The promise of blockchain technology extends beyond purely monetary and financial applications. Blockchain enables the creation of decentralized protocols that can revolutionize how communities operate, enforcing rules of interaction among different actors at the protocol level. This shift replaces social consensus with technical consensus, fostering protocol-based social interactions encompassing business and societal governance.

Although we may not see states governed by decentralized autonomous organizations, or DAOs, in the near future; however, functioning DAOs already manage crypto communities that set rules for ecosystem operations. These setups will inevitably influence the real world, leading to the emergence of “real-world” businesses based on DAO models. 

Currently, we can see the integration of crypto-inspired mechanics into traditional businesses, which can be categorized into three high-level groups: 

1) Immutable ledger for record-keeping and automated transactions

Blockchain can serve as an immutable ledger to facilitate record-keeping and automate business transactions through smart contracts. A prime example is real estate, where ownership can be tracked and verified on-chain, and property rights can be tokenized as NFTs and transferred accordingly. Supply chain management and logistics also benefit from blockchain, making business flows tamper-proof and automated. 

2) Tokenization

Tokenization allows any existing value to be represented on the blockchain. Loyalty rewards programs, for instance, can turn loyalty points into tokens distributed to users with each translation, creating a market for loyalty rewards and attracting more customers. Distributed collaboration networks, such as decentralized physical infrastructure networks (DePINs)  and AI networks, reward participants with tokens that can be used within the ecosystem, creating a self-sustaining economy. 

3) Distributed governance

Implementing a distributed governance approach to making business decisions and building business structures based on DAO-inspired ideas would be a more holistic approach to applying blockchain technology to real-world business. 

The DAO approach

To illustrate, let’s consider a ride-sharing business based on the DAO approach. The ecosystem includes drivers, passengers, payment providers, and infrastructure providers. Payment and infrastructure providers maintain the network, handle payments, and develop the underlying protocol. A smart contract manages driver-passenger matching and tracks the ride flow, with reputation scores recorded on-chain. Cash flows directly from passengers to drivers, increasing driver profits, while a portion is routed to the infrastructure provider to sustain the network. Ecosystem governance tokens, earned by drivers and passengers as loyalty rewards, allow all actors to influence system parameters, balancing interests flexibly. 

At Waves, one of the first L1 blockchain launched in 2016, we have always been interested in governance models. In 2022, we launched Power Protocol to advance blockchain governance. 

However, the Waves ecosystem faces a stress test triggered by the FTX bankrupts and Luna stablecoin depeg. Waves’ algorithmic stablecoin USDN failed to maintain its $1 peg, leading to a sell-off of the Waves token and initiating a slow death spiral. Many products on Waves depended on USDN, causing a contagion effect. Despite personal efforts to mitigate losses, the only solution was to continue ecosystem development by launching new products and creating value.

That’s where the DAO model came into play—the ecosystem funding process became fully decentralized. Waves DAO was launched, where Waves network validators and active community members decided how to spend part of the inflation that the validators earned to propel the ecosystem further and launch new products.

An important part of Power Protocol is slashing mechanics. It provides accountability for the decision-making process. The DAO had certain KPIs established before its launch; if the governance process leads to meeting those KPIs, decision-makers are rewarded, and their voting power is increased; otherwise, they are slashed, and their voting power is taken from them. In my opinion, this is crucial for real-world application of DAOs; simple DAO models usually used in crypto are actually worse than “off-chain” governance since they don’t have any checks and balances against manipulation and abuse and usually just realize weighted voting based on token balances, where the group of holders with the most tokens can have any proposal approved by the DAO. 

In Waves’ DAO, slashing provided a higher level of accountability for the DAO participants and made the DAO focus on its main goal—funding the development process and propelling the ecosystem forward as a whole. 

The Waves example demonstrates that DAO models can succeed where centralized models fail. Properly implemented decentralized governance can be more robust and resilient than centralized counterparts. This approach is not limited to blockchain but can transform any business model by making governance more inclusive, setting clear KPIs, and optimizing cash flows.