Reforming governance in the Web3 era

The world of cryptocurrencies is rapidly evolving, capturing the attention of mainstream corporations and financial institutions, and developing new methods of using crypto holdings. This dynamic field is seeing significant excitement, especially with the rise of Decentralized Autonomous Organizations (DAOs).

DAOs are blockchain-based organizations that are owned and managed by their communities. Adhering to the core principles of blockchain technology, such as decentralization, transparency and security, DAOs offer an innovative alternative to traditional hierarchical governance systems. They are not only popular right now, but are expected to gain more popularity among the general public soon.

In this article, we will look at everything we need to know about DAOs.

What are DAOs?

Decentralized Autonomous Organizations or DAOs are organizational structures bound by the members. It is controlled by token holders or shareholders and not by a central authority.

DAOs are embedded in the blockchain and run through smart contracts. It allows users to collaborate with individuals around the world. Members can create rules and vote on important issues using blockchain without the need for a central administration.

DAOs are open source as they operate on public blockchains. Unlike traditional organizations, the activities and cash flows that occur in a DAO are accessible to anyone, drastically reducing the risk of corruption and censorship.

Unlike the situation where a majority of shareholders do not have access to a company’s financial status, DAOs have a public blockchain balance sheet where every transaction is transparent and documented. Since all financial transactions are recorded on the blockchain, anyone can review their accounts.

Key Features of DAOs

DAOs offer an interesting set of features that differentiate them from traditional organizations such as

1. Core group vision

A DAO’s original concept or structure was devised by a core group, but what makes it stand out is how it has grown beyond those individuals. The DAO’s direction and operations are controlled by the entire community through voting and ongoing proposals after its launch.

2. Visible framework

The DAOs code is stored on a public blockchain such as Ethereum. This code regulates the DAO’s rules, decision-making procedures and treasury administration. It is accessible and visible to all, guaranteeing total transparency and eliminating the need for blind trust in central authorities.

3. Decentralized

In a DAO, no individual has total control. Collective decisions are made through proposals and voting by token holders. Smart contracts also automate essential functions, ensuring that the activities are performed exactly as designed and verified on the blockchain.

4. Publicly Auditable Finances

The blockchain records all financial transactions within the DAO, providing exceptional transparency. Members can hold the DAO accountable for its financial decisions by simply accessing and examining treasury allocations, expenditures and investments.

DAOs’ flexibility and decentralized nature allow them to be used for purposes beyond cryptocurrencies.

Classifications

These organizations can be classified based on their functions that have emerged over time. All DAOs serve as a governance mechanism for discussions, proposals and implementation, regardless of type.

1. Protocol DAO

These DAOs are used to transfer power from a core team to the community to issue tokens in the market. Protocol DAOs are used as governance mechanisms on lending platforms to maintain a decentralized and distributed manner. Uniswap is one such example of a protocol DAO. Uniswap is the largest decentralized exchange that launched its management system in 2020.

2. Investment DAO

Investment DAO combines the ability of community ownership and blockchain technology to make collective financial decisions. Unlike traditional investment funds where a centralized party made the decision. Members usually pool their capital in the form of DAO tokens and vote on how the funds should be invested.

3. Social DAOs

Social DAOs transform every social group into a digital business. Membership in these DAOs can be obtained by purchasing DAO tokens as membership fees. One such social DAO is Friends with Benefits which consists of Web3 enthusiasts, developers and operators. They pay an FWB fee to gain access to this exclusive club.

4. Assign DAO

These DAOs serve as a funding mechanism that fuels innovation. Token holders of the DAO collectively decide which project receives funds based on which they themselves organize funding pools. MetaMask Grants DAO is the official grant program by MetaMask. They focus on security, scalability and user experience by supporting projects within the Ethereum network.

Major advantages of DAO

DAO offers many advantages over traditional organizations that have attracted interest from various parts of the Web3 ecosystem.

1. Trust-less

The code that runs the smart contract oversees all tasks necessary for the organization to perform. Members are united by their common interest and vision for the success of the DAO. It fosters a strong sense of trust and community.

Individual members of the community can become the leader based on relevant skills and the community trust rather than a predetermined hierarchy in traditional organizations.

2. Adaptability

The DAO’s smart contracts can be upgraded and modified through community acceptance, allowing the organization to quickly respond to changing conditions and opportunities. DAOs can be organized for almost any purpose, including managing investment portfolios, sponsoring open source initiatives, and even regulating virtual land in the metaverse. It opens up a world of limitless possibilities and inventions.

DAOs’ open nature encourages collaborative brainstorming and experimentation, which can lead to unique solutions and innovative ideas.

3. Efficiency

DAOs defy geographic boundaries, allowing individuals from around the world to collaborate and participate. Repetitive tasks such as money management, fund distribution and proposal execution can be automated using smart contracts, improving efficiency and reducing human error.

Challenges Facing DAOs

Despite its rapid growth, DAO still faces significant problems and has a long way to go. DAO’s key errors are not insignificant and should be dealt with immediately.

1. Legal restrictions

DAOs cannot fully integrate into the current regulatory framework, as they do not exist anywhere and do not operate like businesses. DAOs have to deal with several difficult regulatory and legal challenges.

2. Underdeveloped infrastructure

Traditional companies benefit from a well-developed operational infrastructure to maintain a clear structure and effective decision-making procedures. The current stage of the DAO is to create from the ground up an infrastructure for management, earnings, money management, communication, etc., similar to that found in traditional companies.

3. Security risk

Since smart contracts are immutable, changes cannot be made once the contract is encoded and placed on the network. This creates a security risk in the technology and can be exploited as the code is visible to everyone and can be difficult to recover.

While these obstacles are significant to DAO growth, they also offer potential for innovation and improvement. Ongoing research, technology breakthroughs, and community collaboration are critical to addressing these issues and paving the way for a more resilient and exciting DAO environment.

Closure

The introduction of DAOs in the Web3 environment has solved many challenges in corporate governance in an innovative approach, showing progress over traditional centralized organizations. The potential of DAOs to overcome issues such as legal restrictions, underdeveloped infrastructure and security risks will determine the survival of this new governance model.