Benefits and Risks of a Decentralized Autonomous Organization or DAO

Have you ever wondered if it’s possible to have an organization where there are no leadership positions and everyone has a say in all of its developments? A democratic group that makes changes and decisions based solely on votes by every member? If you answered yes, you are right. This kind of organization exists and it is happening virtually, in the new world of Web3.

The DAO or Decentralized Autonomous Organization, provides a democratized organizational structure that is run on the blockchain network. It is a collective of like-minded people with a shared financial account, working on a shared goal. It is similar to a digital cooperative but instead of having select leaders at the board, every member is given voting rights. DAOs may have equal governance for each member or weighted votes depending on how many tokens each member holds.

A DAO is run by its own members through the crypto tokens it issues. For example, Decentraland uses Decentraland DAO where they hold their very own MANA tokens to govern all the transactions, land, assets and many others within the virtual world. Rules governing a DAO are coded in the blockchain in the form of a smart contract. The smart contract automates processes, transactions, data storage and other changes and functions.
Currently, there are over a thousand DAOs being used for many purposes like investing, charity, fundraising, managing stablecoins, and borrowing or buying NFTs. The World Economic Forum and other analysts and experts see the power and potential of DAO, it coming to prominence, and even the possibility of it replacing some traditional companies.

Benefits of a DAO

With opportunities and growth in DAO ever expanding, it is important to note the advantages and disadvantages that come with it.

Transparency

Traditional organizations keep much of their operations internal, but DAOs are operated on a decentralized blockchain network where processes and transactions are transparent, stored permanently, and are viewable by the public.

Democratization

All members of a DAO can vote on moves and changes, which encourages accountability and careful thinking among members. This creates a flat, fair and equal organization without the hierarchy hurdles. DAO members vote directly to make moves, changes and developments within the organization rather than electing members to make decisions on their behalf.

Automation

DAO rules are embedded codes in the blockchain. As the program runs, the rules are enforced without the labor, manipulation, discrimation, or errors associated with human intervention.

Removal of Third party institutions

Members can carry out transactions without the help and cost of outside institutions such as regulatory bodies, law practitioners, and other middlemen.

If for example members want to invest in a start-up or change the code of the program they run, DAOs can directly execute these plans via voting and subvert the need for banks, legal counsels and other mediators.

Meritocracy

Members can work anywhere and be evaluated solely on their work. DAO operates virtually so members can work anytime at any place, even by the beach. Anyone can hold a DAO’s crypto token and have voting rights. Members are valued by their work output, not by how they look or how their credentials stand out. This prevents discrimination and fosters freedom to choose for every member of the DAO.

Risks of a Decentralized Autonomous Organization

Stories like Beeple’s or the Bored Ape Yacht Club may make some in the fine art community believe NFTs aren’t The clear benefits of DAOs don’t mean that the organizations aren’t with their own risks and challenges, which need to be considered before choosing to form a DAO and while developing the underlying contracts to govern it.

Slow Decision Making

When all members are involved in every move within an organization, it can result in sluggish developments and progress. Members may take a long time to understand and decide on project changes and development. For example, if the DAO wants to buy a non-fungible token (NFT), they might need to explain the NFT to some members. Sometimes, other members don’t understand it, and members who are explaining it might have difficulty in explaining it to everyone. It creates bottlenecks that can potentially lead to them losing the NFT to someone else interested in buying it who can act swiftly.

Also, the program cannot read votes intuitively as with traditional voting with a human touch. Some might argue that automation dehumanizes and removes the aspect of critical thinking, which is crucial for some pivotal organizational changes.

Majority Wins

Being democratized and decentralized, DAO members abide by the opinions and decisions of the majority. It may get rid of manipulation, but there is still a risk of conspiracy.

Security

Being democratized and decentralized, DAO members abide by the opinions and decisions of the majority. It may get rid of manipulation, but there is stil

The developers cannot ensure the flawlessness and security of the code which is the foundation of the DAO. Codes may be imperfect and susceptible to hacking.

In 2016, an incident led to the demise of the DAO of German startup stock.it, where the code had loopholes in it for hackers to exploit. They ended up losing $50 million out of the $150 million funds that were raised for the creation of a decentralized version of Airbnb. Although a major setback, instances like this have led to the improvement of technology and increased the security and auditing standards of DAOs. 

As Web3 expands and potentially becomes ubiquitous in the future, the DAO has an important role in driving growth and governance systems within blockchain ecosystems. Risks must be addressed and benefits be enhanced to develop superior technology that can give way to optimized user experience, security and scalability within Web3.

Gigster works with major enterprises in their venture into the Web3. Through its pool of specialized talents, Gigster provides guidance on Web3 technology and applications, as well as the technical execution of an enterprise’s Web3 strategies whether it be in blockchain, NFTs, or DAO, among others. If you plan to launch your own DAO for whatever purpose, let Gigster help you better, seamlessly develop and execute your DAO plans, and do away with trial-and-error.

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