- TechFin Consulting
Embrace The Future of DAOs (Decentralised Autonomous Organisations)
Updated: Nov 23, 2022
Decentralised Autonomous Organisation (DAO) was a relatively new idea and concept just a couple of years ago. First seen in 2016 when the creators of “The DAO” were trying to create a crowdsource venture capital fund in the Ethereum blockchain. That project did not go well when it got hacked due to a vulnerability in the code.
Fast forward to today, we hear more talks about DAO. New organisations are created using the DAO model and reports on blockchain often cover DAO extensively.
What is DAO?
To put it simply, DAO is an organisation that is run by machines. In a traditional organisation, you have the decision making at the top level. The board of directors would coalesce in meetings to make decisions for the organisation. A DAO replaces the need for this function. Simple decisions have rules in place and use smart contracts to carry out while more complex decisions are put through the voting process. The stakeholders will vote and a decision will be selected, reducing the need for human intervention.
The role of decision making is dispersed from the selected few at the top, giving the whole organisation the power to vote. Everyone inside will be given a token, and those with the tokens get to vote on a proposal.
DAO has shown significant growth over the years. The total treasury of DAOs in July 2021 was US$1.5 billion and it went up to US$11.3 billion in April 2022.
Share vs Token Based
A share-based DAO is based on permission. The membership for the DAO is not open and accessible and has to be approved by the members. These are used in charity or investment based DAO where they do not want anyone to freely join. Only approved members can receive tokens and vote accordingly.
A token-based DAO is one that anyone can join. It has a freer structure, allowing members to join freely and trade their tokens.
What Is The Future of DAO?
Online communities are formed and grown via the use of DAO to serve specific functions. There is an emphasis on bettering the community in a non-governmental and decentralised manner.
One example of this is Gitcoin. Gitcoin is an online crowdfunding platform, where creators can come to seek funding for their coding projects. Unlike traditional crowdfunding platforms, Gitcoin will pool together resources and users will be able to vote on projects they want to fund. The higher voted you are, the more resources you receive for your project.
Charitable organisations are seeing DAO innovations. Big Green DAO, founded by Kimbal Musk is a philanthropic organisation aimed at supporting schools, families and communities to grow their own food. They are trying to improve the way grants are allocated to the communities by putting the non-profit organisations in the decision making.
Community platforms are the most accessible places to implement a DAO since there is no need for centralised decision making. As we find more things to tokenize, there will be more uses for DAOs.
DAOs can have the potential to rethink how an organisation runs. Traditional organisations that are large but only controlled by top executives face criticism for their lack of transparency. This creates a lot of risk for the organisation as a single person in the top hierarchy of the organisation can make damaging decisions for both the organisation and themselves. Due to the risky nature of these top positions, the people in power are highly compensated which adds to the hierarchical nature of traditional organisations.
By adopting DAO, the organisation can remove these issues. For example, organisations with a large amount of displeasure among stakeholders can use DAO to remove decision making from the executive committee. Giving stakeholders a vote in the organisation’s decision creates more involvement and greater drive to ensure the success of the organisation. With more people in decision making, the risk of making bad or biased decisions is reduced.
Adopting DAO does come with some challenges as well. An organisation may not be too keen on bringing in greater levels of transparency due to its desire to protect trade secrets and business practices.
Using DAO to make decisions can also affect the speed of decision making. In a perfect world, all the stakeholders could make a decision simultaneously and the smart contract will be able to enforce the decision quickly. However, should there be delays in voting members, the decision will be delayed as well.
There will also be issues like poor decisions made due to the voters not having management knowledge. This however could be a small issue, as long the executives in the organisation get higher weighted votes so that there will not be major shifts in decisions.
Businesses with centralised business models may find it hard to adopt DAOs. This is just due to the nature of their business. However, if they wish to enter the realms of web 3.0, changes to their business model will include decentralisation and adopting tokenization. In this scenario, DAO presents a viable change for them.
Governments have been using technology extensively in their government services. For example in Singapore, we have SingPass, a digital verification system that provides personal information. SingPass also allows users to buy or sell HDB flats, manage retirement funds, etc.
