The Evolution of of the DAO

With roots in unionized labor movements, May 1st is an internationally recognized holiday to observe the achievements of workers. While the presence of unions has taken a sharp decline with the rise of globalization and service-based labor, the achievements of early unions distributed the power from the hands of wealthy employers into the hands of mass workers. It has paved the way for luxuries many of us take for granted today, such as the eight-hour workday and weekends. Large corporations, to this day, are taking significant measures not only to hold onto control of their labor force but also to control their customer data, which is ultimately leveraged for profit. 

If Web3 merged as a counter-response to reclaim transparency and data control from the digital giants that reign the internet, the DAO developed as a modern response to the trade union—one where community members and workers alike can influence the vision and direction of an organization, all with greater transparency. 

What is a DAO?

DAOs, or Decentralized Autonomous Organizations, operate on the blockchain, where their rules and decisions are encoded in smart contracts. This allows for greater transparency and operational automation without centralized management. DAOs usher in a techno-democratic paradigm where investor-stakeholders democratically endorse decisions through voting mechanisms. 

How do DAOs operate?

DAOs have a decentralized governance structure that leverages smart contracts and blockchain technologies to automate operations. In essence, DAOs run on blockchains that provide the infrastructure to automate rules and enforce actions based on predefined conditions that live on smart contracts. 

Typically, delegates are comprised of token holders with varying degrees of voting power based on the amount of tokens they hold or have locked. Delegates can propose and vote on decisions that impact the organization, such as budget allocation. In many cases, anyone can become a delegate simply by holding the minimum required amount of tokens—this ensures that those with voting influence are vested in the growth and interest of the organization (i.e., they want the organization to succeed to see the token price increase). 

As all decisions occur on the blockchain, the community has transparency into the organization’s operations, which run autonomously once enacted via smart contracts.

What are the advantages of operating through a DAO?

DAOs are a novel concept in which communities and organizations can function transparently and without centralized power, using blockchain technology to enable trustless decision-making. Whereas a few individuals hold decision-making power within centralized organizations, DAOs open a system where the community can influence the operations. 

Transparency

One key benefit of a decentralized autonomous organization is that decisions and transactions are recorded on the blockchain, offering transparency and audibility. The governance mechanisms on the blockchain ensure accountability for all decisions. While the DAO will likely consider the benefits (and profits) for the organization it represents, there are no secret boardroom meetings that neglect the voices of the community represented by the delegates. 

Inclusivity (community voice)

Traditionally, companies make decisions based on a top-down approach, where the organization's leaders discuss important issues without considering what the community or other team members are asking for. Reminiscent of union leaders representing the interests of the workers, DAOs often have a diverse representation of delegates who vote on proposals, giving the community members better representation within these conversations. 

Caden Bloxham from Tally, a company offering a DAO framework, notes, “Something I really love about DAOs is that they enable a path for bottom-up decision making in a native way, which has been difficult to implement in other types of organizations. Proposals and initiatives can come from anywhere (even outside the DAO in some cases!) and then the members can decide whether to pursue or fund those things.”

Decentralization (Distribution of power)

Centralized power is vulnerable to issues like corruption and lack of accountability, as those in positions of authority can easily act in their own self-interest without a system of accountability and transparency in decision-making. Decentralization is a cornerstone of DAO governance, from its use of blockchain technology to its governance procedures. 

Democracy

Decisions are made using voting mechanisms where delegates vote for proposals on-chain. Voting power may be relative to the number of tokens a delegate holds, but anyone in the DAO can vote on a proposal. Voting is recorded on the blockchain, holding the decision-makers accountable. 

Meritocracy

Regardless of background, anyone can join and progress within a DAO based on their contribution and merits to their work. 

Automation

Within a centralized organization, the company is liable to a single point of failure, where the system can collapse if one person in authority is compromised (in ethics, availability, desire to participate, etc). Once a decision has been made through the voting process, DAOs leverage smart contracts to automate organizational operations. This reduces human error and allows for the organization to run more efficiently. 

What are the disadvantages of a DAO?

DAOs may offer innovative solutions to many of the challenges and concerns presented by centralized organizations, but that’s not to say they’re not without their own complications. DAOs may sometimes experience the same issues that the framework aims to solve! 

