What are DAOs and What are Their Advantages?
DAOs, or Decentralized Autonomous Organizations, are communities of investors that lack traditional hierarchical authority typical organizations have, such as a Board of Directors. So how are decisions made in this type of organization without this traditional hierarchy? Smart contracts code the rules and are programmed to act on them when certain conditions are met. These contracts are then entered onto a blockchain. The smart contract rules are openly viewable and only alterable via DAO member voting; DAO members can create proposals for changes that other members vote upon.
DAOs can be divided into two main categories—ones that pool together and make investments, and ones that manage open-source, blockchain-based projects.
How does one become involved in a DAO? They can become a member by purchasing governance tokens associated with a particular project. Some examples of popular DAO tokens include Uniswap, Maker, Aave, and Curve DAO Token. Purchasing more tokens may give the member more weight to their votes compared to other members. Other ways members can participate include trading governance tokens, joining the DAO Discord, and becoming involved in projects or tasks where they receive compensation.
While the whole selling point of DAOs is the decentralization and democratization that ensues, there are certainly some key challenges one must keep on the radar when considering establishing or participating in a DAO.
Hacking is possibly the greatest concern for DAOs. If the coding that encompasses the smart contract is not secure enough, the potential for hacking is high, which can cause the DAO to crumble. A prime example of this is Ethereum’s 2016 hack. One way DAOs such as LinksDAO are attempting to combat this is through multi-sig use, which requires multiple people’s signatures to allow fund transition.
The other main downfall of DAOs is their poor prognostic success, due in part to the volatility of governance token values, which have the potential to plummet to zero worth.
What Are Some Example Use Cases for DAOs?
- SharkDAO pools funds to obtain expensive NFTs. The ultimate goal of SharkDAO is to purchase Nouns.
- PleasrDAO made an NFT that its members share. The NFT represents a deed of ownership of the Wu Tang Clan album.
- LinksDAO is attempting to democratize the golf country club experience by collecting NFTs to raise money for operational and legal fee costs. The eventual goal is to purchase a golf course.
- Decentraland is a 3D video game built by its players. Several other metaverse video games have begun mimicking decentralization through DAO use, too.
- Opolis is a digital-owned employment organization for independent workers, solopreneurs, and others. They offer payroll, benefits, and membership perks.
The potential for DAO use is widespread and can be applied to virtually every industry. But do the benefits of a democratized organization outweigh the potential challenges? That is up to each potential member to conduct heavy research and weigh the risks and benefits before deciding.