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DAO Pain Points and Paths Forward

A Solution-Focused Discussion of Current DAO Challenges From Across the Ecosystem

Article by MemeBrains | Edited by Melior and trewkat | Cover Art by Chameleon

The DAO ecosystem has an abundance of pain points and thus there are a great many potential paths forward. Which pain points are the most important? And which paths forward are most effective? This was discussed at length during a recent BanklessDAO Twitter Spaces and the conversation is summarized below. The intention of this article is to continue the discussion on finding solutions for this critical topic within our ecosystem for the benefit of us all.

The ‘DAO Pain Points & Paths Forward’ Twitter Spaces was co-hosted between MemeBrains (me), Jordan, and NF Thinker. It featured a dozen speakers across reputable DAOs and organizations including contributors from CityDAO, ApeCoin DAO, Demergent Labs, OrangeDAO, MIDAO, ShapeShift, Kleros, PricelessDAO, Bankless Consulting, and DAOstruct.

Note: The following represents summarized phrasing of what was said during the Spaces event. For exact quotes by the speakers please refer to the original Twitter Spaces recording linked above. Timestamps from the Spaces for each speaker have been provided beside their commentary titles below for easy reference.

Table of Contents: Pain Points

  1. Legal and Regulatory Challenges

  2. Centralized Infrastructure and Sybil Attacks

  3. Overcomplication of Everything

  4. Sustainability Model and Retention

  5. Product Market Fit and Multisig Reliance

  6. Part-Time Efforts

  7. Mistaking Voting for Decision Making

  8. Effective DAO Tooling

  9. Short-Term Thinking

  10. Voter Participation and Onboarding Newcomers

  11. Smart Contract Limitations and Transparency

  12. Unfriendly Government

I kicked off the discussion with an open question:
What do you think are the biggest pain points in the DAO ecosystem right now?

Pain Point #1: Legal and Regulatory Challenges

14:12 Adam from MIDAO:

There are limited laws and regulations worldwide which specifically address DAOs, with only a few existing in the United States and the Marshall Islands. Reports and frameworks from the Biden administration and the EU have also provided little discussion on DAOs, resulting in numerous unknowns and a significant gray area. It is understood that DAOs generally need to follow the same legal procedures as traditional organizations, starting with establishing a legal entity, which can be achieved through jurisdictional selection or the use of agreements, partnership agreements, or constitutions.

Additionally, employment law and contract law are relatively well-established areas for DAOs, but uncertainties arise when dealing with tokens and securities issues. The classification of governance tokens for nonprofit DAOs as securities is particularly unclear, especially when they cannot distribute dividends but may have value appreciation and utility. Engaging in activities like staking or mining adds further complexity as legal and regulatory issues in these areas are yet to be fully addressed by any jurisdiction globally.

Regarding the Path Forward

Creating a legal entity in locations like the Marshall Islands or the Cayman Islands can provide liability protection for DAO members and allow the DAO to own property, pay taxes, and function similarly to a traditional organization. Lawyers often offer free consultations, providing an opportunity for individuals to seek legal advice without incurring immediate costs. In this case, lawyers typically request a brief description of the individual’s legal needs to determine if they possess the necessary expertise to assist. At MIDAO, we’ve curated a network of lawyers who offer a free half-hour consultation, enabling individuals to explore whether the lawyer is a suitable match and whether they can effectively address their specific issues.

Additionally, it is important to consider the path forward for DAOs in terms of legislation and regulation. While certain DAOs choose to remain anonymous and detached from the outside world, and it is acknowledged that there are use cases for such DAOs — particularly those aiming for complete censorship resistance and a revolutionary approach to establishing a new world order — this path is typically not the primary focus.

For the majority of DAOs, the preferred path forward involves active participation in legislative and regulatory processes. This entails the creation and refinement of laws and regulations specifically tailored to govern DAOs. MIDAO, for instance, has been engaged in the task of drafting regulations, actively contributing to the ongoing efforts to establish a comprehensive legal framework.

