Anyone who has spent time in the Web3 world has seen the acronym “DAO” thrown around, but many people may not know much about this term or why it is an important innovation in blockchain technology. Many people are already familiar with cryptocurrency and non-fungible tokens (NFT) to some extent, and while both are important, they are only a small component of what makes blockchain so amazing. One of the more amazing innovations made possible by blockchain is “Decentralized autonomous organization“, or”DAO“.
In May 2016, long before the concept of Metaverse and Web 3.0 (or Web3) existed, Ethereum was not even a year old yet, and people were excitedly exploring the use of blockchain applications. Then a new project entered the scene called “DAO“. The idea was straightforward: people would pool ETH (Ethereum’s cryptocurrency) into a smart contract, and then collectively vote on where to send that ETH. The DAO was used as a decentralized venture capital firm, and was the most popular project of its time. Six weeks later, a vulnerability in the program’s code allowed a clever user to siphon most of the ETH locked up in it, collapsing the project.While the DAO itself died that day, the idea of a DAO as a decentralized governing body survived, and has since thrived.
The Ethereum Foundation defines decentralized autonomous organizations as “Member-owned societies without centralized management.” In 2022, DAOs are everywhere. They have become a critical part of the infrastructure within most blockchain-based projects, and are the core governance structure of Web3. The oldest DAOs consist of token holders who are granted voting rights based on number”control symbols” they hold. However, newer DAOs use NFTs instead of governance tokens to reduce the influence of wealthy members. DAOs may one day form the backbone of governmental blockchain voting systems, decentralized companies, social communities, and collective bargaining units.
Are DAOs really decentralized?
For the past six years, the biggest struggle DAOs have faced has been the first word in the acronym: Decentralization. Decentralization is essential to the future of the Internet, and DAOs could become the cornerstone of that future if their centralization issues can be resolved. According to a blog post published by blockchain analytics firm Chainalysis, in token-based DAOs, around 1% of DAO members hold 90% of the token supply, and thus control the most voting rights. Theoretically, if this 1% were to coordinate together, they could outvote and outmaneuver the 99%. The ability for whales to ram through a governance proposal just to have the most tokens is the opposite of decentralization, and because of that, most new DAOs opt for NFT-based voting systems, where each user can only own one NFT, and thus only a voice.
Another problem DAOs face is deciding who should make proposals. If everyone is allowed, it results in proposal spam and reduced quality of each proposal, but if only a few are allowed, it results in centralized control of the governance process. Token-based DAOs often require a minimum number of tokens to make a proposal, which is prohibitive for most users, but not for whales. Another problem with DAO governance has to do with blockchain transparency. Since all votes in the chain are visible to everyone else, some members may cast a disingenuous vote for fear of reprisals from other DAO members. In general, privacy remains a security issue for Web3, leading many DAOs to use “outside the chain” voting systems instead.
DAOs have become an important component of blockchain over the past six years. From the creation and destruction of The DAO in 2016 to the hundreds of DAOs in operation today, the idea of a decentralized governing body of community members built on the blockchain is at the core of the ethos of the coming Web3 era of the internet. While still evolving and having many issues, it is inevitable that many organizations will use DAO membership and voting for governance decisions, and DAO-owned companies are already emerging, but not yet legally recognized.
Source: Chainalysis, The Ethereum Foundation
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