votes. DAOs arose to address problems that traditional firms struggle with: the difficulty of coordinating across borders, the inefficiencies of centralized decision-making, and the reliance on managers or intermediaries. If blockchains could make payments borderless and trustless, DAOs extended that same principle to governance.
The contrast with corporations is striking. In a firm, capital is held in bank accounts overseen by authorized executives. Spending follows a chain of approvals, regulations, and audits. In a DAO, funds are kept in a blockchain treasury. No single executive can move them; only approved proposals, voted on by token holders, can trigger transfers, which smart contracts then execute automatically. Every transaction is public, offering radical transparency far beyond traditional shareholder reports. Governance is equally distinct. Corporations practice limited, representative democracy: shareholders vote annually, often with little engagement. In DAOs, governance is continuous. Token holders can propose changes at any time, and votes occur frequently. While this creates liquid and transparent decision-making, it also risks domination by “whales,” or large token holders. To counter this, some DAOs experiment with quadratic voting, reputation systems, or delegated voting. Despite these challenges, DAOs represent a bold attempt at direct, on-chain democracy, offering a sharp contrast to the concentrated leadership of corporate governance.
First DAO: The DAO
The first serious attempt to answer that question came in 2016 with a project simply called The DAO. Built on Ethereum, it was envisioned as a decentralized venture capital fund, where contributors could pool their Ether and vote on which startups to support. The excitement was immense, and so was the fundraising: in a matter of weeks The DAO attracted over $150 million worth of Ether, making it one of the largest crowdfunding efforts in history at that time. But within months, a vulnerability in the code allowed a hacker to siphon off about $50 million. What followed was one of the most contentious moments in blockchain history: Ethereum developers voted to “hard fork” the chain, reversing the hack and restoring the funds, while dissenters refused, leading to a permanent split between Ethereum (ETH) and Ethereum Classic (ETC). The lessons were harsh but vital: DAOs showed promise, but code could not eliminate human judgment, nor could it prevent unforeseen consequences.
The wave of DAOs and successful governance
Governance defines every organization: who makes decisions, how they are made, and how accountability is enforced. In corporations, governance evolved over centuries, with shareholders electing boards and executives handling daily operations. Power is concentrated, processes are slow, and transparency is limited. DAOs emerged as a response, using blockchain to make decision-making as transparent as financial transactions. Token holders act as both shareholders and voters, able to propose, debate, and decide directly on-chain. Every vote is recorded immutably, transforming governance from an infrequent ritual into a continuous, participatory process that challenges the opaque traditions of corporate management.
MakerDAO, was one of the earliest and most influential governance experiments. MakerDAO manages the DAI stablecoin, a dollar-pegged cryptocurrency backed by collateral such as Ether and USDC. Governance in MakerDAO involves thousands of token holders who use MKR tokens to vote on issues like interest rates, collateral types, and risk parameters. Decisions once confined to a small risk committee at a bank are now debated in open forums, scrutinized by the community, and implemented through smart contracts. The stakes are enormous: billions of dollars in collateral depend on the decisions of this decentralized body. Yet the process has also revealed challenges. Participation is often low, with only a small fraction of MKR holders actively voting. Large holders can sway outcomes, raising concerns about concentration of power.
Another prominent example is Uniswap DAO, which governs the largest decentralized exchange in the world. UNI token holders vote on proposals ranging from fee structures to treasury spending. Unlike MakerDAO, Uniswap’s governance has emphasized delegation: many token holders assign their votes to trusted delegates, who act like on-chain representatives. This mirrors traditional representative democracy, but with greater transparency, since delegates’ voting records are permanently visible. Delegation has helped address voter apathy, yet critics argue it reintroduces hierarchy and power concentration, albeit in a new form.
In social DAOs, governance takes on a more cultural dimension. Friends With Benefits (FWB), a community that blends crypto with art, music, and social events, uses token-based governance not only to manage finances but also to shape identity. Members vote on partnerships, event planning, and rules of conduct. Governance here is less about managing billions in collateral and more about curating a community’s values. Still, the same dilemmas arise: how to balance inclusivity with efficiency, how to avoid dominance by wealthy token holders, and how to sustain engagement over time.
While DAOs are novel, law and economics still cast a long shadow. The most common legal wrapper for startups is the Limited Liability Company (LLC), a structure that shields members from personal liability while offering flexibility in management. Traditionally, DAOs have had no legal recognition, meaning participants could be personally liable for the organization’s actions. That changed in 2021, when Wyoming became the first U.S. state to pass a law recognizing DAO LLCs. This law allows a DAO to register as an LLC, making its smart contracts part of its charter, and giving members the same protections and privileges that corporate owners enjoy. For the first time, a DAO could be recognized in court, sign contracts, own property, and exist within the legal system. It was a pioneering step toward bridging the digital and physical worlds.
Beyond law, new ideas in economics have also influenced DAOs. One of the most provocative is Futarchy, proposed by economist Robin Hanson. The premise is simple: “vote on values, bet on beliefs.” In this system, participants decide collectively on goals, such as maximizing GDP or minimizing carbon emissions, but then let prediction markets determine which policies will best achieve those goals. In theory, this combines the legitimacy of democratic decision-making with the efficiency of markets. Applied to DAOs, futarchy would allow token holders to set objectives, while traders on a market effectively choose the strategies most likely to succeed. Though still experimental, it embodies the radical ambition of DAOs: to reinvent governance from first principles.
