Decentralized Autonomous Organizations, or DAOs, are back with a vengeance. They can change the very paradigm through which we conceive governance and collective action. DAOs, or decentralized autonomous organizations, have come into the spotlight recently as they adopt decentralized, collaborative decision-making processes and member voting. This increase is fueled by the lightning speed development of blockchain technology and cryptocurrencies. DAOs are currently starting to tackle other issues such as scalability and security vulnerabilities. They’re growing by leaps and bounds, luring in big companies, and leading the way on groundbreaking new models of decentralized funding and governance. The DAO model itself is largely untested. It’s about to become much more important for the future of decentralized systems.
DAOs have already become an important marker in the development of decentralized autonomous organization. They are really the first cooperatives or democratic communities where every individual member may have a vote and may participate in decision making collaboratively there. This decentralized model is a dramatic departure from more top-down, hierarchical organizational norms. In those systems, a handful of leaders wield all the decision-making authority. This increased interest and popularity in the DAOs has been driven by the overall growing interest in blockchain technology and cryptocurrencies in recent years. These innovations provide the basic infrastructure and starting kit that makes DAOs possible and effective.
One of the first and most famous DAOs out there was aptly named, “The DAO,” and it first launched back in 2016. It was one of the first projects to experiment with decentralized funding and governance on the Ethereum blockchain. Yet “The DAO” became a scapegoat hero for all the wrong headlines. It suffered the most infamous security breach of any blockchain project to date, resulting in the loss of millions of dollars of Ether. This event was a useful reminder of the risks that come with early-stage DAO projects and the necessity of having strong security practices.
The Promise of Decentralized Governance
DAOs present a pretty attractive picture of democratized governance, where decision-making authority is held collectively by everyone in the organization. On the flip side, this tactic can lead to more democratic and transparent organizations. It provides certainty that all stakeholders have a say in determining where the community or company’s priorities should lie.
One of the most touted benefits of DAOs is their distributional promise. The ability to increase participation and engagement among their members. Because everyone has the opportunity to vote on important decisions, individuals are more likely to feel invested in the success of the organization. This, in turn, can produce greater motivation, collaboration and innovation.
DAOs can ensure higher levels of transparency and accountability. As with all blockchain transactions and governance decisions, the entire process is publicly auditable on the blockchain. This can help to prevent fraud and corruption, and ensure that the organization is operating in the best interests of its members.
Challenges and Opportunities
For all their promise, DAOs still have some hurdles to clear. Scalability is perhaps the biggest issue, as large scale participatory budgeting often faces challenges in coordinating complicated decision-making across hundreds or thousands of participants. Security is a major concern, as DAOs are susceptible to hacks and exploits.
The 2016 “The DAO” Hack that demonstrated the importance of thorough smart contract tests. More importantly, it underscored the importance of exercising good cyber hygiene—specifically, the need for rigorous security audits. The incident made clear the financial consequences of vulnerabilities in smart contract code. It then shone a spotlight on the industry’s lack of security protocols, calling for DAOs to do more to secure themselves from exploitations. Just a few weeks ago, Vestra DAO fell victim to a $500,000 exploit, demonstrating once again the security hazards that continue to plague DAOs.
With the challenges come unique opportunities to promote innovation. As the DAO ecosystem organically matures, developers have inherently prioritized solutions to tackle the scalability and security issues that have contributed to DAOs’ tumultuous past. This spans the creation of new, less resource-intensive consensus mechanisms, better smart contract auditing tools and decentralized identity solutions.
The Future of DAOs
Looking forward, DAOs will be a very different phenomenon in the years to come. One example is the increasing reliance on layer-2 scaling solutions. These innovations dramatically improve the performance and scalability of DAOs. Third is the development of more sophisticated governance structures. Quadratic voting and conviction voting are examples that are at the forefront of using new methods to improve the quality of decision-making.
Meanwhile, in the RAK Region and beyond, there is growing interest in paving the way for DAO association regimes. These new legal regimes would provide the legal recognition and regulatory clarity that DAOs need. These features, in turn, would help to draw the top investment and adoption of DAOs back to these regions. As companies such as Google Cloud take decisive steps into the Web3 arena, they’re not just funding DAOs, though—they’re providing the infrastructure and resources that these organizations require to flourish. This indicates a developing awareness of the ability of DAOs to disrupt incumbent business models.
DAOs are still very much in their infancy. With the next few years critical to determining their long-term success. The advocacy principles of decentralized governance and community ownership will remain important and applicable. This relevance will remain, regardless of what form technology takes in the future. DAOs offer a bottom-up, decentralized, and community-driven system that is not going away. On a larger scale, this creative method has the potential to upend harmful hierarchies in how organizations are designed and operated.
