Where DAOs Excel — And Where They Must Improve

DAOs seemingly present elegant solutions to common problems, yet they are still widely misunderstood.

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Drobot Dean/stock.adobe.com

Decentralized autonomous organizations (DAOs) have received a lot of attention in the past year for good reason: DAOs are offering improvements upon the foundations of organizational structures. How we communicate, make decisions, and scale our projects have all been iterated upon since the first DAO appeared. Decentralization, transparency and open-sourced, community-driven decision-making are all cornerstones of a DAO.

DAOs seemingly present elegant solutions to common problems, yet they are still widely misunderstood. The reality is that DAOs are not a one-size-fits-all solution to all organizational problems. Rather, DAOs are well-suited to improve a few key facets of society, especially in the workplace and for other groups sharing a common goal.

DAOs are built on the core value of transparency.

DAOs are built on blockchains, which provide a verifiable, on-chain historical record. This ensures all decision-making is transparently and openly documented, holding the DAO accountable to their actions. The approach a DAO utilizes to execute its mission can be updated via open debate in real time, allowing a DAO to redirect and fine tune its path forward in a fast, and efficient manner.

If DAO participants discover that a particular aspect of a DAO's organizational purpose could be accomplished differently, there is no convoluted hierarchy of red tape to navigate in order to see changes come to fruition. DAO members simply propose and vote on changes, and, if agreed upon, changes can be implemented automatically based on what was encoded in the smart contract.

Of course, the decisions to make any changes in a DAO's form, function, or future direction are made in a fully transparent manner, so there can be no debate about whether changes happened fairly, as all members can see the percentage of votes cast and that the necessary threshold was reached.

DAOs excel at workforce cultivation and compensation.

Given the built-in transparency of DAOs, which enables coordinated and fair decision-making, the DAO structure is ideal for businesses and other groups with a shared objective. In an ideal scenario, DAOs represent a group of people with a shared vision that genuinely believes in the aims of the organization. People generally join a DAO because they are aligned with their principles or specific interests.

The drive to work toward a shared mission attracts talent that is passionate and eager to do their best. When this pool of contributors is spread out all over the world, the DAO has access to a much larger pool of candidates to fill positions and scale them in real time, depending on how the workload of the DAO changes over time.

Unlike the familiar structure of a company where employees wait for promotions from leadership, DAOs pay contributors upon the completion of a task, no matter their job title or regular purview. This ensures those who can and want to do the job are one and the same. This makes work an open-source, meritocratic marketplace that anyone, from anywhere, can excel within.

How can DAO execution improve?

Despite all the high praise, DAOs are experiencing some growing pains. Many DAOs have discovered just how difficult consistent community engagement can be to encourage and maintain. As DAOs launch, there tends to be a flurry of activity and ideas, but enthusiasm can wane as the more "boring" day-to-day management of the DAO proceeds. No matter how passionate a member may be about the DAO's stated goals, tedium can easily set in if there is no direct engagement and sense of maintained momentum.

DAOs represent an organizational revolution, but also one that needs to find new ways to keep their communities involved and incentivize contributors to stay active. By making the goals of the organization clear, DAOs will have a better shot of attracting participants whose values align with the mission of the DAO and, therefore, spark greater engagement.

Fair governance can also be hard to preserve, and issues such as double voting, account botting, 51% attacks and rewards distributions remain problematic to many. This is because most DAOs grant permission to vote via governance tokens and the process of obtaining and holding these tokens is not regulated in any consistent way. This system can very easily lead DAOs toward a centralized power structure, as it allows those economically advantaged and able to purchase more "voting power" to monopolize control.

Some even game the system by creating multiple identities and wallets to trick the DAO into thinking they're more than one person and enabling themselves to vote multiple times (commonly referred to as "double voting"). In the worst case scenario, this lack of checking for "unique identities" can lead to 51% attacks, which leave the DAO vulnerable to hostile takeover actions by bad actors wherein a single person or entity had majority voting power and can direct the DAO to do something beneficial to themselves, like distribute tokens.

By embracing decentralized identity-based solutions (DIDs) for wallets, DAOs can address many of these issues. DOAs should also look toward proof of personhood, soulbound tokens and verifiable credentials, as pointed out by a recent Bankless blog post — all of which take different approaches to identity. By being able to verify the uniqueness of each DAO member as a one-of-one human participant without revealing their identity, a more equitable DAO framework can be achieved.

DAOs will shape the future of business.

DAOs have shown considerable promise in an incredibly short period of time. If some of the underlying structural issues are addressed, the remarkable efficiency and transparency that the structure offers can usher in transformative organizational benefits. If provided the right tools and strategies, DAOs will smooth out their rough edges and cement themselves as the undeniable future of digital organizations.

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