DAOs - Revolutionary Companies Or Glorified Crypto Chats?

Have you ever considered being part of a fully democratic community? Yes, one where your voice could actually make a difference, or at least where it was equal to others. In our seemingly imperfect physical world, this “utopia” actually exists in the decentralized blockchains of our very own crypto worlds. Welcome to the emergence of DAOs.

DAOs, also known as Decentralized Autonomous Organizations, are communities where decisions are made by their members. There is no government or authority figure in DAOs, so the future of the organization depends on the votes of the members.

As a fully democratic system, DAOs lack the traditional hierarchy, and voting is necessary for a change to be made. Most DAOs also have a meritocratic voting system — your contribution to the project determines your voting power. Finally, all activities of DAOs are recorded on a public ledger, and automated systems allow nothing to be done behind closed doors.

With this in mind, are DAOs really the ultimate solution to dispel all corruption? Are DAOs really the perfect democratic system? Before dwelling on these debatable issues, let’s focus on what DAOs can (or cannot) offer.

Revolutionary Companies

First and foremost, DAOs are certainly premature ideas that aren’t fully perfected yet. I like to think of them as a constitutional experiment of people of the Internet Renaissance, just like communism in the Soviet Union. Since the latter failed in the late 20th century, there is no reason to expect DAOs to be an absolute success.

Nevertheless, DAOs explore the previously ‘unexplorable’ areas of human communities. There are two main reasons for this: The Power of The Internet, and The Infallibility of AI

The Power of The Internet

Of course, the internet is an amazing invention of our time. With high-speed communication online, members can discuss what projects the DAO should undertake, literally from the comfort of their homes. Quick and easy communication is necessary to appreciate every member’s point of view on a given topic.

On top of that, voting systems can be internet-optimized. Instead of queuing up at polling stations to make their vote, members can do it with a click of the mouse. All you need is someone to set up a basic polling system, which can even be done on some apps like Discord or Telegram, and you’re good to go!

It goes without saying that communities of old did not have the luxury of the internet.

The Infallibility of AI

Another crucial reason for DAOs being possible is the infallibility of AI. What I mean by this is that artificial intelligence is fundamentally uncorrupted. Of course, people can manipulate the system, but the code for decentralized organizations is open-source. This means anyone who tampers with it will most likely get caught by fellow members, and be expelled from the community.

In essence, automation of the system makes voting and decision-making both seamless and trustworthy. There is no middle-man to cut corners, or figures to alter the votes, no one has the power to do that except the computer itself.

By establishing the fact that DAOs have this revolutionary technology as the very backbone of their organization, there is no limit to what DAOs can’t do. DAOs can be…

  • An investment group, where people pool resources to buy cryptocurrencies with skyrocketing potential.
  • A charity, where those who donate can decide how they want the funds to be spent/the charity to donate to.
  • An NFT collector’s group, where NFT enthusiasts can collectively own valuable pieces of digital art.

…and the list goes on.

Hence, if DAOs are legalized by current governments, they can play a big role as corporations to fund mega-projects in line with their mission and goals.

The Sense of Belonging

DAOs, despite the ‘organization’ in its name, are really communities at heart. After all, DAOs are run by human beings no different from you and me. It is said that humans want to belong, thus the formation of interest groups like Golf Clubs or Gaming communities. All of us are already part of one big community, our country.

However, in all the complexities of our physical world, some people have lost that sense of belonging. Maybe they feel that their voices are ignored, there is no or little progress being made, or even worse, the leaders are corrupt.

Taking reference to research by the Office for National Statistics in the U.K., 62% of people felt a sense of belonging in their local area in 2017/2018, compared to 69% in 2014/2015. What’s worse, only just over 50% of Gen-Z and Millennials in the U.K. feel a sense of belonging to their neighborhoods (2018/2019).

As such, there is a high chance that the younger generations are turning to online communities to find their sense of belonging. DAOs, with their fully democratic system and idealistic nature, seems like the perfect place to be heard and matter, even in a large-scale project. I believe wholeheartedly that the community spirit is what attracts many people to become members of DAOs.

Glorified Crypto Chats

On the flip side, there is an argument that DAOs are just glorified crypto chats and something that will never come to pass. As a budding constitutional experiment, it would be foolish to think that DAOs are a widely accepted idea, even in the crypto or NFT community. Here are some arguments of the skeptics.

Lack of Hierarchy = No Progress

This is a debatable issue in many aspects, but lack of hierarchy does limit progress in one way or another. The first step of moving forward is making a decision. The second step is executing it. Hint: DAOs struggle with the execution process.

While some may argue that the execution of the project can be automated, it’s not always the case. Take for example, if a DAO is organizing a charity donation drive, who would be the one to actually deliver the resources to the charities? Even if it’s just donating money to a charity, who will be the one to liaise with the non-profit organization?

