Decentralized Autonomous Organizations

State of Play

The majority of DAOs are built as on-chain applications on the Ethereum blockchain. This follows from ETH has the most developers, robust tooling, and standard templates for smart contracts.

As on-chain apps, they inherit decentralization from their blockchain (ETH in this case) and are at-most as decentralized as the underlying chain.

Depending on how value capture vs creation, ease of transaction, and compliance with local laws are handled, DAOs can have no need for a token, use the token of their underlying blockchain or have a custom token specific to themselves.

Problems

Compliance

  • Unregistered Association – very few jurisdictions have clarified the legal standing of DAOs. So things like are members liable, how are earnings taxed are not clear.
  • Unregistered security sales – the creation, sale, on-going transfer, and promise of proportionate claims on future revenues may make tokens associated with DAOs securities. If this is the case, the compliance costs( as they exist currently) render any decrease in transaction cost obsolete.
  • Privacy vs Transacting with non KYC’d actors.

Misaligned Incentives

  • Voter apathy – lack of standard committee structures forces participants to vote on too many things. Leading to apathy
  • Contributions are not properly valued
  • Speculative entities owning large portions of governance tokens cause volatility against work based contribution.

Decentralization theater

  • Decision-making is centralized to a few actors, sometimes this is reflected in the token ownership.
  • Secret contracts, decisions made without a quorum of token holders, further reveal who has authority.

Re-Introduction of transaction costs

  • Ease of Use – Currently, working with DAOs need users to install special software, learn new ways of operating. This will go down as usage increases but currently is an issue.
  • Transaction Fees – If decisions need to be pushed on-chain, then network congestion, gas costs matter a lot and may slow down decision ratification.
  • Systemic Risk – Like CryptoKitties congested ETH blockchain, and a hack of The DAO caused a network fork, there are systemic risks when/if DAOs get a large share of on-chain value.

Predictions

  • DAOs move to different substrates – This includes higher layers, app-based chains, shards based on ease of use.
  • Legal suits brought against a misbehaving DAO – at the minimum as an unregistered security sale, or issues like fraud, not following the rules-based approach.
  • DAO wrappers for legal entities, Legal Wrappers for DAOs – Things like the LAO which is a DAO wrapper around a legal entity will grow.
  • Remote first companies, growth of digital nomadism will push the need for corporate structures managed like software. They will try to form DAOs
  • Standard structures for governance, bylaws, and conflict resolution emerge. A support eco-system of DAO ratings, compliance, IRL bridges grows.
  • The growth of services like Open Collective, Deel, and Remote go against the growth of DAOs.

Opportunities

  • Better Voter services – easy voting proxies, easy vote delegation, DAO aggregators, Auto routing for most profitable work , Private DAOs, etc
  • Better decision making – decision simulations, transparency on how each decision affects one’s ownership, etc
  • Institutional voter services – DAO versions of ISS, Aggregate reporting on holdings, Voter proxies, Financing for specific events, Valuation services, compliance services
  • DAOs on different substrates – like DAO specific base blockchain, shards on layer1, etc.
  • Better User Interfaces – from native applications, to gas fees optimization, and easy to understand metrics for each DAO.
  • Standard templates for different corporate structures – Decentralized versions of for LLCs, C-Corps, B-Corps, Tax exempt structures.
  • Build Standard templates for governance – bylaws, sub-committees, escalation procedures

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Standard Meta - Data for decision makers.