Why DAO? : The Problem With Traditional Governance

Last month the social media space was hit with a wave of news that Facebook and the rest of its services had temporarily gone down.

The overall effects of that incident and those before it continue to shift our general curiosity about and approval of incentives to switch to decentralized technology.

I argue that our society needs more innovative solutions for privacy, interoperability, and decision-making.

Blockchain is a part of a trustless digital solution.

There are multiple sources and solutions to decentralize existing projects or build a DApp from scratch. Moreover, I observe a notion of building projects under open governance where communities make all the decisions.

Another term for it is DAO governance. Below, you can find out more about what it is, how it works, and the solutions for building trustless projects operated by DAO.

Why DAO?

First, let’s examine why traditional governance doesn’t work anymore.

In innovative business, there is no place for bureaucracy, and decision-making is lightning fast. If you are late, a competitor comes along and steals the show - I mean, money.

Hence, traditional forms of governance usually assume numerous layers of management for the coordination and enforcement of processes. This comes with a drawback: many operations can become a bottleneck or a source of corruption.

DAO (decentralized autonomous organization) is open-source or completely transparent and, in theory, uncorrupt. It has no board of directors or managers, only entrepreneurs whose authority is generally nominal.

The community, or each member of DAO, reviews, records, and maintains all the tasks, proposals, and updates using a blockchain. However, some experts believe that one can’t achieve fully decentralized governance.

While DAOs may be architecturally decentralized (independent parties run different nodes) and geographically distributed, they might also be logically centralized (by the protocol rules).

Cautionary Tale: Examples of DAO Governance Gone Wrong

The history of using DAOs for blockchain projects dates back to 2016. It was the year when The DAO (Genesis DAO) was hacked.

A minor bug in an application on Ethereum led to the loss of 3.6 million ETH (the equivalent of $70 million at the time).

The Ethereum community reacted quickly and regained control: it presented multiple proposals to deal with the exploit. As a result, they froze the tokens leaving the hacker unable to finish his gateway.

Moreover, major crypto exchanges started to delist DAO Genesis to comply with the US SEC’s restrictions.

Nonetheless, it didn’t stop the DAO idea from spreading. The Genesis story showcased a faulty scenario of launching its own DAO. Developers learned to establish secure blockchain solutions and avoid mistakes in their code, often with the help of external audits.

Secondly, the SEC’s ban on The DAO has pushed blockchain startups to come up with new ways of avoiding regulation.

Open Internet Services Managed by Open Tokenized Governance Systems

Many DAOs rely on a simple structure where every member can propose an idea and vote upon it democratically. People use them for charity, investment, governance, and fundraising.

One example would be the Internet Computer (IC) by DFINITY — a public network that promises a safe and unlimited environment for smart contracts. IC gives an opportunity to build anything, tokenize it on Ethereum, and reduce computing costs by more than a million times(!).

A key feature of this software is the open governance system that controls Internet Computer blockchain — NNS (Network Nervous System). Anyone can participate in the governance by staking its utility token ICP: vote, propose changes, and lock tokens.

The second example is Aragon protocol, which enables a plug-and-play process of creating and managing decentralized organizations. Communities get a powerful tool to organize themselves around capital assets, currency, or tokens. The latter can increase in value as more people hold and use them to participate in the life of these communities.

Finally, there is MakerDAO, governed by MKR stakeholders. Apart from its on-chain governance, there is also an off-chain discussion for general feedback. It is used before on-chain voting to evaluate the overall sentiment about issues affecting the MakerDAO ecosystem and determine a consensus regarding their resolution.

More and more projects are beginning to understand the importance of functioning as a DAO. Prominent projects like ShapeShift, Tellor, DOS Network and Orakuru have been in the headlines in recent months with innovative DAO updates. Each with its own element that differentiates them from each other, for example Orakuru functions as an off-chain method for data verification and node validation mechanics.

Key Advantages of Open Tokenized Governance

Open tokenized governance gives a lot of opportunities for developers (DApps creators) and users (token holders).

DAO assists developers and entrepreneurs with user communication, regular feature updates, and necessary funding.

For early adopters, it can be considered as a long-term investment and source of regular rewards. And for the community in general, it gives a clear understanding of the decision-making process.

DAO is the future of organizations. It can make them more secure and give their members a voice. Open tokenized organizations could reduce corruption since all decisions are made by the community, open for review by anyone, and can’t be altered by third parties.

What do you think about DAO and how can it change our reality?

Additional sources:

• What is Distributed Governance?
• Latest research about DAOs