All this takes initiative, and as more projects pile up, there’ll be a debate on who to handle all the administrative matters. Without clear roles and responsibilities set in place to dictate who does what, DAOs can become messy and disorganized, leading to a lack of progress or even loss of members.

If history can teach us one lesson, it is that people need leaders to guide them.

Personal Liability is Non-Existent

In a decentralized organization where all members have an equal say in what the DAO does, no individual can be held solely responsible. Things will go wrong, that is inevitable. But if nobody can be held accountable for the wrongdoing, how can governments trust these entities?

Take note that DAOs are decentralized. To have a decentralized group of people govern our physical world will be like an anonymous cabal overseeing society. Centralized governments are unlikely to ever allow that, because who likes dealing with people who have no skin in the game? If something goes terribly wrong, DAOs can always dissolve and members will never be held accountable.

DAOs, like all other powerful anonymous organizations, can be used to blackmail governments, corporations, and society at large. It wouldn’t be wise to legalize DAOs if they can be used as the new hub of illegal trade, would it? If DAOs want a chance of being legalized, we need to see someone bear the responsibility for the company’s actions.

As the old saying goes, with great power comes great responsibility. Without personal liability, how can DAOs behold great power?

The million-dollar question is, will the public trust a decentralized organization comprising random cryptocurrency token holders? Probably not. Hence, DAOs are not at the stage of establishing an influence in society yet – still glorified crypto chats.

The 2016 DAO Hack

In 2016 just months after the creation of DAOs, The DAO Ethereum project got hacked. At that time, the DAO was a massive project the Ethereum Foundation undertook, and held almost 15% of all Ether in circulation. Safe to say, the success (or demise) of the DAO would make or break Ether.

When the hacker obtained almost $60 million in Ethereum by exploiting a vulnerability in the DAO’s code, people were panicking. The price of Ether fell from $20 to $13 (Well, you would buy Ether at either price today haha!), all DAO and Ether holders were panicking.

Eventually, the Ethereum foundation implemented the “hard fork” approach and the matter was resolved, but not without damage. Essentially, there was a group of people who refused to follow this new approach, creating a new coin as we know it today, Ethereum Classic. The hacker still walked away with roughly $8 million in Ethereum Classic, and DAOs have had a tarnished reputation ever since.

The Fault in DAOs Stars

Many would criticize DAO’s code, claiming that it isn’t secure enough to defend organizations against hacks such as the one we saw in 2016. But I beg to differ. Technical experts had come up with two proposals to deal with the DAO hack almost instantly in 2016. So technically the system could be fixed before the hacker even had a chance to relish in their newfound dollars.

The fault in DAOs Stars lies in their very members, of course. Even in the case of an emergency (like the DAO hack), members of the DAO would still have to vote on the best course of action. Because these situations are unexpected, there are rarely any standard protocols that would dispel the threat automatically.

As a result, shareholders start to debate on the best course of action, like how it went down with the soft fork and hard fork approaches in the DAO hack. All this discussion wastes precious time, and the longer the community cannot arrive at a consensus, the more likely it is for the hacker to run away with the funds.

In cases of emergency, we need DAOs to act first, debate later. This wouldn’t be necessary if the system was unhackable, or even better, nobody tried to hack it.

But as American novelist David Baldacci once said, “Nothing, absolutely nothing, was above corruption so long as human beings were involved.” Well, at least we all agree on that.

A Quick Note About Patronage of the Arts

Shifting our focus on an entirely different topic, some may find that DAOs eradicate the idea of arts patronage for the people. In a previous post, we discussed how NFTs made middle-class arts patronage possible, and that any business taking over the NFT space would render it unsuitable for collectors.

Well, DAOs technically do that. Once DAOs get so huge that they buy multi-million dollar pieces of digital art, any real sense of ownership is lost. To the layman collector, a 69 million dollar Beeple is way out of our budget, so we’ll probably end up owning a tiny fraction of the NFT.

An NFT is bought for one purpose alone, to own it. Owning a small percentage of the piece is akin to not owning it at all, slowly but surely, the owner of the NFT shifts to the DAO as an entity, not the members of the DAO per se.

In short, middle-class patrons of the arts don’t fit in DAOs. In fact, DAOs could push us back to art ownership akin to that in the Renaissance.

Summing Up

In summary, the future of DAOs is uncertain. While the revolutionary idea of governing a decentralized organization may sound appealing, you shouldn’t jump into a DAO before evaluating its risks and management structure.

So, are DAOs revolutionary companies or simply glorified crypto chats? That’s for you to decide, and time will eventually tell.

DAOs - Revolutionary Companies Or Glorified Crypto Chats?
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DAOs - Revolutionary Companies Or Glorified Crypto Chats?