When functioning as intended DAOs create a pure form of governance where every participant's vote contributes to the process and is recorded on the blockchain.
February 21, 2022 · 3 min read
The purpose of a DAO is to create a structure for decentralized and automated decision making. Typically a DAO functions as a mechanism for governance around a project or organization. The rules of the DAO are written in code. Governance weight is distributed to the participants of the network based on set parameters. One of the most common ways that a DAO distributes voting power is through the issuance of a governance token. Holders of the governance tokens have the ability to create and vote on proposals. The decisions within a DAO are dependent on active network participants and a functioning smart contract.
A DAO allows for group decision making without a hierarchical power structure. DAOs allow groups to pool resources and vote on how to best make use of them. DAOs may have specific goals, like building a blue chip art portfolio (physical and/or digital), or they may not have set parameters about investment type. In the blue chip art example a DAO is a good fit because it is an investment category that is out of reach of most individuals on their own and there is the added benefit of utilizing the combined industry knowledge of the DAO members to make well informed investment decisions. There is power in this collective action.
One of the greatest benefits of the DAO is also one of its greatest potential vulnerabilities: code is law. What makes a DAO so powerful is that governance rights are distributed based on network participation (how “network participation” is defined varies from DAO to DAO) rather than a hierarchical power structure. This allows DAOs to operate across borders/cultures/socio-economic divides etc. This is possible because all decisions are initiated by satisfying certain parameters within the code.
However, if there are vulnerabilities in the code, bad actors can hijack the system for their own gain; for example, the original ethereum DAO hack in 2016. DAOs may also run into complex legal issues as they deal with cross border contractual agreements. Additionally, DAOs may sometimes take a long time to make a decision as the consensus mechanism is dependent on the smart contract parameters being met by the network participants.
Currently most DAOs rely on some level of centralization, especially in their initial stages, to ensure efficiency and flexibility. Through experimentation in governance models there will be smart contract standards developed over time that will support the wider use of DAOs across a myriad of industries, leveling the playing field and lowering the barrier to entry allowing active participants to have a meaningful voice in the governance decisions that they care most about.
The most important next step in the evolution of DAOs is that you get involved. The higher the percentage of the population that actively participates, the higher the chance we have as a society to build truly equitable smart contract standards. The world is changing whether or not you get involved. The DAO, for maybe the first time in human history, is a governance model that cannot discriminate against anyone who has the capacity to contribute. Let’s build a more equitable future… together.
Any field that is on the cutting edge carries with it a great amount of risk; anyone who has been in crypto for a few years should understand this. DAOs are an innovation within an innovation and therefore may carry exponentially greater risk.
If societal mechanisms (such as DAOs) are implemented in a way that effectively incentivizes humans to spend their personal intellectual capital towards what they care most about, imagine the benefit this could have on our planet. With DAOs, we are seeing the social aspect of blockchain coming to the fore, which is an incredibly exciting advancement. For a decade, we’ve seen the positive impact of decentralized currencies and financial markets. Now, we may be seeing the early stages of widespread decentralized governance.
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February 21, 2022 · 3 min read