Beyond personal services, can governments introduce DAO for other collective services? It is possible, but with concerns. Votings like elections or public polling can use DAOs, however, government functions are traditionally centralised. The decentralised government services will reduce governmental control, which will make governing difficult. The need to have privacy is a big issue and governments are not comfortable with making such big changes.
There are feasible use cases for adopting DAO in certain government functions, but these concerns have to be resolved. Perhaps not with individual governments, DAO could have a better chance on the global stage.
For example, Singapore is using blockchain technology to certify vaccination status to aid in cross-border travel. This proves to us that maybe blockchain and DAO will see better use on the international stage, where we can create a new global identity. This transcends individual government and unifies everyone into a global citizen.
Concerns of DAO
As DAO grows bigger and receives a greater adoption rate, there will be issues that arise and need to be addressed.
Fully Autonomous and Fully Automated?
DAOs in theory can be fully automated and autonomous. It requires some programming to build the voting systems and automation techniques to create smart contracts. The autonomy aspect will be more challenging for complex DAOs as language models will have to be created to turn a human suggestion into voting and implementation.
However, beyond the implementation mentioned above, there are certain aspects that a DAO may fail to identify. What if there are human manipulations on the system such that the DAO performs undesirable activities? Money laundering, scams, and allocating resources to illegal activities are just some examples. Will the AI implemented be smart enough to detect? Will you be able to trust multi-million dollar funds to the AI?
If the DAO is a shared-based DAO, how would the AI determine whether to allow the user to join the DAO? There are many scenarios where it is challenging to allow for the DAO to be fully autonomous. It requires large amounts of training data to train the AI to make the right choices and detect potential issues. DAO can be autonomous, but a human administrator will still be needed for DAO that involves large amounts of money or complex decisions.
The DAOs now have much better security than when they first started, but security concerns are still an issue. If a DAO manages a large amount of capital or is tasked to make important decisions, a sound security framework that is well tested will be needed before we can fully trust the system.
There are no strict regulations put in place on DAO as of now, but there is a need for accountability on the decision made. In the event, the DAO is used to commit an illegal act, who is to be blamed? In a traditional organisation, there are board directors and executives who make the decision and take the responsibility for the actions. A DAO however, involves all stakeholders, which will make them difficult to prosecute.
In Wyoming, the state allows DAO to be a limited liability company, granting them the right to become a legal entity. This meant that members of the DAO in Wyoming can be limited liability members and be exposed to fewer liabilities.
Fraud and Money Laundering
Just like the frauds we see in some tokens, DAO can have the potential to be a front for fraud. A user could lose the money that they put in, thinking that it is for a project or cause that they resonate with.
Furthermore, it can be used as a tool for money laundering. Funds could come in as donations and members could rig the votes such that the money gets syphoned out to the respective laundering accounts.
As web 3.0 infrastructure becomes more robust and included in our daily lives, DAO will find a firm footing and be integrated into our lives as well. We foresee innovations in AI and ML technology to facilitate a fully autonomous DAO that can handle more complex functions. As DAO grows, policymakers will be looking at them and in the future, we may see new regulations and playbooks written for DAOs.
We will see a future where traditional communities get reinvented using DAOs, just like what we see in charitable and for-profit organisations. Traditional companies and governments will consider the use cases of DAO and maybe DAO will be adopted by them. But this future is not without concerns like regulation, fraud and security.
As DAOs are gaining popularity, it is time to catch this wave while it is on its ascend. DAO is here to stay, with potential new innovation or regulations to be created. To be well-prepared for the future of DAO, we need to understand what it is, what it can become and what are the obstacles.
Embrace the future of DAOs together with SMU Academy at the Understanding Decentralised Autonomous Organisations course, happening on the 1st of February 2023 where participants can learn how to leverage on the upcoming trends in the blockchain community. Interested applications can receive up to 90% off using SkillsFuture Subsidies as they deep dive into the world of blockchains and DAO. Sign up here today!