DAOs and crisis
The DAO hack of 2016 revealed one of the deepest tensions at the heart of decentralized governance: the uneasy relationship between code and human judgment. When an attacker exploited a flaw in the smart contracts of “The DAO” and siphoned away millions in Ether, Ethereum’s community was forced into a dilemma. Should they hold to the mantra that “code is law” and accept the hack as legitimate, or should they intervene and effectively rewrite history to restore the stolen funds? The eventual decision to hard fork Ethereum and undo the damage was, in practice, an act of governance, a collective social choice that overrode code. It demonstrated that while DAOs strive to minimize reliance on trust in people, human judgment cannot be eliminated. Governance is never just about rules written in code; it is about the ability of communities to make collective decisions in moments of crisis. If DAOs are laboratories for a new form of governance, then their crises are the stress tests.
MakerDAO’s crisis came in March 2020, during the global financial panic sparked by COVID-19. MakerDAO governs DAI, a decentralized stablecoin pegged to the U.S. dollar. As Ether, one of its main collateral assets, collapsed in price, smart contracts were supposed to liquidate positions and auction collateral. But with Ethereum’s network congested, only a handful of liquidators could participate. Some won auctions with bids as low as zero, draining collateral and leaving the system under-collateralized. DAI lost its peg, debts mounted, and insolvency loomed. Governance had to respond. Token holders voted to mint and auction new MKR governance tokens, diluting existing holders but recapitalizing the system. The episode exposed critical weaknesses: code could not anticipate extreme scenarios, decentralized decision-making proved slow in a crisis, and collective survival came at the expense of individual interests. Maker survived, but the scars remain.
Uniswap’s governance drama was less about survival than about resources. In 2021, token holders debated whether a portion of trading fees should be redirected from liquidity providers to the DAO treasury. Proponents argued this revenue was needed to fund long-term ecosystem growth; opponents warned it would weaken incentives for liquidity. Votes were held repeatedly, participation was low, and large delegates, often venture-backed dominated outcomes. The dispute illustrated the problem of apathy and plutocracy: when few participate, governance risks capture by concentrated interests.
Curve Finance’s “wars” reflected yet another dimension of DAO governance: competitive conflict. In 2020 Curve introduced vote-escrowed CRV (veCRV), rewarding long term token lockups with greater voting power. Rival protocols like Yearn and Convex began accumulating veCRV to direct Curve’s liquidity rewards toward their own pools. Convex succeeded in amassing so much influence that Curve’s governance became a battlefield between coalitions of protocols rather than individual holders. This “vampire war” showed how DAOs can be hijacked by strategic players and how governance power often accrues to aggregators who coordinate more effectively than individuals.
Taken together, these crises underscore the fragility but also the dynamism of DAOs. MakerDAO revealed the difficulty of crisis management. Uniswap highlighted the danger of low engagement and concentration of power. Curve demonstrated how governance can turn into proxy wars. Yet each crisis also sparked adaptation: Maker improved auctions, Uniswap refined delegation, Curve’s wars birthed new protocols like Convex that reshaped the ecosystem.
The lesson is clear: governance is not an afterthought in DAOs but their core function. Unlike corporations, where boards deliberate behind closed doors, DAO conflicts play out in real time, on-chain, and in public. This radical transparency empowers communities but also exposes fractures. Crises in DAOs are not failures but reminders that while code can automate, governance will always remain a profoundly human endeavor. The first wave of DAOs encountered problems that theory had overlooked. The second wave of DAOs sought to address these shortcomings. Multi-signature wallets like Gnosis Safe introduced safeguards, ensuring that no single keyholder could drain a treasury. Delegated governance, pioneered by protocols like Compound and Uniswap, allowed active participants to gather voting power from passive token holders, creating a more functional form of representation.
The story of DAOs is not simply one of technology, but of institutions. The DAO of 2016 revealed both the power and the danger of entrusting millions to code. The rise of DeFi DAOs showed that protocols could indeed be governed by communities and treasuries. NFT and social DAOs demonstrated that culture and community could be organized on-chain. Legal recognition in Wyoming and beyond pointed to a future where DAOs coexist with traditional firms. Futarchy and other experiments suggest that governance itself could be redesigned from the ground up. And Coase’s old question of why firms exist now finds a new answer: perhaps in the age of blockchains, firms and DAOs will complement each other, with each thriving where its comparative advantages lie.
The governance of DAOs thus oscillates between radical democracy and creeping plutocracy. On the one hand, they promise openness: every decision is visible, and every member can propose change. On the other hand, they risk reproducing the inequalities of wealth, since voting power often tracks token ownership. Experiments such as quadratic voting, where the cost of votes increases nonlinearly to favor smaller holders, or reputation-based systems that weigh participation history more than wealth, are attempts to counterbalance this tendency. Yet none of these models has solved the puzzle entirely.
Conclusion
In conclusion, DAOs are not the end of the company, nor are they a passing fad. They are experiments in reimagining how humans coordinate capital and decision making in a digital, global, and transparent age. They have stumbled, sometimes dramatically, but each failure has spurred new designs. Whether DAOs will eventually rival the corporation, or merely provide a niche alternative, remains to be seen. What is certain is that they force us to rethink the foundations of governance, law, and economics in the twenty first century. From the early collapse of The DAO to the cautious legal recognition in Wyoming, from the radical proposals of Futarchy to the enduring insights of Ronald Coase, the journey of DAOs reflects humanity’s ongoing search for better ways to work together.
Nithin Eapen is a technologist and entrepreneur with a deep passion for finance, cryptocurrencies, prediction markets and technology. You can write to him at neapen@gmail.com
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