New technologies often enable the reimagining of old systems.
Such is the case with decentralized autonomous organizations (DAOs) - an organizational structure made possible by blockchain technology. DAOs allow coordinated group action and decision-making without any centralized control. They promise a more transparent, democratic, and flexible form of governance.
In recent years, DAOs have rapidly proliferated as a new form of blockchain-based collective governance. DAOs allow stakeholders to coordinate through open on-chain voting and fund allocation. In essence, they are treasuries. Money is sent to them, either via smart contracts or contributors, and stakeholders vote on where to allocate these funds. This could represent the future of governance, offering a compelling alternative to the bureaucracy, opacity, and misaligned incentives of the modern state apparatus.
Partisan gridlock, corruption, and accountability shortcomings are all too prevalent in today's model of representative democracy. The tendency for centralized control over the economy to be harnessed for political ends, rather than the public interest, signals a clear need for change. DAOs could potentially subvert these issues with trustless, decentralized, and participatory technology.
Why doesn't everyone just submit a bill? Then, we all just vote on who we spend money on," which is effectively what a DAO does. I had a hard time wrapping my head around, "What does a DAO do? How do you get all of this stuff on-chain? I run a company. There's no way you can bring all of this on-chain." Then, I realized a DAO is actually really simple. It's just a treasury. All it does is have money get sent to it either via smart contract or contributors. Then, all it does is people vote on who to give that money to. That's as simple as, how much and to whom? Which wallet? That's it. Sahil Lavingia (Gumroad) — Infinite Loops EP.87
DAOs exemplify the potential for direct coordination, capital allocation, and collective decision-making. Open-source rules encoded on the blockchain eliminate the need for a self-interested political class. Policy emerges from the transparent interplay of stakeholders, not backroom deals. DAOs thus realize the concept of "government by the people, for the people" in a true sense.
More broadly, decentralized governance aligns better with the complex, emergent realities of modern society. Central planning struggles to anticipate local needs or adapt to rapidly changing conditions. But DAOs leverage real-time input from those closest to the issues at hand. They flexibly empower communities to self-organize and meet local challenges.
DAOs In Action
The ConstitutionDAO coordinated over 17,000 donors to pool $42 million in just 1 week in an attempt to bid on an extremely rare first printing of the U.S. Constitution that was being auctioned. Despite ultimately losing the auction, it showed the ability of decentralized governance to quickly align stakeholders around high-value public goods like historical artifacts. ConstitutionDAO pioneered new mechanisms for transparently acquiring publicly-accessible goods.
The LAO (Limited Liability Autonomous Organization) aims to provide an angel investment fund governed entirely by DAO-based shareholder voting. The LAO functions as a decentralized venture capital fund for angel investing. Instead of a centralized fund manager, investment decisions are made entirely through votes by LAO token holders in the DAO. Any approved investor can submit a startup funding proposal. If LAO members approve the target startup and terms, the DAO will automatically invest from its pooled capital. Payouts are distributed proportionally back to LAO members. The LAO aims to disrupt traditional VC models by leveraging the wisdom of the crowd and eliminating fundraising middlemen through blockchain-based governance.
The CityDAO is an experiment in decentralized land ownership, starting with a 40 acre parcel in Wyoming. The DAO aims to collectively govern new "smart cities" built around blockchain technology and decentralized governance. It coordinates stakeholders to fund and build the infrastructure, systems, and services in these cities. Members vote on proposals to allocate treasury funds to initiatives like power grids, transit, digital ID systems. CityDAO is an experiment in decentralized urban planning and management.
Friends With Benefits is a DAO focused on forming a decentralized community aligned around culture and the arts. Members collectively manage and grow the FWB ecosystem, which includes publications, events, token membership, and content creation incentives. The DAO votes on community initiatives, submits proposals, and fosters collaboration. FWB explores a social coordination model based on blockchain alignment and value sharing rather than centralized control.
Such experiments highlight how DAOs and blockchain technology are redefining governance and organizational architecture.
Maybe we don't need parties. Maybe we don't even need politicians because all the politicians do is we have to trust them. Then, we hope that they have a bill that supports the things that they ran on, or what have you. Then, obviously, that never happens. There's all these excuses, and consensus that you need. But what if I could just vote on a bill. It has allocations for this and that. I don't need these other middle layers in between me and them. Sahil Lavingia (Gumroad) — Infinite Loops EP.87
As with any new technology, DAOs also come with some risks e.g. legal, cybersecurity and governance.
DAOs are often transnational organizations, subject to laws across multiple jurisdictions. This makes determining applicable laws and enforcing legal claims against DAOs challenging. For example, the bZx DAO hack in 2020 highlighted the need to consider legal implications, as the DAO operated across borders. Recent rulings in this case have implied that DAO governance token holders can be Held responsible for the actions and inactions of the DAO.
DAOs face cyber risks like hacked smart contracts and phishing. The 2022 Beanstalk DAO hack saw hackers exploit a governance vulnerability to steal $182 million. Incidents like this demonstrate the importance of security for DAO operations and assets.
Flawed DAO voting systems can enable manipulation by small groups. They may also struggle reaching consensus in decision-making. For instance, hackers exploited a bug in TornadoDAO's voting mechanisms in 2023 to maliciously secure $4m in TORN tokens. Robust governance is crucial for DAO success.
Despite risks, DAOs have shown resilience after hacks. Cream Finance DAO recovered stolen funds after a $130 million 2021 exploit. Deus DAO recovered some of their stolen funds in 2023, with damage limited by the actions of white hat hackers. These cases demonstrate DAOs can bounce back through proper risk mitigation. This involves designing voting mechanisms that ensure fair representation, creating contingency plans for decision-making deadlocks, and employing comprehensive security audits of smart contracts.
While concerning, the millions lost so far in DAO exploits should be viewed in context. Government waste in the US is estimated at $200 billion for the pandemic relief programmes administered by the SBA. Medicare fraud costs taxpayers over $100 billion per year. The Sackler family made over $10 billion promoting addictive OxyContin, spurring a public health crisis.
Corporate malfeasance is also rampant in business. Wells Fargo opened millions of fake accounts, resulting in billions in fines. Uber misled regulators and customers by concealing data breaches. Theranos raised $700 million through false blood testing claims before collapsing. Such large-scale unethical acts are only possible in opaque corporate structures.
Against this backdrop, the transparency of blockchain technology offers a powerful remedy. All DAO transactions occur publicly, open to scrutiny. Their decentralized nature provides robustness against single points of failure. The resilience of DAOs, as evidenced by their recovery from past exploits, also speaks volumes about their potential.
While DAOs undoubtedly have risks to manage, their transparency and accountability offer a stability and integrity that traditional institutions often struggle to achieve. While losses may occur, the inherent transparency of the blockchain offers the hope that DAO-related corruption will never approach the systemic levels of deception facing our legacy institutions. In a world searching for better governance models, DAOs provide a compelling alternative worth exploring.
Replacing today's institutions with decentralized governance will not happen overnight. Despite persisting technical and incentive challenges, the technology continues to advance rapidly. In the long run, DAOs could provide all functions of the state via smart contracts, from taxes and benefits to infrastructure and defence. New technologies often enable the reimagining of old systems, just as online shopping complements brick-and-mortar stores. When it comes to modernizing governance, DAOs provide the efficiency and transparency sorely lacking in status quo bureaucracy.