What’s Holding DAOs Back? | Nasdaq
In 2021, DAOs broke out of their blockchain confines and spread into the real world. Until then, most decentralized autonomous organizations stuck to managing financial protocols or managing digital assets.
Backed by a set of new DAO laws in Wyoming, Vermont, and Tennessee, a wave of crypto collectives has begun to pursue bold acquisitions of real-world assets, including rare works of art, a golf course , a copy of the US Constitution, a National Basketball Association team and real estate. (Disclaimer: your author founded CityDAO, which purchased 40 acres of land in Wyoming.)
Scott Fitsimones is the founder of CityDAO and the author of “The DAO Manual.”
However, it became apparent as soon as DAOs collided with the real world that these powerful new vehicles for crowdfunding and organizing are limited by immense coordination and regulatory costs that can negate the benefits of using a DAO in the first place. By understanding these costs, entrepreneurs, researchers, and regulators have the opportunity to help DAOs deliver on their promise to create a fairer Internet.
On the coordination side, DAOs add friction to resource use by requiring members to adopt proposals. By default, most DAOs today risk being what Ethereum co-founder Vitalik Buterin would call a vetocracy, where the default result is “no” unless a proposal sponsor does not get enough support for his project. In some cases, the fact that the democratic process adds friction is a feature, not a bug.
See also: DAOs are the real meritocracies | Notice
For financial protocols that handle millions of user deposits, it should be difficult to change settings that could impact tens of thousands of users. In the early stages of value creation, however, a core team should have the power to take dozens of small actions toward a goal without the friction of proposal writing.
Many projects were eager to cede that authority and adopt the “DAO” moniker early in their lifecycle in an effort to drum up excitement in the community, taking on the task of coordinating hundreds of people just to make small steps. Additionally, most DAO infrastructure and tooling is built on the assumption that DAOs will primarily interact with smart contracts, which means there is little thought to allow members to act in the real world. .
On the regulatory side, starting a DAO is easy – you can create a multisig (a multisignature wallet, which requires multiple people to sign transactions together) in minutes. However, the cost of starting a compliant DAO is immense.
Everything from incorporating an entity to paying contributors in jurisdictions around the world can take weeks of legal work and rack up hefty bills, making the idea of starting a DAO seem like a wild ride. . If a DAO needs a lawyer and an accountant just to operate, that’s a huge barrier to entry.
When it comes to fundraising, vague securities laws can make crowdfunding a risky business. When it comes to spending money on anything off-chain, a DAO will need to open an institutional or “off-ramp” trading account, which can take several months.
And if the DAO owns real-world assets like land and trademarks, the cherished ownership of bifurcation, which allows a group that disagrees with the main group to branch out, becomes even more difficult, or even impossible.
Make DAOs work
Many of these coordination and regulatory costs can be solved through innovation. Entrepreneurs create tools to ease the burden of payroll, compliance, and DAO governance. Some of these obstacles need to be overcome at the political level, for example by clarifying the DAO’s bylaws and securities laws. Further research is also needed on governance mechanisms to move DAOs away from vetocracies and towards meritocracies.
Sometimes, however, the high costs of coordination and regulation are simply worth paying. For example, important parts of the Internet infrastructure that touch the lives of many people should be decentralized. MakerDAO, which acts as a kind of Federal Reserve gatekeeper to the stablecoin DAI, is a great example of something that should be very decentralized because trust in the protocol is established by the fact that it is (theoretically) run by a large group and safe from the whims of one person. The success of Bitcoin, Ethereum, and the internet itself is largely due to decentralization, which has brought them robustness and passionate communities.
See also: The Psychological Differences Between Bitcoin and Ethereum Governance | Notice
Making the DAOs work is an important project for humanity because they promise us a more democratic future where we own and govern the public squares of tomorrow. One thing is clear: the demand for democratic systems is growing and people are skeptical of a few platforms that rule the internet.
By reducing coordination and regulatory costs, we can make DAOs more viable and help them achieve their original vision of creating a fairer level playing field and a more democratic Internet.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.