Ethereum introduced the idea of Decentralized autonomous organizations (DAO), and it has become a leading classification of organization models. It started in 2016 after the original DAO — called The DAO — crowdfunded $150 million worth of ether (ETH) tokens — however, the functions and services offered by DAOs expanded from the crypto sphere to other industries.
Nevertheless, it was apparent that DAOs were dying a slow, painful death, and many considered it unable to live up to its promise. However, there can still be a resurrection for DAOs, so long as the proper steps are taken.
In this article, you will get detailed information about DAOs, how they work, the types of DAOs, their deficiencies, and how they can make a comeback.
What Are DAOs?
Decentralized autonomous organizations (DAOs) are organized, efficient, and effective means of sharing or distributing stakeholder power and resources. In other words, DAOs are software-enabled organizations that allow two or more people (stakeholders) to pool resources toward a common objective. The implication is that it allows all those pooling these resources to enjoy and equally share the value of achieving those goals.
During the industrial revolution of the last decades, LLCs (limited liability corporations) were the preferred way of creating organizations. However, DAOs are becoming more enhanced and reliable for creating organizations, businesses, and corporations. Especially in the web3 world, which aims to give back power to users, DAOs operate on open blockchain ecosystems such as Ethereum and often use native tokens. These native tokens contain rules encoded in smart contracts to ensure a smooth and equal distribution of power and resources.
How Does DAOs Work?
The first thing to note is that there’s no central authority in DAOs, which means that the members of the DAO have almost equal rights to make decisions concerning the DAO. It is a bottom-up entity structure where members have a token of the DAO and use it to vote on important decisions. What a DAO does is that it gives every member of an entity a voice and opportunity to partake in the decision-making process.
For this to happen, smart contracts need to exist. These smart contracts contain the code governing the DAO’s operation and are made publicly available. So, native or DAO tokens represent voting power and ownership proportion, and the more a holder has these tokens, the more power they have.
Types of DAOs
Below, we will be discussing some of the classifications of Decentralized autonomous organizations (DAO) and their functions:
- Protocol DAOs
First, protocols in crypto are open-source platforms that contain rules and regulations guiding users’ behaviour in such platforms. Uniswap, Compound, and Aave are some examples of protocols, and their goal is often to be as decentralized as possible. Hence, protocol DAOs are a way through which those who are members of a protocol will have a say in what is happening in such a network. Users of such protocols are given what is known as governance tokens, which help them exercise their voting rights. For instance, Uniswap token holders are the ones that usually decide the layer two networks the decentralized exchange protocol will be deployed on.
Image from DeepDAO and Coinbase As of December 2021
- Social DAOs
Social DAOs are also in existence, and they are just like social media and intend to bring people with the same social beliefs together. Hence, they are often in the form of online communities, and a good example is the Friends With Benefits and its $FWB token. To join this social DAO, you need about 75 $FWB tokens, giving you access to many things, such as crypto events, experts, and even artists.
- Media DAOs
Media DAO is a form of DAO that is trying to change how media personnel, consumers, and creatives engage the media industry. For a long time, the media has always been relying on advertising-based revenue models, but media DAOs want to change this. Hence, they are introducing a new method where both media content producers and consumers are rewarded with token incentives. An excellent example of this dates back to 2013 with the “Let’s Talk Bitcoin” podcast, but many different types of media DAOs already exist. One of them is the BanklessDAO, which is based on the Ethereum network and aims to create a newsletter and podcast for its consumers.
- Service DAOs
Service DAOs want to become the revolutionary platform where talent hunters and providers can work together. This is how this works. Service DAOs contain talent hunters worldwide and those who can provide different skills and services. So, what happens is that the clients deposit funds into the DAO treasury for the task. So, when the task is completed, the funds are shared according to the individual contributions of the talent providers.
- Investment/Investor DAOs
Investment DAOs are one of the most significant categories of DAOs and can allow investors to pool their resources together. This type of DAO is good for you if you want to invest in decentralized finance protocols, buy up a business, or even NFTs. Some good examples of this type of DAO are Flamingo, Komerab, MetaCartel Ventures, and many others.