These are essential steps toward achieving regulatory clarity and establishing the right types of laws and regulations for DAOs. Such endeavors are not confined to a single jurisdiction; the ultimate goal is to create a global environment that fosters regulatory clarity, enabling DAOs to operate within a well-defined legal framework.

By participating in the legislative and regulatory processes, DAOs can actively shape the legal landscape, ensuring that their operations align with established guidelines. This collaborative effort seeks to facilitate the growth and development of DAOs while maintaining compliance with applicable laws and regulations.

Pain Point #2: Centralized Infrastructure and Sybil Attacks

19:28 Jordan from Demergent Labs:

There are two pain points I’d like to discuss. The first is my theory around the challenges posed by centralized infrastructure. When it comes to tasks that cannot be performed directly on the blockchain, one typically needs to rely on centralized infrastructure like AWS or other cloud providers. Platforms like Snapshot require the setup of centralized infrastructure. If too many of these centralized services are introduced, it creates multiple central points of failure within the DAO. This could even occur unintentionally if, for example, the administrator responsible for a particular cloud account loses interest or access. I have gathered some evidence that supports this theory, and I am keen to have others validate it.

The second pain point I want to address is the lack of Sybil resistance within DAOs. Specifically, there is no foolproof method yet to determine the identity of individuals within a DAO. Many DAOs employ token-voting systems, which can be vulnerable. Recently, in the Internet Computer Ecosystem (ICP ecosystem), an entire DAO — although it was a smaller test DAO — was taken over because someone managed to acquire all the tokens. This occurrence raises concerns about the level of decentralization and transparency in the governance of the main DAO that powers the ICP ecosystem, known as the Network Nervous System (NNS). The NNS serves as the onchain governance system where all ICP token holders can vote, and it facilitates the deployment of new protocol versions. It is disconcerting for me to consider the extent of decentralization in the NNS. I am unsure whether it’s controlled by a select few or even a single individual. It is crucial to enforce one-person:one-vote schemes to prevent DAO takeovers and ensure decentralization and transparency — both fundamental aspects of decentralized organizations.

Regarding the Path Forward

Now, let’s briefly discuss the two paths forward that I envision. Firstly, concerning my theory about centralized infrastructure, I genuinely believe that the Internet Computer offers a potential solution for DAOs to build their offchain infrastructure onchain or on a decentralized computer. The Internet Computer functions as a decentralized cloud platform, similar to AWS or EC2, but is not owned or controlled by a single entity. This path forward allows DAOs to reduce reliance on centralized services.

Secondly, regarding the lack of Sybil resistance, I am keen to learn about the practices followed by others. Gitcoin Passport is often mentioned as a primary tool, although I must admit that I have identified certain issues with it so far, which may hinder its widespread adoption. In my opinion, zero-knowledge identity solutions hold promise in addressing this pain point. These solutions enable individuals to provide proof of real-world information, such as passports or other government-issued documents. The concept can extend to various web2 and web3 contexts, allowing for the issuance of proofs based on existing mechanisms to establish unique human identities. I believe this path forward can enhance Sybil resistance within DAOs.

Pain Point #3: Overcomplication of Everything

23:55 Puncar from Bankless Consulting and How-To-DAO:

In my opinion, the biggest pain point is the overcomplication of processes. I believe the primary purpose of DAOs is to simplify the process of pooling resources and starting initiatives. Whether it’s two people starting a project in their garage or a larger community, the idea behind DAOs is to facilitate simplicity. However, as Adam mentioned, legal complexities have arisen, and now we are striving to create onchain DAOs for the sake of simplicity.

Initially, you could simply spin up a multisig wallet and call it a DAO, establishing communication channels and the like. Then the realization sets in that you need to domicile the DAO in a specific country, resulting in the creation of another entity on top of the DAO. Now, you have to manage and navigate the complexities of two organizations, which can be even more convoluted than starting a regular company.