Slower decision making

In the name of transparent and democratic decision-making, DAOs typically review a proposal—either presented by a member of the DAO or by an outside party—and then cast votes on-chain.  Even if most members vote to pass a proposal, this process may take several weeks—and this is before action can be taken to put the proposal into action! As many voices and opinions contribute to the outcome, it’s also possible that there may be disagreements that stall the process or that proposals need to be redrafted. 

Similar delays can occur in centralized organizations where board members disagree on an initiative. Typically, fewer decision-makers allow for more agility. 

Security

The same mechanisms that allow organizations to run trustlessly via contracts can also be a point of vulnerability. Smart contracts are susceptible to coding errors that can be manipulated for malicious purposes. In 2016, one of the concept's trailblazers, The DAO, was drained of nearly $70 million worth of Ether due to a coding error on the DAO’s wallet. This resulted in a controversial hard fork on Ethereum to restore investor funds, splitting Ethereum into two blockchains: Ethereum and Ethereum Classic. 

The DAO hack, although historically and monetarily significant, was not the last of its kind. Other security threats, such as social engineering and token security (ex., A hacker could steal voting power by siphoning the governance token from an unprotected wallet) remain threats to the future of DAO security. 

Manipulation

Although DAOs heavily rely on smart contracts and blockchain technology, human beings are still behind the votes, putting DAOs at risk for corruption and manipulation. It’s possible that someone can bribe delegates on important issues to influence a desired outcome on a vote. Furthermore, those with more voting power can influence decisions, even for personal gain. 

Legal & Regulatory Uncertainty

Uncertainty in the regulatory framework around cryptocurrencies and DAO governance paints an unclear picture of the future of DAOs. Laws vary by jurisdiction, making it difficult to abide by legal standards within a decentralized organization. This could lead to fines and legal liabilities in the future. 

What is the future of DAOs and decentralization? 

Despite the disadvantages, DAOs offer an innovative solution to decentralized governance—one that solves many of modern consumers' concerns, especially in the digital age. 

Mainstream adoption

Could we see a future where DAOs are more widely adopted by “mainstream” or Web2 brands, even government organizations? As more consumers demand greater transparency and protection, the DAO framework could be adopted on a wider scale. Just as unions arose from global unrest regarding workers’ rights, we could envision that DAOs are created in response to growing social and consumer pressure to govern anything from currency to commonly used products. 

Community Empowerment

DAOs, run by token holders from diverse backgrounds, offer a more inclusive method of decision-making. As they are made up of community members, they often represent the community's interests. However, in order to participate, someone needs to hold a specified minimum of the token or be assigned voting rights by someone who does. As organizations become even more community-focused, some DAOs may find new solutions to incorporate community voices that aren’t part of the DAO, such as using elected representatives. 

Governance Innovation

At the time of writing, the DAO concept is only eight years old and still evolving. Builders may find creative solutions to govern, automate, and operate within a DAO as new technologies emerge.

Daniel, an instigator at RnDAO, notes, “We're really just seeing the tip of the iceberg here. Early DAOs focused on fairly outdated models of governance like direct or representative democracy (i.e. delegates) by token holders. We’re now starting to see experiments with more advanced techniques like deliberative assemblies, multi-stakeholder voting (e.g., context+token holding+contribution+product usage), and delegation to domain-specific teams that work with self-management.” 

In an era marked by growing concerns over centralized power structures and a desire for more transparent, equitable, and secure systems, Decentralized Autonomous Organizations (DAOs) emerge as a beacon of hope. By leveraging blockchain technology and decentralized governance mechanisms, DAOs offer a transformative solution to protect the modern consumer and worker. 

DAOs empower individuals with direct control over decision-making processes, fostering trust, accountability, and inclusivity while mitigating the risks of fraud, manipulation, and exploitation inherent in centralized systems. As we navigate the complexities of a rapidly evolving digital landscape, DAOs stand poised to revolutionize how we organize, collaborate, and govern, ushering in a new era of empowerment, resilience, and prosperity for all.

To learn more about RARI DAO, please visit https://rari.foundation/governance.