Decentralized autonomous organizations, or DAOs, are one of the most fascinating use cases for blockchain.
Proponents of DAOs feel they have the potential to be revolutionary, giving communities a fully transparent and democratic mechanism to reach decisions that are in the best interest of most of their members, while ensuring everyone else gets the chance to have their say.
DAOs are popping up all over the place, whether it’s to fund larger companies, raise money for blockchain projects or pursue more idealistic goals such as attempting to purchase the first edition of a popular novel with the goal of making that book freely available to the public.
What Are DAOs?
DAOs are really just groups of crypto enthusiasts who come together, without any central leader to dictate what decisions the group will make. Blockchain technology plays a critical role with all DAOs, as they rely on smart contracts to facilitate voting and ensure that all decisions a community makes are enforced.
To become a part of a DAO, it’s necessary to acquire the group’s governance token, which bestows on holders the right to make proposals and vote on issues, such as how its funds will be spent and managed.
DAOs are typically made up of people from across the world, and use channels such as Discord and Telegram to enable communication between their members.
One of the most inspirational DAOs to emerge so far was ConstitutionDAO, which was a group of like-minded individuals that attempted to acquire an original copy of the U.S. Constitution at an auction by Sotheby’s.
The group ultimately failed in its bid, losing the auction, and chose to refund its members. Had ConstitutionDAO been successful, its members would have followed up with proposals on which museums would be allowed to showcase the document and for how long, and also what text should be displayed alongside it.
Other DAOs are more business-focused and don’t generate that much excitement. Mantra DAO, for example, is a community-led DeFi platform that allows people to borrow, lend and stake cryptocurrencies. Most of its community votes are centered on business issues, such as what new features to introduce, and so on.
Problems With DAOs
DAOs have some grandiose goals but they aren’t without their problems. One of the major criticisms of DAOs is that they aren’t always democratic.
The issue is that members are required to buy governance tokens to take part in the voting, with one token equal to one vote. Such a mechanism is obviously open to abuse.
A few so-called whales that purchase thousands of tokens could easily tip the scales against the wider community if they decided it’s in their interests to do so.
Another danger is more malicious abuse. If, for example, only two or three individuals acquired pre-sale tokens, they could vote to delay the public token launch indefinitely and keep all of the power in their own hands.
A second issue with DAOs lies with their smart contracts and possible vulnerabilities. The first-ever DAO, simply called “The DAO”, was launched in 2016 with the promise of allowing anyone in the crypto community to present their idea for a project and apply for funding.
DAO members would then vote on each plan and decide whether or not it deserves funding, and receive rewards if the plan achieved certain milestones.
The project was initially a big success with The DAO raising 12.7 million ETH (around $150 million at the time) from its token sale, making it the most valuable crowdfunding raise of all time. The DAO seemed destined for stardom, but within a few weeks, it failed dismally when hackers seized upon a flaw in its smart contracts’ code.
Just a few days after its launch, The DAO lost around 3.6 million ETH, or about $70 million at the time, after a hacker realized it was possible to ask the smart contract for a deposit refund before it could update its balance.
The attack led to what is known as the Ethereum Hard Fork, where the community basically reset the blockchain back to just before the hack, resulting in not one, but two Ethereum chains – Ethereum and Ethereum Classic.
The DAO’s hack highlighted one of the big weaknesses of DAOs. The issue is that the rules governing DAOs can be extremely complex, not to mention impossible to change without a community consensus.
If a vulnerability in a DAO’s smart contract code is found, there’s no way for anyone to quickly fix it. This inability to react means DAOs are vulnerable to attacks looking to exploit security failures.
Some DAOs have since emerged with ideas to solve these problems. With regards to the voting issue, OlympusDAO’s members have made a proposal to move towards a quadratic voting mechanism, which reflects the intensity of people’s preferences in collective decisions. Such a model greatly mitigates tyranny-of-the-majority and factional control problems.
What Are The Prospects For DAOs?
Although DAOs have had their setbacks, and will probably face more in the years ahead, it cannot be denied that there are dozens of incredible projects pushing forward under this unique governance structure.
DAOs are being used right now for multiple purposes. One popular use case that’s gotten attention in recent weeks is the use of DAOs to raise money – such as UkraineDAO, which last month raised more than $6.75 million in ETH to support Ukrainian soldiers fighting the Russian army.
DAOs are being implemented to make decisions in the metaverse. The Decentraland DAO, for instance, operates a decentralized city planning committee that gets to decide on its metaverse content moderation policy, land sale policy, and more.
For investors and enthusiasts who might be considering throwing in their lot with a DAO, it does of course remain a gamble.
No investment is totally safe, but what is equally clear is that some DAOs are taking big steps to safeguard their investments.
In the play-to-earn crypto gaming community, DAOs have become key players in the space. Over the last year, multiple gaming guilds have emerged that employ a DAO-based governance structure.
With gaming guilds, the idea is that the community bands together to buy NFTs that enable access to P2E games such as Axie Infinity, where some full-time players are able to earn thousands of dollars in rewards each month.
AxieInfinity NFTs are expensive, so guilds loan these tokens to the most promising players in return for a share of whatever profits they make from playing.
It’s a fairly straightforward business model that sees the guild community decide which NFTs to buy and which players to sponsor as “scholars” but it’s not entirely without risk.
The danger is that if a P2E game becomes less popular, its NFTs will quickly lose their value, impacting all members of the community.
One guild, Balthazar, is attempting to offset this risk. Instead of purchasing NFTs like other gaming guilds do, it instead looks to rent NFTs and then loan these out to scholars.
That way, if the NFTs lose their value, Balthazar won’t lose any money itself. That makes it a much safer bet for investors than guilds such as Yield Guild Games, which owns all of the NFTs it loans to scholars.
Other DAOs make a compelling business case too. Take FriesDAO, which is selling FRIES tokens to raise funds that will be used to acquire fast food restaurant franchises such as Burger King, Taco Bell, and Subway and run them under a democratic governance-led model.
FRIES tokens don’t confer ownership of FriesDAO’s restaurants or entitle holders to a share of the profits, but they will get to vote on proposals regarding their business operation and, perhaps, perks such as a free burger and fries.
FriesDAO’s plan is to acquire at least one restaurant in its first year of operation. FRIES token holders have been asked to review the financial details of its first planned acquisition, ahead of a vote on the acquisition that will take place in the coming weeks.
It will be fascinating to see if FriesDAO’s first fast-food restaurants can flourish under this model.
A Bright Future Awaits
With so many novel ideas for DAOs it seems clear that the concept is not going to disappear any time soon.
On the contrary, what we can expect to see is yet more unique and interesting use cases for DAOs emerging from the crypto industry, spanning ideas around business, music, art, buying high-value assets, and more besides.
The challenge for every DAO is to overcome the problems around the threat of centralization, scams, and security.
Make no bones about it though, these are problems that have already been overcome by other industries, and the crypto community is nothing if determined.Most DAOs are pursuing admirable goals, and that alone provides all the incentives necessary to find solutions to any problems they come up against.
With that in mind, it’s almost certainly only a matter of time before the DAO governance model shows it can succeed.