Currently, we are in a phase where we are experimenting with various aspects of DAOs, some of which are significantly more complex in governance, voting, and decision-making processes than initially intended. In the past, it was as simple as launching a token and observing the outcomes. Now, we understand the need for better preparation, particularly considering factors such as potential SEC regulations. I hope that we will reach a stage where starting a DAO becomes easier once again.

To summarize, I believe we are currently overcomplicating matters in the DAO space. Launching a DAO involves challenges from both legal and technical perspectives, among other considerations.

Regarding a Path Forward

Perhaps people on this call might be interested in initiating research projects on DAO pain points, and with a simple click of a button, we could establish such initiatives. These projects would immediately aggregate our efforts towards solutions and employ a straightforward governance structure selected from a dropdown menu, allowing us to focus on achieving our goals rather than spending excessive time setting up the organization.

I envision a path forward where DAOs become so user friendly that we may not even refer to them as “DAOs” anymore. We would simply start initiatives without needing extensive knowledge of blockchain or governance intricacies because the system would seamlessly work. Additionally, I hope that the need for establishing legal entities in specific jurisdictions diminishes, and DAOs are recognized as onchain entities with broad acceptance across jurisdictions.

Pain Point #4: Sustainability Model and Retention

28:57 Ellson from OrangeDAO:

In my view, one of the critical considerations for a DAO is establishing a sustainable business model that enables the organization to continue working towards its vision or goals. The DAO structure offers a framework whereby individuals can contribute their fractional resources and receive corresponding rewards, whether material or otherwise. This fractional contribution and reward system can facilitate a continuous flow of contributions and support for the DAO’s vision. However, without a well-defined business model, perhaps due to legal frameworks and other constraints, it becomes challenging to adequately compensate individuals for their work.

The second issue that arises in the context of DAOs is retention. At OrangeDAO we experience different seasons where new faces join and others depart. This fluidity can disrupt the consistent flow of work and make it challenging to maintain the same standard of productivity. To address this, active management is required to ensure the continuity of work and uphold the DAO’s mission.

Regarding a Path Forward

Firstly, a DAO must consider and implement a robust business model that provides sustainable financial resources for the DAO’s operations and rewards contributors appropriately. This will enable the organization to compensate individuals for their efforts and ensure the long-term viability of the DAO.

Secondly, implement strategies to retain members and manage the dynamic nature of the DAO’s composition. By fostering an environment that encourages ongoing engagement and commitment, the DAO can maintain a consistent level of productivity and achieve its mission effectively.

Pain Point #5: Product Market Fit and Multisig Reliance

32:47 Willywonka from ShapeShift:

As a DAO, finding product-market fit can be particularly challenging. While it’s already difficult for centralized organizations, it becomes even more complicated for DAOs — especially when growth is not immediately evident. It can be hard to align everyone’s efforts and maintain motivation during bear markets which can also slow progress.

Additionally, I believe the multi-signature wallet challenge is a significant problem that many DAOs can relate to. Although we claim to be DAOs, the reality is that the community does not have direct control and instead places a great deal of trust in the multisig signers’ decision making.

Regarding a Path Forward

At Shapeshift, we’ve utilized SafeSnap and recently implemented oSnap, which is an improvement. oSnap allows for the inclusion of transactions and snapshot proposals, offering the benefits of gasless voting. Once a transaction has been included in a proposal and it passes, token holders can execute those transactions within 48 hours without the involvement of the multisig. This has undoubtedly been a step forward. However, it still requires going through the entire governance process and anticipating transactions in advance.

Pain Point #6: Part-Time Efforts

39:04 Nishu from DAOstruct:

The pain point that I see with DAOs is related to the people involved on a limited, part-time basis. If we consider DAOs as the future of companies, we should also envision individuals fully dedicated to these organizations. The reality is that most people are not engaged in DAOs on a full-time basis, instead participating in DAOs part-time while continuing their primary jobs elsewhere.

This lack of full-time commitment stems from the fact that people don’t see DAOs as something that can provide them with a substantial income to sustain themselves. If a DAO fails to attract and retain the talents and expertise of full-time individuals, it faces limitations in terms of input, availability, focus, and overall participation. These challenges are inherent to part-time efforts and can hinder the progress and effectiveness of the DAO.

