As the crypto space and the blockchain world continue to mature, many compelling use cases are being put to the test.
Today we take a look at DAOs. While DAOs look promising, like other communication and management hierarchies, there are advantages and disadvantages to this approach.
If you’re wondering what a DAO does, or if building a DAO is the right choice for our specific business goals, this article might be of some help.
What is DAO?
Read the advantages and disadvantages of DAO in one article
Although it only recently started to become a household name, the first DAO was actually created in 2016. Here is how Investopedia explains the narrative of the origins of the first DAO:
“The original DAO was an organization designed to be automated and decentralized. It was a venture capital fund based on open source code and had no typical governance structure or board of directors.
In order to be fully decentralized, the DAO is not affiliated with any particular nation or country, although it uses the Ethereum network. Why build an organization like a DAO? DAO developers believe that by handing decision-making power to automated systems and crowdsourcing processes, they can eliminate the risk of human error or human manipulation of investor funds. “
By using blockchain, DAOs are structured so that anyone with voting rights can vote and help determine the direction of a project or company.
Decentralization and autonomy are widely considered key components of the Web3 philosophy, and as such, the DAO hopes to make a compelling case for those building products in a consumer-centric environment.
In theory, a DAO allows a business or entity to be run by a group of supporters in the truest sense, without any individual having the final say. The basis of DAOs is the introduction of tokens that can be used to vote on various improvements or protocols.
With hundreds of DAOs created and a huge increase in developer education since 2016, more and more developers and business builders are considering using DAOs to operate.
Advantages of DAOs
Read the advantages and disadvantages of DAO in one article
DAOs offer a number of benefits that, for a particular use case, we can hope for will increase over time. As blockchain technology becomes more user-friendly, more users will be able to actively participate in DAOs without being limited by current technical knowledge.
Let’s take a look at some of these benefits.
decentralization
By design, DAOs aim to be as decentralized as possible. While it is difficult to achieve 100% decentralization no matter how hard you try, a decentralized autonomous organization emphasizes that it is driven by the collective rather than any individual.
Typically, in a public company, the CEO and the board of directors ultimately call the shots, and users or customers may not have much say.
For example, there is a growing perception that many employees in retail jobs are earning unsustainable wages. If a retail store is run as a DAO, users can vote on what they think is fair compensation.
With DAOs, participants have a greater say in the direction of the organization. While voting power can be weighted in a DAO, the power is significantly lower compared to more traditional businesses where leadership determines the direction of the company.
DAOs offer participants an opportunity to “play the game”
Part of the underlying mechanism that allows DAOs to flourish is that each participant has some opportunity to “play the game”.
First, DAOs that use governance tokens require users to burn or use their tokens to vote, which will encourage DAOs to be thoughtful about every vote. Governance tokens essentially give users the ability to influence the future of the DAO.
Second, every vote on the blockchain is public, meaning that every time a user votes, their reputation is online and fully displayed publicly. Based on the employee salary example mentioned above, after the vote, it will be clear who wants to keep employee salaries the same and who supports a company-wide raise.
While not foolproof, this literal and symbolic cost encourages thoughtful voting and reduces the prevalence of “bad ideas.”
community driven
Another benefit of DAOs is that they make it easy for communities around the world to connect to build a vision of prosperity. With internet connectivity and governance tokens, almost anyone can participate in building the future of Web3. Whether this is shaping the future of domains like ENS or creating a popular way to earn cryptocurrency, the DAO is open to individuals who may have had the opportunity to participate in the past.
Also, like owning stock in a company, participating in a DAO gives us an ownership that drives innovation further and even financial rewards.
Disadvantages of DAOs
While DAOs have many benefits, there are also some important drawbacks to consider.
Reduced decision-making speed
In particular, as a DAO, getting everyone to vote on proposals in a timely manner can be a challenge. Keeping DAO participants up-to-date and involved can be a challenge due to different time zones and investor priorities.
While there are ways to fix this, coordination can be a challenge if every decision requires a majority vote. Those who choose a DAO as an organizational business tool must be very proficient in this method of making decisions based on a specific structure. Especially in a fast-paced Web3 environment, speed is the key to long-term success. Sometimes, letting leadership make decisions quickly is the best way forward.
Bike Shed Effect
Read the advantages and disadvantages of DAO in one article
The community-driven effect of DAOs can be a blessing or a curse. While DAOs allow more users to participate equally in decision-making, this comes at the cost of the so-called bike shed effect.
As DecisionLab explains, “Bike Sheds, also known as Parkinson’s Law of Triviality, describe our tendency to spend too much of our time on the little things, and ignore the important things.”
Farnam Street shared a great example:
The “law of triviality” states that in an organization, the time spent discussing an issue is inversely proportional to its actual importance in the overall program. Major, complex issues get the least discussion, while simple, minor issues get the most.
Parkinson’s Trivial Law is also known as the “Bike Shed,” and Parkinson uses this story to illustrate it. He asks readers to imagine a finance committee meeting to discuss a three agenda. as follows:
Proposal for a £10m nuclear power plant
Proposal for a £350 bike shed
£21 a year coffee budget proposal
What will happen? The committee finally considered the nuclear power plant proposal within a very short period of time. It’s too advanced for anyone to really delve into the details, and most members don’t know much about the subject in the first place. One of the members didn’t know how to explain it to the others. Another commissioner put forward a proposal for a redesign, but it seemed like a huge undertaking that the rest of the committee refused to consider.
Should DAOs discuss implementing a more technical protocol that would gain more at the expense of alienating current users? Or do I need to update the colors of the logo?
“Bike sheds can have a negative impact on personal productivity because it prevents us from effectively managing our time,” DecisionLab wrote.
While no structure is immune to the bike shed effect, DAOs are more vulnerable to the negative effects of human bias.
Safety
While it is theoretically possible to start a DAO with just a few lines of code, security remains an issue as it requires a lot of technical expertise to implement. Considering that a well-run DAO requires a huge technology stack to operate efficiently, maintaining optimal security can be tedious and expensive. Furthermore, many participants of the DAO choose to remain anonymous, which creates an additional security risk.
While the tools needed to run DAOs are constantly improving, they do not have a strong security foundation, and DAOs could be exploited or exposed to other, worse, risks. While multisig can greatly reduce the risk of funds being misused, nothing is certain, especially in the crypto wild west.
For example, a user interface bug helped hackers exploit BadgerDAO for $120 million. Core contributor Tritium told Decrypt, “It appears that a group of users has set permissions on the exploit address, allowing the address to manipulate the funds of the vault.”
From phishing attempts on Discord to exploiting the user interface, online threats are still real because there is a lot of money online. Fortunately, the people building the future of DAOs also still see security as a priority, and may be significantly improved long enough.
A Bright Future for DAOs
While DAOs will inevitably face setbacks in the coming years, dozens of projects and businesses already use this promising structure.
Entrepreneurs have ample opportunity to engage builders around the world.
We will continue to see new and unique DAO use cases, ranging from music, fine arts, purchasing high-value assets, and more.
While we still have a long way to go before DAOs solve their problems, we’re still a long way from sports fans banding together to buy a sports team or investors buying open space and giving participants a say in what should be built Not far.
A DAO cannot be launched without building and deploying the smart contracts that form the backbone of the organization.
If we want to understand how to connect to the blockchain and deploy DAO smart contracts, it might be helpful to have a look at Alchemy.