Decentralized Autonomous Organizations (DAOs)

Introduction

Starting an organization that involves funding (money) with another party requires a lot of trust in the other party. Also, it’s hard to trust someone you’ve only ever interacted with over the internet.

This is where Decentralized Autonomous Organizations (DAOs) come into the picture.

DAOs are designed to help remove the need for central leadership in an organization and ensure that people are not making decisions in their own interests. With DAOs, you can enter an organization without necessarily trusting anyone else in the group, just the DAO’s code. This code is, theoretically,100% transparent and verifiable by anyone.

DAOs are a proposed safe way to co-operate, trade, and interact with strangers.

DAOs are native to the internet and managed by the members of the DAO itself. They are often used to vote on blockchain proposals, accumulate and spend treasury funds, and reward members for their participation.

Why DAOs

Simply put, you can’t ultimately trust people to an endless degree. While this sounds negative, the reliance on trust for investment and business arrangements is a point of weakness that can (and often is) exploited by those acting in bad faith.

DAOs are really about trust (or the lack thereof) when dealing with people. This is mainly within groups of people that are not truly known to each other and when finances are involved.

Completely transparent computer code is seemingly more trustworthy than faith in the integrity of strangers. With its reliance on immutable, verifiable smart contract code, DAOs attempt to remove the need for trust and oversight by centralized powers to enforce agreements. Instead, arrangements involve a flat hierarchical structure, with any stakeholder able to vote and propose changes.

Foundations

The backbone of a DAO is its smart contract. The contract defines the organization’s rules and holds the group’s treasury.

Once the contract is live on a blockchain, typically on the Ethereum blockchain, no one can change the rules except by a vote. If anyone tries to do something that’s not covered by the rules and logic in the code, it will fail. Furthermore, because the smart contract defines the treasury, no one can spend the money without the group’s approval.

Because of this, DAOs don’t need a central authority. Instead, the group makes decisions collectively, and payments are authorized automatically when votes pass. This is possible because smart contracts are tamper- proof once they go live on the blockchain. In addition, you can’t just edit the code (the DAOs rules) without people noticing because everything is public.

Under the surface, DAOs are lines of executable code that are run on the blockchain, typically Ethereum. This code is auditable, meaning DAOs are transparent. While outside of a DAO, a rogue agent could wreck the plans of an entire organization with a few self-interested acts, a DAO prevents this sort of behavior, with only the authorized code executable.
These chunks of code are known as smart contracts and are the backbone of all DAO projects. Smart contracts are implemented to ensure agreements are met, and fairness is maintained. A smart contract code is designed to ensure specific conditions have been fulfilled before executing.

Smart contracts comprise the rules of the DAO, with the community voting and shaping the collective organization proportionally through their stake in it. Being decentralized, DAO proposals are only implemented once most stakeholders approve of them. This threshold varies between DAO projects.

The concept is not new. People have always found strength in numbers, and, collectively, working together is the foundation of all communities and society. However, what DAOs purport to provide is a way to organize such cooperation with no need for a central authority, which is often a weak point in terms of security.

Our Take

DAOs require the transfer of a lot of trust to computer code. Unfortunately, computer code has never been proven ironclad or without vulnerabilities, no matter how much the code was initially intended to be safe and secure.

That kind of trust transfer that DAOs require can be dangerous if too much trust is granted without the due diligence of skepticism. It can lead to more significant vulnerabilities and exposure if trust is given too quickly without considerable hesitation, due diligence, and verification.

Throughout the decades, many new technologies have made very lofty claims and then failed, sometimes stunningly so, to live up to anywhere near those high-minded proclamations. When serious finances are
involved, as they could be here, the danger of failed attainment of those lofty claims and promises can be even more impactful and detrimental.

While smart contracts and their computer code may be “transparent,” how transparent really is computer code? How many can effectively inspect it and understand its many layers and complexities?

While it may be accessible, most users may not understand it. The theories that underly quantum mechanics are readily available too, however, they remain monstrously difficult to understand even if easily accessed.

Meanwhile, computer code is only “immutable” until it isn’t. At that point, all of the “mea culpas,” “apologies,” and “whoopsies” won’t do much for those who sunk a lot of trusts and a lot of money in said code.

The reasons we need smart contracts are the same reasons they remain ultimately vulnerable. There’s potentially a lot of money involved so they are a lucrative target for malfeasance.

DAOs are very new and not widely implemented nor stress tested as of this writing. However, they offer some promises that can lead people to run to them where no other solution is available. Being the only available solution does not necessarily make it a perfect or even good solution.

DAOs are based on immature technology foundations (e.g., smart contracts, blockchain, etc.) and are not very mature either. This type of “layering” of immature technology on top of immature technology can introduce novel and unanticipated problems.
Summary
DAOs could eventually become an attractive solution to an age-old problem: how do you trust others when money is involved? However, the emphasis is on “could.” DAOs are certainly not mature enough now and may truly never be; only time will tell.

It is not advisable to rush into DAOs, certainly not for anything consequential at this point.

DAOs will need more stress testing and proof of reliability before your organization should decide to transfer too much trust to them and their purported promises.