Regarding a Path Forward

It’s crucial for DAOs to consider how they can incentivize people to commit to working on a full-time basis instead of just on a casual or part-time basis. This requires a comprehensive model and a thoughtful approach. It should be an ongoing topic of discussion within the community until a resolution is found. DAOs need to establish a profitable business model that enables individuals working within the organization to earn a sufficient income. Ignoring this topic will not make it disappear, so addressing it should be a priority.

Pain Point #7: Mistaking Voting for Decision Making

43:26 Grace from DAO Leadership:

One of the main observations I’ve made is that we have mistakenly equated voting with decision making in DAOs. In reality, voting is not the primary method through which most decisions are made. The current process in most DAOs involves logging in with your NFT and participating in voting, but when it comes to actual decision making, it often ends up resembling the reconstruction of a software development tool like Jira. This discrepancy arises because decision making in software development teams, for instance, is a fluid and dynamic process, unlike the rigid nature of voting.

Furthermore, voting as a concept itself feels unnatural for many of us in our daily lives and organizational settings. Even when it comes to budgeting — a crucial aspect of DAOs — decisions are typically reached through discussions, strategic considerations, and trade-offs rather than relying solely on arbitrary voting. Budget proposals are formulated and then ratified, which may involve voting, but the substantive decision making about budget allocation occurs much earlier in the process.

By fixating on voting, we miss the point of where the real power lies. In democratic systems, for instance, voting for political candidates rarely leaves us overwhelmed with an abundance of exceptional choices. We have mistakenly identified the decision-making juncture, often overlooking the fact that crucial decisions are made well before voting takes place, and execution continues long after the votes are cast. Placing such heavy emphasis on voting has led to issues like voter apathy, as voting itself can feel unnatural and disconnected from our day-to-day decision-making experiences.

Regarding a Path Forward

To move forward, it is crucial to adopt a first-principles-thinking approach. This approach, also known as reasoning from first principles, is a powerful strategy for breaking down complex problems and generating innovative solutions. By embracing this mindset, we can challenge conventional thinking and foster independent thought processes within the DAO ecosystem.

It’s essential for us to take a step back and reevaluate our starting point. We must acknowledge that we may have erred in our initial approach and reexamine the fundamentals.

For instance, when investment DAOs are determining which projects to fund, a more effective approach might involve a weighted decision-making table. This method, which can be automated and utilized within a DAO-like structure, allows participants to fill in their own weighted decision-making tables to assess the projects seeking funding.

Pain Point #8: Effective DAO Tooling

51:00 Lyons from CityDAO and Missio:

One issue I’ve observed is the lack of adequate tooling for DAO members to contribute effectively across different levels of involvement.

When I mention different levels, I’m referring to three main categories of DAO users. First, we have the power users who possess a deep interest in governance and operations. They are active participants, often part of the core team or holding a significant number of tokens. Second, there are users at the medium level who display an interest in the DAO and its outcomes. They may have joined early or invested in the token but face challenges in participation due to time constraints or the absence of sufficient monetary incentives. Third, there are individuals who engage at the lowest level, often characterized as speculators. Although they don’t actively contribute, they may offer opinions if asked.

These observations revolve around the notions of intelligence and engagement. Intelligence refers to the collective understanding across these different levels of contributors, while engagement entails the ease with which individuals can interact with DAOs at varying degrees of involvement.

Regarding a Path Forward

There’s a crucial need for better tooling that can accurately identify the three types of DAO users and enable them to be more productive. Each category of user has unique requirements and expectations, and it’s essential to address their specific needs in order to foster a more inclusive and productive DAO ecosystem.

Power users need to have a more efficient way to review summarized highlights of all the conversations taking place within a DAO to prevent them from getting bogged down with the volume of discussions. Medium-level users need a better way to interact only with people at their contribution level. The remaining individuals within a DAO need to have the entirety of the DAO’s activities summarized into easily digestible form so they can make educated decisions without feeling overwhelmed. It’s important to strike a balance that allows these users to interact seamlessly while maintaining the decentralized essence of the DAO. This is some of the work we’re doing with Missio.

