The Way of the DAO
Part 2 — Blockchain 101
In the previous part of the article, we learnt that the developers of the DAO believed they could eliminate human error or manipulation of investor funds by placing decision-making power into the hands of an automated system and a crowdsourced process.
All of it is aiming to decentralize the process of decision-making and give power to the community.
Why do we need DAOs?
Being internet-native organizations, DAOs have several advantages over traditional organizations.
One significant advantage of DAOs is the absence of trust needed between two parties. While a traditional organization requires a lot of trust in the people behind it — especially on behalf of investors — with DAOs, only the code needs to be trusted.
Trusting that code is easier to do as it’s publicly available and can be extensively tested before launch.
Every action a DAO takes after being launched has to be approved by the community and is completely transparent and verifiable.
Such an organization has no hierarchical structure. Yet, it can still accomplish tasks and grow while being controlled by stakeholders via its native token. The lack of a hierarchy means any stakeholder can put forward an innovative idea that the entire group will consider and improve upon.
Internal disputes are often easily solved through the voting system, in line with the pre-written rules in the smart contract which, on one hand, allows decisions, once a standard set of rules are in place, to be automated and also ensuring transparency as every decision is recorded on a public ledger.
In addition, by allowing investors to pool funds, DAOs also give them a chance to invest in early-stage startups and decentralized projects while sharing the risk or any profits that may come out of them.
But ‘is not gold all that glitters’ … Let’s find out why
Disadvantages of DAOs
Decentralized autonomous organizations aren’t perfect. They are an extremely new technology that has attracted much criticism due to lingering concerns regarding their legality, security, and structure.
In regards to the security aspect, a peculiar and important case was the “The DAO,” an Ethereum powered DAO has been one of the biggest failures for this model, especially early on. There was a vulnerability in the code that let hackers take a back door and duplicate funds.
(more about it in dept on the following article by Samuel Falkon)
MIT Technology Review has, for example, revealed it considers it a bad idea to trust the masses with important financial decisions and “crowdsources investment decisions among cryptocurrency enthusiasts is unlikely to yield returns.”
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While MIT shared its thoughts back in 2016, the organization appears to have never changed its mind on DAOs — at not least publicly. The DAO hack also raised security concerns, as flaws in smart contracts can be hard to fix even after they are spotted.
DAOs can be distributed across multiple jurisdictions, and there’s no legal framework for them. Any legal issues that may arise will likely require those involved to deal with numerous regional laws in a complicated legal battle.
In July 2017, for example, the United States Securities and Exchange Commission issued a report in which it determined that The DAO sold securities in the form of tokens on the Ethereum blockchain without authorization, violating portions of securities law in the country.
What the Future holds for DAOs?
The onset of more accessible artificial intelligence will also be a tailwind for DAOs.
While organizations which have gotten close to being considered DAOs still require users to vote on protocol changes, for example, an AI-based DAO will one day be preprogrammed to autonomously consider the preferences of millions of individual stakeholders simultaneously.
DAOs are still years away from complete autonomy, yet savvy businesses can already identify areas where inputs are excessive before applying DAO-component technology to streamline operations without fear that their livelihoods will fall to pieces.
While there are many lingering concerns and potential issues regarding legality, security, and structure, some analysts and investors believe that this type of organization will eventually come to prominence, perhaps even replacing traditionally structured businesses.
I would like to argue that there is no such thing as a fully decentralized and autonomous organization.
Depending on the governance rules, there are different levels of decentralization.
While the network might be geographically decentralized and have many independent but equal network actors, the governance rules written in the smart contract or blockchain protocol will always be a point of centralization and loss of direct autonomy.
DAOs can be architecturally decentralized (independent actors run different nodes) and are geographically decentralized (subject to different jurisdictions), but they are logically centralized (the protocol).
The question of how to upgrade the code — when and if necessary — is very often delegated to a set of experts who understand the techno-legal intricacies of the code, and therefore represent a point of centralization.
I am in favor of technology taking over some of our workloads to increase efficiency, but at this current stage, DAOs is facing challenges that need to be addressed in order for this fascinating technology to become mainstream and widely adopted: