The Dark Side Of DAOs: Separating Fact From Fiction

Decentralized Autonomous Organizations (DAOs) are digital entities that operate on a decentralized platform, such as a blockchain. They are typically governed by a set of rules encoded in smart contracts, and they can be used to manage a wide range of assets and activities.

Experts have varying views on the potential and limitations of DAOs. Some experts believe that it has the potential to revolutionize the way that organizations and communities are managed and governed. They argue that the decentralized and trustless nature can give users greater control and autonomy over their assets and activities and help create more transparent and secure environments for conducting transactions and making decisions. Other experts, however, are more skeptical of its potential. They argue that the complexity and uncertainty surrounding the legal and regulatory framework could limit their adoption and growth. They also highlight the challenges and limitations of using smart contracts and other blockchain-based technologies to manage and govern complex systems and activities.

The views of experts on DAOs are mixed, with some seeing great potential in this technology, while others are more skeptical. As with any new technology, it will likely take time for the full potential and limitations to become clear.

Potential Benefits

DAOs offer an array of tantalizing advantages over their traditional centralized counterparts. One of the most notable advantages lies in their decentralized nature. Because they are not tethered to a single central authority, users wield more control and autonomy over their assets and activities. This unique structure can usher in a more democratic decision-making process and give users a louder voice in managing and using their assets.

Furthermore, given its trustless nature sets them apart from centralized organizations. They are governed by immutable, transparent rules encoded in smart contracts, creating an environment of unbridled trustlessness. Users aren't required to rely on third parties to manage their assets or conduct transactions, as the rules are predetermined and unchangeable without a collective consensus. In addition to this, accessibility is another shining benefit. Because they can operate on decentralized platforms, anyone with an internet connection can potentially participate, regardless of their location or other hindrances. This aspect can make it more feasible for people to partake in their activities and bask in their benefits.

Last but certainly not least, security is an invaluable advantage. Decentralized platforms are often more secure than centralized systems, meaning users can enjoy an added layer of security for their assets and activities. This can effectively thwart malicious attacks, fraud, and other types of threats, especially for organizations that handle large amounts of valuable assets.

Potential Challenges

While the concept of a DAO presents many alluring features, it's essential to acknowledge that there are also challenges and limitations to consider. One potential hurdle is the complexity of their operations. As they operate under rules encoded in smart contracts, this can prove challenging to understand and navigate for users unfamiliar with this technology. This can result in a lack of participation and hinder access to the benefits offered by DAOs.

Another possible challenge is the absence of legal recognition and regulatory clarity. Due to the relatively new and untested nature, there is currently no clear legal framework governing their operations. This can make it difficult to operate consistently and comply with regulations, creating uncertainty for users. In light of this, the operators must weigh the legal and regulatory risks involved in their operations and seek advice from qualified professionals knowledgeable about the intricacies of DAOs. It's possible that new regulatory frameworks will be developed in the future, but it would require collaboration among regulators, industry experts, and other stakeholders. This effort could lead to clearer and more effective guidelines for its operations. Nevertheless, it's also conceivable that these changes could take significant time and effort.

Ultimately, the evolution of DAOs will depend on the willingness of regulators to embrace their potential benefits while also addressing the challenges they pose. As they continue to grow in popularity and usage, it's likely that new solutions and regulations will emerge to support their sustainable growth and ensure their potential is fully realized.

Potential Use Cases

DAOs possess a paradigm-shifting potential to disrupt various industries and use cases. The possibilities for applying are limitless and some of the areas where they can create a colossal impact are governance, finance, and gaming.

It offers a novel approach to governance, where they can manage and oversee an extensive array of assets and activities. In the finance industry, it can bring about revolutionary changes by facilitating various financial transactions such as the transfer of funds or issuance of digital assets. Due to the trustless nature, they offer a secure and transparent platform for conducting financial transactions, leading to more reliable and efficient financial systems. It can be leveraged in the gaming industry to manage and govern virtual worlds, games, and other digital experiences, providing users with more immersive and engaging experiences. The decentralized nature o can create more secure and transparent gaming environments, leading to more engaging and captivating user experiences.

