Putting your money in a conventional investment management firm means trusting a third party with your wealth.
At the end of the day, how do you know if your money is in safe hands? It could potentially be a Ponzi scheme, or worse the managers could flee with all the money and without notice.
How do smart contracts solve this problem?
Imagine an investment management firm where shareholders do not have to trust any fund managers with their money: because shareholders would be the managers.
Well, it’s possible, and it’s one of the outcomes of a Decentralised Autonomous Organisation (DAO).
A DAO is a leaderless entity that runs on a set of rules programmed by smart contracts.
It automates interactions within an organisation and gives a right to its token holders: either by governance, claim on dividends or access to a portfolio.
Through a voting system, DAO members can interact amongst each other and manage the organisation’s funds without trusting anyone but similar investors.
The same way Bitcoin does not require an intermediary in a transaction and offers an alternative to the current financial system, a DAO can make companies operate without a complex hierarchical system and manual processes.
It digitalises and automates a pre-defined set of rules for organisations: it is not confined to financial interactions but can be applied to any sort of decision or governance problematic.
The goal here is to make decision-making more transparent, efficient and collaborative.
Since a DAO is built on programs, changing the purpose or some pre-defined operations can be deemed complex as the rules are set in stone.
If a smart contract has a bug, developers may not be able to fix the issue. As such, depending on how smart contracts are built, they could be immutable and therefore jeopardise the utility of a DAO, in case a programming mistake occurs.