Governments Will Resist: What Is Holding DAOs Back Today

DAO Politics — a podcast series from Forklog, in which, together with invited experts, we examine howdecentralised autonomous organisationsare structured, and discuss their conceptual and technological foundations. In the second episode of the podcast we spoke with Vlad Koen, a trader and macro-market economist, about when it is worth using DAO tools and what hinders their widespread adoption.

1. DAOs — a flexible management tool. Most governance problems can be solved with smart contracts. The transition to them is happening right now. Technically, DAOs allow removing unnecessary bureaucracy, acting as a fast, precise and transparent mechanism. At the moment, such organisations cannot serve as a universal key for institutions of power, but they can be implemented in a wide range of spheres of human life.

2. Governments will resist the adoption of DAOs. Governments are run by officials. Typically these are people who do not particularly crave change. Existing states are not interested in implementing DAOs, because this structure establishes its own laws. China, Russia, Brazil will 100% not permit DAOs on their territories, as for them they are islands of destabilisation in society.

Governments, in general, are not interested in people controlling their money and removing their financial, technological and human resources from the state apparatus. States exist thanks to taxpayers. Therefore we see a trend toward the adoption of centralised digital currencies (CBDCs), ensuring full control over the movement of funds.

3. Before building a DAO, several factors must be considered. First, one must decide whether the founder is ready to delegate governance. Because even initially laid ideas may be rejected by the community later. A DAO evolves with new participants. When a certain threshold is reached we get the crowd effect, which may vote for decisions not aligned with those proposed at the founding stage. Secondly, one must be prepared for transparency and have technical knowledge to build a complex structure and achieve its stability.

4. Neglecting legal aspects in building a DAO is a grave mistake. All attempts to create local DAOs outside the legal framework lead to risks of project closure and freezing of funds. For example, recently the TON community voted to restrict the rights of early miners and freeze their assets, despite the fact that it was they who risked their capital and capacities for the project, whose future was unknown.

This is a striking example of how a DAO runs counter to its founders. If all participants in the BTC network were given the right to vote, they would probably use it to freeze the tokens of all Bitcoin’s creators. Human nature and greed lead people to try to make decisions that are advantageous to themselves.

Meanwhile, for the adoption of DAOs there must arise technical measures that would prevent the usurpation of power by the minority. Perhaps advances in artificial intelligence will allow the creation of more sophisticated and robust smart contracts, reducing the risk of cyberattacks. Yet the shield-and-sword problem will endure: there will inevitably be AI that designs hacking systems.

5. The inertia of the majority — the main problem of DAOs. Existing algorithms and smart contracts are written correctly and work efficiently, but the situation may change in six months to a year. Accordingly, they need to be optimised. This happened with BTC when the SegWit upgrade was introduced. Since most Bitcoin holders lack sufficient technical competence, several network-upgrade projects stalled. In the end SegWit was implemented.

Smart contracts are written and understood by only a minority of DAO users, and global decisions depend on them. Thus the majority is forced to trust the minority. Many DAOs face the problem of motivating people to participate in voting. In addition, there are technological risks in the form of hacks, cyberattacks and backdoors from the developers themselves.

6. New tools simplify DAO creation for all. There are now enough frameworks, mostly using the Ethereum blockchain, so that anyone with the right background can configure their own DAO in about 10 minutes. The simplest and best-known of these platforms is Aragon.

It provides users with the ability to independently choose smart contracts by functionality, connect a wallet, generate and distribute their own tokens.

If we delve into history, before the spread of blockchain there were organisations that solved their tasks in a similar way, but their mechanism was laid out on paper. Technical progress has made everything easier. I hope that in the future such frameworks become so accessible that with their help even children can achieve their goals.

Which DAOs is Vlad Koen watching?

• Ukraine DAO, which united to raise funds to aid those affected by the war. It has highly respected founders; everything is transparent, but there remains a governance tilt.
• VitaDAO — a new project that brings together people aiming to extend human life. Pfizer invested in them $4 million. Bill Gates and Elon Musk also have similar projects in which they develop systems to combat aging.
• KlimaDAO — tokenises carbon emissions. The fight for the environment and reductions in emissions at the governmental level has run into a phenomenon of corruption, speculation and non-compliance with regulations. Greenpeace also has quite a few unhealthy decisions. I support all environmental movements, but their methods lead to growing distrust in the industry and a drop in donations.