Experts on the Path to a DAO: Pros, Cons and Prospects

DAO Politics — a podcast series from ForkLog, in which we, together with invited experts, examine how decentralised autonomous organisations are structured, and discuss their conceptual and technological foundations. In the first episode, crypto enthusiast Stepan Gershuni, Bitcoin maximalist Tony (the project ’21 Ideas’) and trader Ton Weiss answer questions about the prospects, advantages and disadvantages of DAOs.

1. A DAO is an organisation that has no single point of control and, accordingly, no single point of failure. The autonomy of a DAO is expressed in its approach to decision-making, its execution and oversight of this process with the help of blockchain, smart contracts or other digital tools. This fundamentally distinguishes decentralised organisations from traditional corporations or government institutions with classical bureaucracy. A DAO is a qualitatively new form of organisation that lives on the internet and is governed by a community of user-contributors.

2. One of the main advantages of DAOs is the alignment of participants’ economic objectives. Governance in such organisations is based on their own token, which serves as a means of reward or punishment, incentivising actions in the interests of the project. This is a qualitative difference between DAOs and traditional companies, where the interests of shareholders, management, ordinary employees and customers may diverge fundamentally.

Another important advantage of DAOs is openness. Decentralised autonomous organisations find it easier to attract new participants who can influence the organisation’s development. Since DAOs originated and exist on the internet, they operate more quickly and effectively in the global space.

3. The key advantages of DAOs in practice may turn into their own disadvantages. Primarily, this concerns the speed of decision-making. Participants must negotiate openly and democratically, which leads to lengthy discussion and voting processes. DAOs are more complex to organise than traditional organisations; they require more resources to run. There is also a high likelihood that different groups of participants will strive to direct common funds to different projects.

4. The advantages of such organisations can be realised in traditional companies as well. For example, consider Elon Musk’s deal to buy Twitter, after which the billionaire began conducting user polls to ascertain audience desires. According to critics of DAOs, this demonstrates that one can be a centralised company, but interact directly with customers to develop the project.

Legal questions also arise concerning the operation of DAOs. In particular, if the organisation has no chief executive, there would be no one to press charges in a hypothetical sale of unregistered securities. A certain unease may also be triggered by the opposite scenario: if the majority of participants votes for something the creator of the DAO dislikes, he will not be able to block the implementation of the agreed decision.

5. Bitcoin — the first DAO. This argument is often cited by proponents of decentralised autonomous organisations to demonstrate their economic efficiency. Bitcoin can be regarded as the first structure of this kind that arose and continues to exist on the internet without a single group of leaders making all the decisions. Modern DAOs emerged ten years after digital gold and have learned many lessons in that time. Organisations such as Gitcoin, ENS, Optimism Collective, Token Engineering Commons are more thoughtful and their governance is more complex.

Opponents of this argument argue that the first cryptocurrency should be regarded not as a DAO, but rather as a ‘decentralised autonomous organism’ or a ‘decentralised system’. Finally, among Bitcoin maximalists there is a view that from DAO-like structures in the future only Bitcoin will remain, because ‘DAOs and tokens are not needed for anything else’.

6. DAOs have every chance to become a truly functioning mass phenomenon, but their development requires experimentation and critique. Experts note that over the past year the segment has made huge progress thanks to the drive to increase efficiency and decentralisation. Thus, in modern DAOs there is a growing shift toward a delegated system: people give their tokens to delegates who receive salaries for reading documentation and voting. For example, Arbitrum DAO provides for both direct and delegated voting by participants. This partly reflects a system of representative democracy that exists in most countries and, as a rule, works effectively.

At the same time, according to analysts’ observations, DAOs have been actively pursued for speculative purposes. This is evidenced by liquidity outflows from protocols during the bear market. Skeptics also point out that today DAOs rarely strive to perform utilitarian functions that are understandable and accessible to the mass consumer.

A brief recap of the DAO Politics podcast episode, whose guests were crypto enthusiast Stepan Gershuni, Bitcoin maximalist Tony (the ’21 Ideas’ project) and trader Ton Weiss.