DAOs — Their Strengths, Weaknesses And The Way Forward

DAOs have given rise to a powerful mechanism for managing blockchain protocols, as well as a novel possibility for individuals to get actively involved with a passion project on a variety of levels.
The concept of a DAO was first proposed by BitShares, Steemit and EOS (Block.one) founder Dan Larimer in 2015, and further refined by Ethereum’s Vitalik Buterin in 2016. Decentralized autonomous organisation (DAO) have been here a long time but picked up the pace in terms of usage and popularity in 2020.
What are DAOs? What prompted its massive adoption lately and why? What are the features of DAOs, how many types are there? What are its strengths and Weakness? All of these and more will be revealed in this article.

DAO Explained

A "Decentralized Autonomous Organization" or DAO, is a community-run organization with no central authority. It is completely self-contained and transparent. They are characterized by the use of blockchain technology to provide a secure digital ledger to track financial interactions across the web, guarded against forgery and manipulation by securely keeping track of the creation, modification and dissemination of a distributed database.
The DAO’s rules are embedded into a smart contract which executes by itself based on the behavior of the protocol. There is no need to interpret these program rules as they are automatically implemented when the specified conditions occur which are agreed upon such as decisions, proposals, voting, and even the code itself can all be publicly audited at any time.
DAOs are designed to be completely transparent so that all financial operations performed by the company are visible to all shareholders and the DAO community. This high level of transparency is essential to the concept of a DAO. Just like the underlying motive behind cryptocurrencies, the idea of a DAO is to surpass the traditional centralized management of a company and create an absolutely transparent organization whose actions and finances are completely public.
In order for the plans and rules of the organization to be accepted, a percentage of the community needs to be in a consensus. This consensus is achieved through a decentralized, distributed blockchain, and each DAO determines the percentage required for a decision to pass.

Principal Features of A DAO

As the name suggests, a DAO has 3 main features, that make them different from other traditional organizations:

• Decentralization: It is not governed by a centralized entity.
• Autonomous: can perform operations automatically and autonomously, without any external intervention.
• Organization: is an organization that follows its own rules, which are written in smart contracts and executed on a blockchain.

Other features include;

• I) It is based on Smart Contract.
• II) They have a financing phase and Token.
• III) Open Source Code
• IV) Blockchain Technology
• V) Definite rules, roles and responsibilities for members

Strengths of DAOs

1) Bringing people of like-minds together.

DAOs are effective and safe way to work with like-minded folks around the globe. Since DAOs are open to the public, only people who’re interested in it or whose principles are aligned with the core values of the DAO will join. Starting a business that involves money and capital necessitates a high level of confidence in the individuals you’re dealing with. However, it’s difficult to trust someone with whom you’ve only ever communicated on the internet. You don’t have to trust anyone else in the group with DAOs; all you have to trust is the DAO’s code, which is completely visible and verifiable by anyone.
Individuals now have the opportunity to be a part of a community that collectively operates a protocol of interest as well as the chance to get paid for meaningful contributions that push the project forward. Passion becomes employment, which becomes financial sustenance.

2) It’s speed

On 30th April 2016, German startup slock.it launched the creatively named "The DAO" at 01:42:58 AM +UTC on Ethereum Block 1428757 with a website and 28-day crowdsale to fund the organization. The token sale had raised more than $34 million by 10 May 2016, and more than $50 million worth of Ether by 12 May, and over $100 million by 15 May 2016. On 17 May 2016, the largest investor in the DAO held less than 4% of all DAO tokens and the top 100 holders held just over 46% of all DAO tokens.The fund’s Ether value as of 21 May 2016 was more than $150 million from more than 11,000 investors. This was the largest crowd fund that had ever occured till date.
On 28 May 2016 the DAO tokens became tradable on various cryptocurrency exchanges.

A Rare copy of the constitution of US that The Constitution DAO bid for.

A consortium of crypto investors pulled together $47 million worth of ether in a week to try to buy a rare, first-edition copy of the U.S. Constitution at a Sotheby’s auction — and lost. What happens to all that cash is up to the people. The group is called ConstitutionDAO

In July, a group of "crypto fans" pooled their money in order to collectively make a seven figure investment: The group secretly bought the sole existing copy of the album "Once Upon a Time in Shaolin" by the Wu-Tang Clan for a whopping $4 million
But not until October 20th that the group, an organization known as PleaserDAO came forward as the buyer. The announcement was a pleasant surprise for the crypto community.

Wu-Tang Clan’s Once Upon a Time in Shaolin album

The short time frame with which these DAOs come up with such huge amounts of money is not achievable in traditional LLCs where hierarchy, trust and harmony are big issues causing delays and slow decision process.

3) Gets better as it increases in size.

Traditional organizations get more complicated and difficult to run as it increases and expands this is because the central body get over-burdened with the administrative job. Decisions, procedures, proposals and approval becomes very long and discouraging. However, with DAOs which are decentralized and autonomous,life gets better as the organization grows. The more the number of participants,the more the funds involved with same process and procedures and the same smart contract.