For example, a group of individuals could form a DAO to manage the allocation of funds, vote on decisions, and other activities related to the community or organization. The members could use smart contracts to encode the rules and governance structure and to manage the allocation of funds and other assets. Because it would be decentralized and trustless, the members would not need to rely on a central authority or third party to manage their assets or conduct transactions.

The members could use the DAO to vote on decisions related to the community or organization, such as how to allocate funds, what projects to support, or who should serve on the governing body. Because is it transparent and immutable, the members would be able to trust that their votes would be counted accurately and that the results of the vote would be fair and unbiased. The use cases illustrates how a DAO can manage and govern a community or organization in a decentralized manner. By using smart contracts and other blockchain-based technologies, it can provide users with greater control and autonomy over their assets and activities.

Governance Concerns In Reality

Is the reality of DAO the same as what I have shared above? My straightforward answer is "NO".

When some people talk about DAO, they immediately mention underlying technology, decentralization, transparency, and revolution. When some project teams talk about it, they speak on things like voting and governance. "Governance tokens" are perhaps the most shameless scam in this industry: “Buy a token, and you're part of the DAO.” It gives you the illusion that you have the opportunity to "decide" and you are owned part of the project. Even if the price dropped, it became more acceptable because this is your own project.

When a project team has carefully prepared and put a proposal on Snapshot, what choice does the "community" have? First, because of their limited knowledge, energy, connections, and abilities, people cannot propose valuable ideas. Second, voting rights are not as simple as one person, one vote, and you have already experienced that.

The Arbitrum team released their token before the holders did the voting. The Arbitrum Foundation faced backlash from the community after it held a "ratification" vote on decisions it had already implemented, leading to questions about the vote's meaning and the platform's decentralized governance structure. The proposal, known as Arbitrum Improvement Proposal (AIP-1), allocates 750 million ARB tokens (around $1 billion) to the Arbitrum Foundation for operational and administrative costs. The foundation has since announced that it will break up the controversial governance voting system and redo the vote after token holders revolted against it. Citing another incident, the ETH miners voted against 1559, but it still goes live -There has never been a victory for the people.

The current state of DAO governance is fraught with several issues that need to be addressed. One of the primary problems is the complexity and opacity of the governance process, which can make it challenging for members to comprehend how decisions are made and participate meaningfully fully. The distribution of decision-making power may not always be fair or transparent, with some members holding more tokens or influence than others.

Another significant issue is that the governance mechanisms are also prone to manipulation or capture by a select few powerful actors. These actors can skew the decision-making process in their favour, undermining the decentralized and community-driven principles that DAOs are meant to embody. Participation and engagement are also problematic, as not all members have the time, resources, or expertise to contribute actively to the governance process. Consequently, decision-making power may be concentrated in the hands of a small group of active members, which may not represent the broader interests of the community.

Do You Still Believe In The Future Of DAOs?

Yes, you should still believe in future.

These issues highlighted above necessitate more transparency, accountability, and inclusiveness in its governance. To address them, innovative governance mechanisms like quadratic voting, liquid democracy, and prediction markets are increasingly necessary. These approaches can foster more effective and equitable decision-making processes. Many experts including myself believe that DAOs represent a promising new model for decentralized governance and organization and will continue to play an important role in the future of blockchain technology and beyond. They are still in their early stages of development, and there are various types of DAOs with different goals and objectives. It is up to the community to critically evaluate the current state and work towards improving their design and governance in order for them to reach their full potential.

The DAOs you see right now maybe not be ideal. Jack Dorsey, the co-founder of Twitter and Square, has expressed concerns about the decentralized nature of Web3 being compromised by VC firms that prioritize profits over the principles of decentralization and blockchain technology. I believe that this issue extends to DAOs as well and that they are also compromised.

Some propose a more decentralized web, which could be called Web4, to address this issue. While the specifics of Web4 are not clear, it is clear that decentralization will be a central focus.