Part 3: Decentralized Autonomous Organizations (DAOs)
DAO is an entity that lives on a network and exists independently, but also relies heavily on the human person to perform certain tasks that it cannot. – Vitalik Buterin
- Web 3.0 applications – Community managed applications
- Decentralized Autonomous Organizations (DAOs) – Community owned governance
- Decentralized Finance (DeFi) – Community Finance
- Stable-coins and Central Bank Digital Currencies – Fiat collateralized and Government issue digital coins
- Creator Economy & Non Fungible Tokens (NFTs) – Community creations
- Blockchain based games – Community built, created and owned Games
Decentralized Autonomous Organizations (DAOs):
Before we review the merits of DAO, it is important to review the challenges in a centralized system. Every publicly traded companies are centrally organized with a CEO at the top. As such, it is important for the CEO to be ethical, trustworthy, and showcase a flawless image to the public. Otherwise, we have seen how Elon Musk’s interview while smoking marijuana evaporated $4 billion Tesla stock. Or how Lukin Coffe’s revenues catapulted the company stock to $24 and fell down to $2.40 after it was identified. In addition, when the central head dies or leaves there’s an impact to the stock price and company. Is there a way to fix this dependency? DAOs emerged to address this issue.
Decentralized – Power lies in the community not with a single individual. Rules cannot be changed by single individual but by the community voting.
Autonomous – With on-chain governance, there is no human intervention, votes are tallied and decisions are implemented through smart contracts.
Organizations – entities that coordinate activities among stakeholders
The following captures the differences between the centralized and decentralized organizations.
DAOs are fundamentally changing the ways the work is done. They remove the capital and human resource limitations by converting them to community ownership and machine contracts. The resources can reside anywhere in the world to contribute and get rewarded. There is no central authority and everyone has an equal say in the future or operational aspects of the project. While there are benefits of adopting the decentralized organizations, they also come with some challenges.
- It may be challenging to coordinate multiple decisions to be made initially when the project is kicked off. However over a period of time these will reduce and will be more manageable.
- Governance conflicts between shareholders, company managers and creditors. These cannot be resolved through the current legal framework and there is no entity that validates the smart contracts.
- There is a tradeoff done between scalability, security and decentralization for the blockchain. Security and decentralization may have some impact on scalability of the blockchain
- Security and economic are the biggest blockers for the growth of DAOs as the combined security and economic attack would render them useless.
However, there are tools like Discourse, Tally, Snapshot, Cybill etc., have emerged to solve the above challenges. The DAOs are great solution to mitigate the ills of centralized organizations but it is still in its infant stage. The tools, regulations and security breakthroughs will help grow DAOs and eventually be adopted across the board. One of the areas that has blossomed is the Decentralized Finance which we will review in detail next.