4) Global Outreach.

DAOs aren’t confined to any location, anyone in any part of the world with an internet access can join a DAO. Location is not a priority. People come together with the sole aim of moving the organization forward from all over the globe, this had lead to the massive and steep increase in numbers of many DAOs within a short period.

5) Advancement

When like-minded people come together willingly for a singular purpose and with the hope of receiving incentives for roles played in the development of a DOA, all their energy and synergy will be aligned and geared towards the development and missions of the DAO. Each and everyone of them will strive fulfill their duties to the best of their capacity without being coerced. When this happens, massive explosion in growth and development of the DAO will be inevitable.

DAO’S Weakness

1) Security.

The rules that govern a DAO can be extremely complex and difficult to change once they are in place, as any modifications would necessitate the creation of new code and network consensus approval. 
This inability to react quickly to code bugs does leave a DAO vulnerable to hacker attacks that could exploit security flaws and drain the cryptocurrency’s funds. 
The most notable example is, of course, the 2016 hacking of “The DAO,” despite having several documented security flaws in its code still drew a recorded breaking crowdfund. About 3.6 million ETH ($50 million as at then) were stolen at the time and its fallout resulted in an Ethereum hard fork to undo the hack — the reason we now have both Ethereum and Ethereum Classic today.

2) Legal Issues.

The legal status of this form of business entity is often unclear and may change depending on the jurisdiction. 
Wyoming became the first state to recognize DAOs as legal entities on July 1, 2021. 
The American CryptoFed DAO was the first commercial entity to receive such recognition. 
The Securities and Exchange Commission in the United States has deemed some comparable tactics to be illegal offers of unregistered securities. 
Although often of uncertain legal standing, a DAO may functionally be a corporation without legal status as a corporation: a general partnership.This means potentially unlimited legal liability for participants, even if the smart-contract code or the DAO’s promoters say otherwise, this means that participants may face unlimited legal culpability.
Known participants, or those at the interface between a DAO and regulated financial systems, may be targets of regulatory enforcement or civil actions.

3) Members Unwillingness to Participate.

Shareholder participation in DAOs can be problematic. There have been situations where DAO members were reluctant to participate in votes ands financial aspects which are the core moving factors of a DAO.
For example, BitShares has seen a lack of voting participation, because it takes time and energy to consider proposals.

4) The technicality Involved.

The technical competence required to maintain and secure the underlying infrastructure and consensus mechanism is very demanding. The playing filed is not levelled in this aspect, most times the ideas of potential initiators of DAOs die because of inability to bring it to reality through smart contract.

Types of DAOs

There are more than 100 DAOs today that manage assets worth over $10 billion. Creating a DAO is not as difficult as it seems. While a DeFi protocol with over $1 billion of assets governed on-chain by over 10,000+ token holders qualifies to be a DAO.

A) Grant DAOs.

The first real application of DAOs was in grants. Online communities will donate funds and then use a Decentralized Autonomous Organization to vote on how that money is allocated to various contributors in the form of governance proposals.

B) Protocol DAOs.

These protocols allow the transition of power from the hands of the core team to that of the community. Protocol DAOs introduced the concept of transferable ERC20 tokens that come with a secondary market value. Token holders have the authority to vote, propose and implement various changes to the network’s underlying mechanics.

C) Service DAOs.

Talent is needed as more and more tokens are continuously being created and introduced. Service DAOs are simply talent aggregators that use on-chain credentials to funnel and allocate resources from one DAO to the next. These DAOs establish decentralized working groups for individuals that will act as crypto-native talent agencies.

D) Social DAOs.

The modern world is mostly focused on financial capital. Social DAOs are changing the landscape by focusing on social capital. Social DAOs are evolving group chats where friends become co-workers working towards a common goal. Social DAOs challenge the traditional social community set up and aims to create digitally native tribes.

E) Collector DAOs.

Collector DAOs were created to collect and curate NFTs that are expected to increase in value. By teaming up and coordinating efforts and funds, digital collectors are able to purchase NFT’s that would otherwise be too expensive or perhaps even too risky to be purchased by an individual on their own.

Current DAO Landscape

The Way forward

A DAO can be used for almost all forms of collaboration. It can map collaboration between individuals just as it can map collaboration between companies.

The biggest driver of DAOs is the changes in the way we all live and work toward independence and self-determination. Whereas in the past a full-time job in dependent employment was “normal,” today’s working worlds are increasingly characterized by freelance work. Whereas the radius of one’s own action was severely restricted by office duties, today at least part of the work can be performed from any location as a matter of course. Whereas in the past it was completely normal to buy and own things, today simple usage matters more than owning a product. All these changes demand and promote structures of cooperation and participation from which the DAO idea was born. Some ways forward towards a high sustainable and stable DAOs in the future are:

Our Mindset

In the crypto world, DAOs are taken for granted today, but outside the bubble they are hardly a topic. If this is to change, DAOs must be understood not as a fixed construct (with blockchain, smart contracts & co) but as a path. Regardless of the means used, there are nevertheless increasingly widespread efforts that new forms of collaboration must be found. Until this becomes the new normal, there are still some hurdles to overcome.

