What is a DAO?

One of the most compelling features of cryptocurrencies is that they are decentralized, which means they are not controlled or governed by one single entity or a bank. Instead, cryptocurrencies use consensus mechanisms, which divides the work amongst multiple computers, networks, and nodes.  

A DAO, short for Decentralized Autonomous Organization, was inspired by crypto’s decentralization. It began as a quest to answer “How can we exchange values in a trusted environment?” A DAO is a software that runs on the blockchain, using a set of rules written down in code that are enforced by the network of computers running the same shared software.  

Image Source: Medium.com

How does a DAO work?

The DAO acts as a form of a venture capital fund utilizing open-source code without traditional management structures. To become a member of a DAO, you must first purchase its cryptocurrency. Holding the DAO’s asset allows you weighted voting rights on projects and updates, proportional to the amount you are holding.  

Fueled by the Ethereum network, the DAO allows investors to transact, by sending and receiving money from anywhere in the world through an automated, crowdsourced process, known as smart contracts. The smart contracts are then programmed to execute ‘if and when’ certain conditions are met. These conditions are decided by the DAO Stakeholders. Once the conditions, and rules are established and programmed on the network, the DAO enters a funding stage where anyone wishing to access it can purchase its cryptocurrency and participate in it. Once the funding phase is complete, the DAO is considered live and operational, and all key decisions in the organization are through a consensus mechanism.  

Why are DAOs going mainstream?

The DAO is proving to become mainstream as it’s particularly unaffiliated with any nation-state, or entity, thus removing any bureaucracy or administrative hierarchy. Since the rules are embedded in code, there is no need for human capital management. It also promises the elimination of human error or the manipulation of funds by placing the decision-making power into the hands of an automated system, free from any human interference.  

DAOs can be used for many purposes including investing, fundraising, and buying NFTs, all without any middle-man or centralized authority. One of the most prominent functions of a DAO is accepting donations for fundraisers. The donations can be accepted by members of a DAO from anywhere in the world, with the voting rights determining where these funds are being used and for which cause. This goes to show the potential that a DAO has, as we enter the realm of the metaverse, and De-Fi protocols.  

Criticisms and Limitations of DAOs

Still in the early stages, but growing in popularity, DAOs have a long road ahead before becoming mainstream and trusted. As we come to the end of 2021, DAOs are still subject to significant limitations including public policy problems, security and regulatory issues as well as economic problems.

The first limitation we will talk about is the use of DAOs for illicit and undesirable purposes. Although most DAO projects are aimed to serve the common good, due to its autonomous nature, it opens the possibility of scandalous use. Some examples of this include evading federal regulations or coordinating social resistance/terrorism attacks. In the wrong hands, DAO projects can result in some really bad situations.

Another limitation is the security and regulatory uncertainty that comes with DAO. In 2016, near the dawn of the original DAO, a paper was published addressing several potential security vulnerabilities, cautioning investors from voting on future investment projects. Due to these vulnerabilities, hackers attacked the DAO. These hackers gained access to a massive 3.6 million ETH, which was worth over $50 million at the time. Although many of these vulnerabilities were resolved shortly after the attack, we still see security problems with DAO today. When looking at regulatory uncertainty, the SEC holds back the development of DAOs and the optimization potential of their digital assets. Although there are many regulatory issues, a major one has to do with DAO claiming to be a crowdfunding contact but since it is neither a broker-dealer nor a funding portal registered with the SEC and the Financial Industry Regulatory Authority, they could not meet the regulations for crowdfunding requirements.  

When looking at the economic limitations, the consequences of decentralized decision-making can cause problems. Because DAOs use majority voting consensus, many issues voted on may result in the compromise of the lowest common denominator and a mediocre outcome. Because of this, DAOs tend to lean towards low risk, low reward outcomes instead of high risk, high reward outcomes. Another issue is the fact that if DAOs start to outperform human run companies, they could not only become monopolies or oligopolies, but could avoid regulations prohibiting price fixing or collusion.

Although, as seen above, DAO has faced many problems in the past and will continue to run into them in the future, but being in such an early stage of development, and solving such a large public problem, the future of DAOs still look very promising.

Future of the DAO

DAOs show a huge potential for widespread adoption and competition with traditional organizations. Many big players in the space see our future having the most successful companies as DAOs.

Image Source: thetilt.com

Jonathan Turley quoted, “I think DAOs are the new LLCs … I think in five years, companies won’t have equity anymore. They’ll have tokens, and they’ll be represented as DAOs.”

In May, Mark Cuban also tweeted his thoughts on the value of DAOs. “The future of corporations could be very different as DAOs take on legacy businesses. It’s the ultimate combination of capitalism and progressivism … If the community excels at governance, everyone shares in the upside.”

We have already seen many companies switch to a DAO configuration but one that has caught the attention of many in 2021, is the first DAO to bring NFTs into orbit. Jenny DAO is a recently launched project, self-proclaimed as the Metaverse DAO, that focuses on the purchase and sale of NFTs. Members of Jenny DAO are provided fractional ownership of the organizations NFTs. These members oversee and vote on specific NFTs to be bought which are then put on Unicly to be sold to the highest bidder. In May 2021, Jenny DAO acquired its first NFT, an original song created by legendary DJs, Steve Aoki and 3LAU. With this purchase, all members of the organization became co-owners of the original song.

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