Deficiencies in DAOs
While Decentralized Autonomous Organizations (DAOs) offer innovative approaches to governance and collective decision-making, they are not without their challenges and deficiencies, as seen below:
- Security Vulnerabilities: DAOs rely heavily on smart contracts, which are only as secure as the code they are written in. Any bugs or vulnerabilities in the code can be exploited, as seen in the infamous “The DAO” hack in 2016, where a significant amount of funds was siphoned due to a code exploit.
- Regulatory Uncertainty: The legal status of DAOs still needs to be clarified in many jurisdictions. Without clear regulations, DAOs operate in a grey area that can pose risks for participants, especially regarding liability, taxation, and compliance with securities laws.
- Scalability and Efficiency Issues: Decision-making in DAOs can become cumbersome as the organization grows. The need for consensus on every decision can lead to inefficiencies and slow the operation, especially if the governance model requires a quorum or majority vote for every minor change or action.
- Concentration of Power: Although DAOs aim for decentralized governance, there can be a concentration of power if a small group of members holds a significant amount of tokens or voting rights. This can lead to decisions favouring a minority rather than the collective interest of all members.
- Complexity in User Experience: DAOs can be complex for the average person to understand and interact with, often requiring specific technical knowledge. This complexity can be a barrier to entry for mainstream participation, limiting participation.
- Interoperability Challenges: DAOs often face difficulties interacting with other systems, platforms, or traditional corporate entities. This lack of interoperability can limit their ability to integrate with the broader economy and constrain their operational capabilities.
Addressing these deficiencies is crucial for the long-term success and sustainability of DAOs.
Can DAOs Make a Comeback?
The truth is that DAOs can make a comeback under the right circumstances. A DAO is much more likely to thrive and achieve its goals if it is run by those who genuinely believe in the objectives.
A few noteworthy DAOs have recently gained traction, illustrating the diverse applications and renewed interest in this organizational structure.
- The LAO: Reimagining Venture Capital
The LAO is a prime example of a DAO making a significant return, particularly in the venture capital sector. This member-directed venture capital fund operates entirely on blockchain technology, allowing investors to pool funds and collectively decide on investments in early-stage blockchain and crypto projects. The LAO’s success demonstrates how DAOs can provide a more inclusive and decentralized approach to funding innovative tech ventures.
- MakerDAO: Stability on the Blockchain
MakerDAO, one of the earliest and most successful DAOs, has seen a resurgence as the DeFi (decentralized finance) space grows. Its platform allows users to generate Dai, a stablecoin pegged to the US dollar, by leveraging cryptocurrency as collateral. MakerDAO’s success is indicative of the comeback of DAOs.
- Curve Finance: DAO Governance in DeFi
Curve Finance, a decentralized exchange for stablecoins, has adopted a DAO governance model, allowing token holders to participate in decision-making. This transition to a DAO structure has empowered its community, ensuring that changes to the protocol are made transparently and democratically. Curve’s success as a DAO highlights the potential for community-led governance.
- MolochDAO: Coordinating Ethereum Development
MolochDAO was created to address the issue of underfunded open-source Ethereum development projects. By pooling resources and allowing members to vote on grant allocations, MolochDAO embodies the collaborative spirit of the Ethereum community. Its model is funding public goods within the blockchain space.
These examples show the versatility and adaptability of DAOs across various sectors. DAOs are making a comeback and paving the way for a future where collective decision-making and decentralized governance are the norms.
Future Outlook for DAOs
The resurgence of Decentralized Autonomous Organizations (DAOs) is poised to be a testament to the evolving landscape of organizational structures and governance models in the digital age.
However, challenges such as legal recognition, regulatory clarity, and practical governance issues still need to be addressed.
Efforts such as improving smart contract security, seeking legal clarity, refining governance models, and enhancing user interfaces are underway to overcome these challenges and fully realize the potential of DAOs. Also, the innovative spirit and community-driven ethos of DAOs suggest they make a comeback, potentially reshaping the future of finance, corporate governance, and collective organization.
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