Better incentives

In practice, social complexity emerges as one of the greatest challenge. Openness and active co-creation are required from all participants, but this is hardly the case. To solve this, the initiators of a DAO must create incentive and control systems that function stably over the long term. Once a cooperative has been launched, members must have the will to actively participate in its expansion once they’ve been greatly incentivized.

Patience for Growth

Such cooperative systems do not emerge overnight. Based on a common goal, defining, building and legally anchoring a cooperative organization is a path worth taking.

Lets take a look at a perfect example of a social DAO

Covalent AlchemistDAO

COVALENT a data infrastructure company which has a vision to empower the pioneers of tomorrow by providing the richest and most robust data infrastructure for the entire blockchain ecosystem started their Alchemist program early February to onboard members of the community to be an extension of their team. As a Covalent Alchemist, you will act as a key leader in developing the Covalent ecosystem. Covalent invested in the growth & development of Her Alchemists in all levels helping them succeed. The Alchemist program was a huge success, some of the members got employed by partners after seeing their capabilities. Due to the large number of people who had shown interest and onboarded into the program (more than 2500), the system couldn’t be run in a centralized manner any longer and hence the birth of COVALENT ALCHEMISTDAO.

Covalent AlchemistDAO Banner

The AlchemistDAO is a community of innovative data-nerds within the Covalent network, breaking barriers and creating a new economy powered by data. It provides the opportunity to explore aspirations, pursue queries, and own your future in a space where contributions become currency. Covalent believes that everyone should have access to education,high quality network, career opportunities, and a space to explore their purpose. With AlchemistDAO, Covalent is creating that space for data nerds like them who want to understand more about data and the possibilities that it unlocks.

The Alchemist Advantage

Alchemists will be able to dive deep into the various facets of the DAO and develop the necessary skill sets to thrive in the web3 world

• a) With Guilds, community members can work towards a singular goal or joint mission and vision in the AlchemistDAO
• b) Members in the DAO will connect with top-tier partners, industry leaders and expand career path opportunities.
• c) Alchemists will be working on passion projects that align with our values.
• d) CQT will be the governance token for the AlchemistDAO. Governance will allow Alchemists to vote on proposals about grants for guilds, operations, and overall management.
• e) Members can earn, create, redeem, or use NFT POAPs exclusively available to Alchemists through multiple initiatives.

Guilds of The Alchemist DAO

The Alchemist program is separated into guilds and members can join as much as they want depending on interests. These guilds include
a) Fitness guild
b) Research guild
c) Mental health guild
e) Developer guild
f) Marketing and growth quild
g) Education guild

How to join the Covalent AlchemistDAO

The members of the AlchemistDAO meet and interact on discord on their level 1 channel specially prepared for Alchemists. The level 1 channels and the guilds have been token-gated. They will be available once you pass the basic verification become an Alchemist.

Here’s what you need to do to become an Alchemist

1. Go to the join channel and type in !join. You will receive a message from Collab.Land bot to check your PM. Make sure your permissions allow you to receive PMs.
2. Verify you hold 1 CQT by connecting your wallet (it will give you a list of options - this info is also in the AlchemistDAO wiki page).
3. Once you are verified, you will automatically be assigned an @Alchemists role under your profile name. You will see your name turn neon yellow. Congrats you’re officially an Alchemist.
4. Next, go to guild-select channel (Level 1 - only available after you’ve passed verification and received an Alchemists role). You will see instructions on how to select what Guild you’d like to assign under your name. This will allow you to keep up to date with Guilds you’re interested in or would like to contribute. This information is also in the AlchemistDAO Notion page.
5. Take the time to do a proper introduction of yourself in the intros channel, Say hi to their leaders and the community.
6. Read carefully through the AlchemistDAO Notion wiki and become familiar with the tools & pages. I recommend to read the Start Here section.

Being an Alchemist means owning all 4 Covalent Core Values. It’s what makes us unique. You have to take initiative on what you think you’ll be able to contribute to the Covalent Network and AlchemistDAO as a whole.

Other examples of DAOs are:

• Dash (cryptocurrency) — Governance, fund allocation.
• Augur (software) — Prediction market, Sports betting, Option (finance), Insurance.
• Steem — Data distribution, Social media, Name services, Industrial
• ConstitutionDAO — Purchasing an original copy of the Constitution of the United States.
• Choice coin — Governance, Voting, Smart Contracts.
• HPEC — Digital identity and peer-to-peer censorship-resistant communication for practicing physicians.

Closing Thoughts

The advent of the Blockchain came with it DAO which is another smart use of the Blockchain to organize people into a cooperation is one of many more innovations (most which are yet to be discovered) brought about with the help of the Blockchain, it’s still in it’s development stage and will gain more outreach in the near future. The resources of the Blockchain is yet untapped just merely scratched, don’t miss out or maul it, accept them when they arrive with full embrace.

References

Wikipedia
Coinmarketcap
Forbes
Bitnovo.blog
Covalent
RollingStone