The Challenges for DAO Adoption: Hype Cycle, Orientation, Free for Alls, and Unclear Incentives

An unprecedented amount of energy has entered the crypto space over the last 18 months. A dynamic that’s naturally increased the number of Decentralized Autonomous Organizations (DAOs) while expanding their scope and purpose.

At the same time, there are now more tools available to DAO participants, and the blockchain technology that underlies them is maturing. All of which has set the stage for DAOs to hit the mainstream.

Reorganizing the world with DAOs

The first thing to say is that many “DAOs” are not decentralized nor are they autonomous. They’re also not monolithic. People have different definitions, and what qualifies as a “DAO” is still being defined. But for our purposes, we’ll use the term to refer to anything with a DAO-like structure.

That is a software-enabled organization — or said another way, a permissionless, blockchain-based collective formed by disparate individuals who congregate around similar beliefs, interests, hobbies, goals, etc.

Source: Ethereum Foundation

DAOs are an attempt to improve human coordination by putting decision-making power into the hands of an automated system and a crowdsourced process. And in this way, DAOs are a solution to the principal-agent problem.

By minimizing the need for hierarchical human intervention or centralized coordination, DAOs aim to reduce problems that arise when, for example, a business owner or “principal” with their own agenda makes decisions for their employees or “agents.”

In doing so, we replace oppositional relationships with more cooperative ones, which has the knock-on effect of increasing the number of people who benefit from a network while also better-aligning value creation and capture.

Hype cycle

While DAOs seem fun and sexy, it’s easy to get carried away. There’s a sense that if we just introduce the right incentives, DAOs can solve for greed, corruption, dishonesty, inequality, etc. This is the kind of framing that goes with any hype cycle.

A more sober take considers that DAOs are tasked with reverse engineering centuries of lessons learned about governance. Indeed, like many other technological advancements before them, DAOs are in their stage of inflated expectations.

One of the biggest problems facing DAOs is that very few have reached maturity. And as such, there are a number of unknown variables. One thing is clear though, to become mainstream, there are many obstacles left to navigate.

Problems include contributor liability, payroll, challenges related to real-world interactions without a standard legal entity, and voter apathy — a crisis-level problem in many DAOs. Other issues are governance, security, treasury management, smart contract risk, a lack of operational clarity, and balancing hierarchy with structurelessness.

https://twitter.com/josephdelong/status/1496864468873228291

Orientation challenges

DAOs are decentralized by definition and, therefore, essentially leaderless. Where leaders in a traditional organization provide the vision and set goals, DAOs have to provide clear directions to members, especially new ones, without the benefit of central leadership.

Join the Discord of almost any DAO, and you’ll likely find it hard to work out what’s happening. DAOs throw open the door for anyone who wants in, often without creating a structure to ensure meaningful or even coherent experiences once they arrive.

https://twitter.com/notscottmoore/status/1488239894505955329

Organizational free for all

Two things generally drive DAO contributors: 1) the DAO’s mission and 2) the rewards (financial or not) that they expect from their involvement. The mission can usually be made clear (“Buy a copy of the US constitution”- ConsitutionDAO, “Build a network of assets on-chain”- CityDao), but specific milestones and day-to-day direction are often less well defined.

This leaves community members to rise, pick up leading roles, and define workstreams that contribute to the goal. At best, this can be messy, and at worse, it’s a disaster. And the severity of this often depends on the type of DAO.

https://twitter.com/balajis/status/1494244523983081475

In many cases, the mission and vision of a DAO are open to interpretation, which means the contributors that take on leadership might steer the DAO in a questionable direction. This can create controversial or contradicting proposals leading to confusion and even the fracture of the community, whereby members have to pick sides.

Unclear incentives

Rewards are the second reason a contributor might join, and currently, incentivization and compensation structures are not well defined or standardized in most DAOs.

To put it simply, if it’s not clear how a contributor will get rewarded or compensated, it’s hard to attract and engage talented people. This is an even bigger challenge in an early stage DAO because the treasury is often limited, and token economics are not clearly defined.

Some DAO Solutions We're Worked With

PieDAO

There are, of course, solutions to some of these issues. For instance, one way to combat voter apathy and incentivize DAO members to participate in the governance process is to only distribute earnings to members who have been active during a certain period.

Source: Cryptonomist

PieDAO, the DAO formed to increase access to wealth creation strategies, has implemented such a mechanism successfully. To be eligible to receive rewards for an epoch (currently one month), a member of PieDAO must have voted on at least one proposal during the epoch.

Suppose a member does not vote for three consecutive epochs. In that case, their share is redistributed to active members in the next epoch, thereby incentivizing active members and ensuring greater participation in the governance process.

Solutions: FreeRossDAO

To take another example, there’s FreeRossDAO, a collective formed in late 2021 to push for the freedom of Ross Ulbricht and prison reform. The DAO has attracted a lot of attention but struggled with some of the issues mentioned above.

Source: FreeRossDAO

In particular, how to orientate and reward users has been difficult. In response, FreeRossDAO is trying to eliminate Discord as a centralized task delivery and organization mechanism. To achieve this, they’re building a tool that’s a “dashboard for social action.”

This (still unnamed) tool was prototyped in WordPress and Gravity Forms, and they’re currently coding it. Once finished, it will tie together actions that benefit the DAO’s mission with rewards like airdrops and POAPs — clarifying high-impact contributions and facilitating incentive delivery.

Looking forward

DAOs have plenty of challenges ahead, but there are also many reasons to be optimistic. Future ​​DAOs will likely have more delegated authority. Similar to corporate hierarchies but more open, transparent, and fluid. There will also be more vertical-specific DAOs, where incentives, onboarding processes, and governance have been ironed out.

DAO tooling is getting overplayed at the moment, but tools are needed. And in the future, there will be more to complement what already exists. Tools like EPNS (on-chain notifications), Llama (economic infrastructure), Mirror (ethereum-native publishing), Gnosis Safe (digital asset management), Clarity (workspace organization), Utopia (payroll), and Wonderverse (task management) to name a few.

Overall, a lot’s happening, and we applaud the people building, advocating, and experimenting with the ideal DAO design. There is infinite opportunity in this design space. There will also be more headwinds, and most of the hype will be washed away. But this isn’t a reason not to get involved. As Will Papper, the co-founder of SyndicateDAO, puts it, “the best way to contribute to a DAO is to show up and do the work, even when no one asks.”

This post originally appeared on the ChainSafe blog.

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