The DAO Achilles Heel: Navigating Challenges to Build an Ideal System

A DAO is a unique model, it can be repeated over and over again. It is hard to imagine a better system than direct democracy with all decisions fixed on an immutable blockchain. At a glance, we can draw a few affirmative advantages: openness, honesty, transparency, freedom of speech, and will of all participants.

Theory tells us that DAO is the future. But in practice, that DAO, like all other models of management, is subject to cruel human hypocrisy and fraud. Recently we have noticed more and more cases of "breakdowns" of DAO systems: because of bribery of the majority, hacking, and other things.

All of these problems are due to imperfect technology. In this article, we will look at several key challenges that we need to overcome in DAO. In order to get to a whole new level. Let's go.

What is the root of the problem?

If you don't know what we're talking about, we highly recommend reading the article about How thieves are draining DAO funds in plain sight or, an investigation by the DAOTimes. However, the whole point of the problem boils down to a few simple truths:

• Plutocracy,
• Misunderstanding of how to be a member,
• Corruption,
• Hacker attacks,
• Lack of understandable infrastructure.

We will talk about each of these points separately.

Taking Power from the Rich

Plutocracy is an ancient problem throughout our society. The rich have had more power and opportunity than the poor throughout history. Not surprisingly, this problem is also present in DAOs.

In most modern DAO management models there is an unspoken (or, on the contrary, very open) rule - the more tokens you have of a particular project, the stronger your vote is on the ballot.

On the one hand, this makes logical sense. After all, a member could get these tokens at the very beginning of his journey with this organization. On the other hand, it has a lot more problems. After all, if a notional "rich man" wants to take control of an organization, he can simply buy a large number of tokens. In this way, power goes to a minority of the rich and powerful.

Designing effective governance models that balance decentralization and effective decision-making is a major challenge. Ensuring fair voting mechanisms, preventing manipulation, and avoiding minority control are critical aspects that must be addressed to ensure the long-term success of the DAO.

Not knowing how to be a member of the community

Another big problem is ignorance. There is a whole set of problems, which at first seems imperceptible. DAO is not yet a prevalent system, so, often, members of such organizations simply do not know how it works.

The big problem remains that many DAO participants remain passive. Many simply do not understand why they should vote, make suggestions, or just actively participate in the training. Often it boils down to "mindless" voting for the sake of some small bonuses.

It is also important to understand that the DAO is a "living mechanism" that always requires activity: discussions, suggestions, and votes. So it's really important to show yourself.

Many current DAO platforms lack user-friendly interfaces and suffer from a steep learning curve, limiting their accessibility to non-technical users. Improving the user experience, designing intuitive interfaces, and providing educational resources are crucial for encouraging broader participation in DAOs and attracting users from diverse backgrounds.

So we come to an important part of every DAO's work - it's important to teach your members how to use the infrastructure of the organization properly: how to make proposals and draw attention to them, delegate, vote, etc.

It is the DAO's duty to teach the members to be effective, not just random NPCs.

Fraudsters, corrupt, and just boorish people

Let's look at some examples of how corruption can be used in DAO. But not just corruption. The dark world of DAO has a large number of different sins.

Here are some of them:

• Collusion and Vote Manipulation: In DAOs with voting mechanisms, there is a risk of collusion among members to manipulate voting outcomes in their favor. This can involve forming alliances, controlling a significant number of voting tokens, or exploiting loopholes in the governance system. Such collusion undermines the democratic principles of DAOs and can lead to unfair decision-making.

  
  

• Misappropriation of Funds: DAOs typically manage funds in a decentralized manner, but there is a risk of misappropriation or embezzlement. Individuals with access to the funds may abuse their privileges, divert funds for personal gain, or engage in fraudulent activities. DAOs need to implement robust financial controls, audits, and transparency measures to mitigate these risks.

  
  

• Insider Trading and Market Manipulation: DAOs often have native tokens or assets associated with their ecosystem. Insiders or influential members may engage in insider trading by leveraging their access to privileged information. They can manipulate the market value of tokens, engage in pump-and-dump schemes, or exploit vulnerabilities for personal profit. Regulations and transparency measures can help mitigate these issues.

  
  

• Governance Capture: Governance capture occurs when external entities or individuals gain control or influence over the decision-making process in a DAO. This can happen through acquiring a significant number of voting tokens, influencing key stakeholders, or exploiting weaknesses in governance mechanisms. Safeguarding against governance capture requires active participation and vigilance from DAO members.

  
  

• Sybil Attacks: Sybil attacks occur when an individual or a group creates multiple fake identities or accounts within a DAO to gain disproportionate influence or control. By flooding the network with these fake identities, the attackers can manipulate voting results, governance decisions, or funding allocations. Robust identity verification mechanisms are crucial to prevent Sybil attacks.

  
  

Hackers do not sleep

DAOs rely heavily on smart contracts to automate processes and execute decisions. However, smart contracts can be prone to vulnerabilities and bugs, leading to potential security breaches and financial losses. Enhancing the security of smart contracts and performing rigorous audits to identify and mitigate vulnerabilities is critical for building trust and confidence in DAOs.

Finalizing

Every technology has its own way of development. We have gone through hundreds of trials and errors in order to live in a better world: from huge computers with a couple of megabytes of power to today's 13 inches that can do (almost) anything. From engines that use fuel with lead to Tesla.

It’s hard to consider DAOs a technology. But, they are a technological concept that appear to have passed the "problem-solving" test period. The only question is, can we find the right answers to the questions above in time?