Pain Point #9: Short-Term Thinking

54:18 Damjan from Kleros:

I believe one of the biggest challenges in the tech world is our tendency to get caught up in the minutiae and lose sight of the bigger picture. We often prioritize short-term gains and are consumed by the daily demands of our rapidly changing environment, particularly in the volatile crypto market. This narrow focus poses a significant problem for the direction of the entire DAO.

Regarding a Path Forward

To move forward, we must broaden our perspective to consider the wider social spectrum. Let’s examine the issue of constitution building for DAOs, which has been a topic of discussion for several years now without a viable solution. If we look back at the Athenian democracy, we see that it took them approximately 100 years to transition from tyranny to democracy, employing a multi-tiered system with some elements of DAO functionality that actually worked. The Athenian policy, although imperfect, managed to progress.

We sometimes view DAOs and decentralization as a shiny new concept that can be applied universally to effortlessly improve everything. However, there are inherent risks involved. Our experiences at Kleros have taught us that while decentralization is remarkable, specific measures must be taken to ensure its effective implementation. This is where the concept of the Montesquieu separation of powers becomes crucial. If we only focus on voting and engaging people without establishing a judicial system and a governing body, we are essentially building a parliament without checks and balances.

I firmly believe we should return to first principles, as Grace mentioned earlier. It is vital to reconsider the established systems and structures we have at our disposal. In many ways, we are all attempting to reinvent the wheel.

Therefore, I propose we delve into the study of history, exploring how national governance and democracies were established in different eras and how they functioned. By drawing on this knowledge, we can chart a more informed and effective course for the future of DAOs and decentralization.

Pain Point #10: Voter Participation and Onboarding Newcomers

1:01:30 Vulkan from ApeCoin DAO:

At ApeCoin, we’re deeply invested in encouraging active participation and voting among our members. It’s a challenge to maintain consistent voter engagement, which reflects a larger issue — establishing a seamless onboarding process for newcomers. The abundance of information can be overwhelming, not only for new members but also for those who have been part of the DAO for some time.

One aspect that often confuses newcomers to ApeCoin is that participation and proposal submission don’t require ownership of a Bored Ape NFT; just a single ApeCoin is sufficient. While this approach promotes inclusivity, it can contribute to the confusion surrounding onboarding. If the process of joining any DAO is not straightforward and user-friendly, people get left behind, leading to disengagement. It is crucial for us to ensure that new users have a seamless and empowering onboarding experience. Otherwise, we risk losing them right from the start.

Regarding a Path Forward

To forge a path forward, we’ve been working diligently at ApeCoin on developing a comprehensive onboarding guide and refining the onboarding process for all newcomers. This is a vital initiative that any DAO can undertake to support its community, as it significantly enhances participation and helps maintain engagement over time. I am eager to connect with anyone who shares our passion. If you have ideas to contribute, or if you simply wish to connect and discuss matters related to the DAO, I would be thrilled to engage with you.

Pain Point #11: Smart Contract Limitations and Transparency

1:08:00 Seb from CodeAndState:

If we examine the core of a DAO, it boils down to a smart contract, which is a collection of code. Of course,o there is a surrounding community, infrastructure, and resources, but the true technical revolution lies within the smart contract. Nonetheless, smart contracts have their limitations. They cannot store extensive data, connect with the outside world effectively, or handle complex computations and massive data processing. Consequently, I consider DAOs to be quite restricted in their functionality. While they currently enable token swapping, proposing, minting, and burning, what truly excites me is to witness DAOs engaging in tangible actions and offering many functionalities.

Regarding a Path Forward

Three years ago, I made the decision to leave school due to my fascination with the internet computer (ICP). It introduced me to the concept of Canisters, which are decentralized servers that extend the capabilities of smart contracts. With Canisters, you can perform a broader range of actions, such as calling a remote server. I recently participated in a call where someone demonstrated how to control a physical light using a Canister. It showcased the potential for a digital organization to exert control over physical objects, which was a mind-blowing experience for me.

