DAOs, Decentralized autonomous organizations, have gained immense popularity as associations that are presumably more democratic and equitable (1).
For those unversed, a DAO is a business structure akin to a corporation or an LLC made up of a token or a custom cryptocurrency and online community space on platforms like Discord.
Its members hold internal discussions and then vote to make the final decision on using the token. More funds you put in, the more votes you gain. DAOs promise that an organization’s decision-making will rely on a wide group of members instead of, let’s say, a select few “corporate elites.”
Since its beginning in April 2016, this structure has shown promise, which forged an ecosystem for digital startups outside Silicon Valley. To join a DAO, you will have to purchase the token. Then, you will chat with other members on platforms like Discord, participate in physical meetings, and even develop projects together. All in all, it is like a decentralized brand identity.
As a token holder, you get to vote on ratifying codes of conductors, collaborating with others, and approving monthly budgets. And since the blockchain records are open and transparent, the results of every vote are public.
Andreessen Horowitz and others have poured billions of dollars into them. However, it seems that investors and insiders have started to jeopardize the purpose of decentralization within DAOs, indicating challenges ahead for the crypto industry.
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DAOs: Exciting New Communities for Creatives and Entrepreneurs
Dao advocates argue that such groups allow rookies to participate in organized venture investing.
“We are witnessing an emergence of a hive mind – not the wisdom of crowds, but the wisdom of a smaller and curated crowd with skin in the game,” said Aaron Wright, a law professor and the co-founder of Tribute Labs (2). This company supports a network of DAOs like Flamingo, which purchases NFT artworks, and Neon, which invests in metaverse assets like avatars and fashion pieces.
DAOs made several headlines, and one of those famous instances was last year when ConstitutionDAO, made up of about 17k people, gathered over 40 million USD to bid for an early copy of the US Constitution. While the group was outbid by Kenneth Griffin, a hedge fund billionaire, it showed the strength of a DAO (Suggested Reading: Emerging Business Opportunities With Trends Like DAOs, Super Sacks, and Losing Weight with Psychedelic).
The promise of a large pool of funds is the main incentive for DAOs (3). Several DAOs today serve as communities for entrepreneurs and creatives (4).
In fact, the number of DAOs has surged to over thousands over the past few years, and their combined treasuries have reached a valuation of more than 13 billion USD in 2021 (5). One DAO called CityDAO even holds a parcel of land in ̇Wyoming, USA, and aims to pioneer a new asset ownership model (6).
However, experts in the crypto space worry that several DAOs may exist only to increase their tokens’ valuation, and it can leave enough open space for abuse.
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DAOs: A Flawed Model?
However, not everyone holds the same opinion. Raihan Anwar, a co-founder and head of community and culture of a DAO, called FWB, Friends with Benefits (7), described the group as a “creative incubator,” and joining the group is similar to “rushing for a frat.” It seems like a consequence of the decentralization ethos: it is often hard to stick to one mission when no one individual makes decisions.
In a recent interview, Vitalik Buterin, a co-creator of Ethereum (8), also said, “we can’t have a DAO to be a DAO; we need a DAO to have a mission.” However, maintaining the community itself comes with several challenges.
According to Sarah Moosvi, a co-founder of aGENDAdao, a group that supports nonbinary and trans artists working with blockchain (9), “the decentralized model is in some ways just as flawed as traditional corporate models.”
“Even though in theory, DAOs have no bosses, organizations still need to make decisions about who gets rewards for the work that goes in them,” Moosvi added.
If rewards primarily happen via the internal token, it can only support those members who don’t need immediate financial compensation or “sweat equity,” as Moosvi put it.
Several larger groups and startups have started experimenting with DAO governance. For instance, last August, SuperRate, an NFT marketplace, sent its users tokens equal to their transaction volume on the platform. Users could use the token to pick which users can open new storefronts on the platforms.
Other companies in the crypto industry, like Uniswap, a crypto exchange platform, and Ethereum Name Service, offering .ETH domain names have also come up with their governance tokens.
From the user standpoint, said Moosvi, the philosophy is that “I expect some remuneration for transacting your place and having you take a share of my activities.”
In theory, government tokens are not for financial instruments like company shares. But, it hasn’t stopped users from turning a profit on the secondary market.
More and more insiders and investors seem to have compromised the goal of decentralization within DAOs. And it serves as an indication of challenges ahead for the crypto industry.
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The Way Forward
Andreessen Horowitz is lobbying for the increased recognition of DAOs with aggression. Several investors in DAOs also receive a large pile of tokens as rewards.
It provides these investors with significant power over the organization’s future decisions. As a result, DAOs may end up readopting the traditional corporate structure (10).
Such a structure has the potential to bring some order to a space that has seen infighting, scams, and several other challenges. If left unchecked, it could compromise the decentralization promise that DAOs were based on.
If other decentralized projects follow this path, Web 3.0 will become just as centralized as Web 2.0, perhaps vilifying the entire crypto industry.