I envision a world where organizations can manage and influence various aspects of a city. Once we have the necessary technological advancements, I believe regulations, funding, and communities will naturally develop around these possibilities. However, at the core, it is technology that needs to evolve and improve, providing better frameworks for DAOs.

Pain Point #12: Unfriendly Government

1:39:34 Joseph from Granata Consulting:

There is a concerning and aggressive crackdown on cryptocurrencies, particularly in the United States. The ability of authorities to access and reveal the identities of individuals associated with a legal entity poses significant risks. The potential consequences could ruin lives. This situation is undeniably unfair and unjust. While there is a possibility for change, such as shifts in the political landscape following elections, it is crucial to acknowledge the present reality that the U.S. government is actively working against the cryptocurrency ecosystem, aiming to cause harm and hinder its progress. This unfortunate reality underscores the need for caution and vigilance within the crypto community.

Regarding a Path Forward

If you’re contemplating joining a DAO or launching a new one, particularly within the United States, I strongly advise prioritizing anonymity and protecting your identity. In the current climate, it is crucial to recognize the potential risks and ensure your personal information remains safeguarded. Additionally, before venturing into the establishment of a new DAO, it is important to have sufficient capital resources. In the United States, lacking adequate capital can leave you vulnerable to potential risks and challenges. Therefore, it may be worthwhile to explore jurisdictions that are more welcoming and supportive of DAOs. Taking these factors into consideration is more prudent than diving headfirst into the endeavor.

Moreover, when assembling the team for your DAO, carefully select individuals who truly contribute to the project’s success. Having a lean and focused team can enhance efficiency and minimize potential risks associated with a larger group. If you plan to raise funds, consider alternative fundraising methods instead of solely relying on the DAO structure. There are two clear alternatives: a startup established in a place that is friendly to web3 or a non-profit foundation to push forward your project. Remember that DAOs work best when there is either an existing project for governance or funds, or a project that attracts a passionate following. If you have neither, consider another form of organization.

Remember, not every initiative needs to be structured as a DAO. There are numerous ways to build remarkable things and achieve significant goals without strictly adhering to the DAO framework. It is vital to approach the creation of a DAO with a clear understanding of the potential challenges and risks involved. By entering the realm of DAOs with a cautious and well-informed mindset, you can avoid unexpected pitfalls and navigate the landscape more effectively.

Making Space for DAOs

If the ideas and discussions above have piqued your curiosity, I encourage you to join the next Twitter Spaces. Feel free to send me a DM and I’ll make sure to include you. These Spaces are intended to facilitate a safe and constructive place for us all to share knowledge and collaborate to discover and create solutions. I believe that we’re all in this together with a shared vision of a better future and that we can benefit from the sharing of each other’s experiences.

Join the next Twitter Spaces, raise your hand in the conversation, and LET’S BUIDL!

Author Bio

MemeBrains is a DAO Activist and lifelong Entrepreneur with a passion for decentralized technology. He hosts the CityDAO podcast and builds infrastructure for decentralized communities with his current venture that won at ETH Denver 2023. He firmly believes that Bitcoin is better money for the world and DAOs are the natural evolution of human organization.

Editor Bios

Melior is a DAO enthusiast with experience in engineering, data science, development, design, project management, and writing. Melior comes from the word meliorism, which is the belief that humans can make the world a better place.

trewkat is a writer, editor, and designer at BanklessDAO. She’s interested in learning about crypto and NFTs, with a particular focus on how best to communicate this knowledge to others.

Designer Bio

Chameleon is a designer and creator in the web3 space.

BanklessDAO is an education and media engine dedicated to helping individuals achieve financial independence.

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This post does not contain financial advice, only educational information. By reading this article, you agree and affirm the above, as well as that you are not being solicited to make a financial decision, and that you in no way are receiving any fiduciary projection, promise, or tacit inference of your ability to achieve financial gains.

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