Easy DAO definition

In simple terms, DAOs are how humans come together to make decisions in the digital world. They do so with the help of two key tools. Firstly, the rules that govern the organization are expressed as a series of digital “IF/THEN” statements, that are coded directly into a blockchain, thus rendering them both auditable and permanent.

Secondly, voting shares are issued to stakeholders in the form of “digital governance tokens” - also recorded on the blockchain.

Doing things this way, in theory, replaces the legal hassle of today’s organizations (rules are coded) and their hierarchical nature (everyone has a voice).

Technically, all sorts of work structures can be created as Decentralized Autonomous Organizations. Investment companies, consulting companies … but that’s just the theory. Reality is much less kind.

In DAOs, your pay is decided by your peers

DAOs are trying to innovate on the way people get paid. Having one entity (a team, a committee, a leadership …) decide on salary would be centralization, and thus unacceptable for the crypto world. There are interesting ideas being tested instead, but the way communities are doing it highlights the privilege of people working on decentralized projects.

Today, pay revolves around a set of key questions. Should salaries be market-based? Role-based? Employment-based? Ethics-based? Are they guaranteed? Localized? Negotiable? Secret or transparent? Singular, variable, tiered? Annually adjusted? Market-adjusted? Are raises possible? If so, should they be tenure or experience-driven? Linked to performance? Currently DAOs fail to answer most of these questions.

DAOS today are composed of two classes of people: Core contributors and Edge contributors. The former are employees of some sort, and earn a stable base pay from the organization. The latter are attracted to the organization’s mission, and volunteer their skills to perform tasks. They will usually expect a reward for their work. But the money set aside for salaries and rewards is not infinite, and must be shared fairly between contributors. Some DAOs have turned to tools such as Coordinate to tackle this challenge. This solution allows for the creation of “circles'' of contributors. Each member of the circle is given points and allocates them to other members of the circle over a certain period. The higher the perceived “value” of the work done, the higher the number of points received, and the higher the financial reward.

The Coordinape method also requires a common definition of “value”, which does not exist. Even if it did, while app development can easily be itemized, a company strategy cannot. To say it in another way, creating an API is a more concrete task than a marketing plan, but is less valuable. DAOs don’t account for this, which means two things:

A) Technical skills are better rewarded as they are easier to define.

B) Less precise tasks will be either grossly overestimated or underestimated compared to market prices, leading to an unsustainable cash burn rate or contributor demotivation.

Finally, compensation often consists of Native Tokens or Stablecoins. Because of this, only people that can afford to do so will participate in DAO projects, which will further bias the organization.

In DAOs, decisions are reached by vote

Tokens given to DAO stakeholders for services rendered 2 functions. They act as valuable shares which can be traded, and as ballots to make decisions within the organization. Pretty much like the concept of a public company’s shares.

“Democracy is flawed.” Giving a louder voice to some individuals over others only strengthens those flaws by disproportionately favoring an already powerful minority. DAOs tend to use a “1 token = 1 vote” system instead of a “1 man = 1 vote” one. This means people who own the most tokens stand a chance of losing more due to poor governance decisions, and are thus more engaged.

Many alternative systems have been proposed for DAOs; Quadratic voting, Conviction voting … They are all interesting but not widely adopted yet.

DAOs voting structure can also be exploited to create a hostile takeover. This happened to the Buildfinance DAO in 2022. One person amassed enough tokens to have a majority, then voted to give themselves full control of the DAO. Using this power, they drained all the money from the treasury. This can be done by buying shares, or simply borrowing them at a much lower cost. The nature of blockchains makes it hard to see these things coming, and impossible to reverse. In passing, this also applies to any bugs put into production which are impossible to fix.

Needless to say that these are not issues. They are features and thus core to the very definition of DAOs.

DAOs force absolute transparency

Having an organization’s decisions and work recorded on blockchains for all to see has loads of advantages. But there’s also two immediate downsides to pursuing transparency.

Firstly, linking a wallet to a DAO means anyone and everyone can see every transaction made with that wallet. Imagine if all your co-workers could see every transaction going in and out of your account. That would lead to chaos. One could solve this by having multiple wallets, but that seems like a hassle we don’t have in the traditional system.

Secondly, and more importantly, the nature of DAOs means that their stakeholders are vulnerable to off-chain coercion. Crypto proponents are primed for scams. This often showcases poor judgement, low social literacy, high tolerance for risks, and are highly persuadable. It makes them perfect targets for social engineering schemes. This can be used to influence decisions, and perhaps gain control of a DAO.

DAOs take too much time to decide

A side effect of the way DAOs operate is that they are slow. The Sol Invictus scan occurred over 5 days, which is fast for the DAO world, but very, very slow for the corporate world. One of the often overlooked benefits of centralization is speed. If decentralized organizations want to compete with other structures, they will need to become faster and leaner.

We are creating an over-monetized and over-teched society DAOs take the concept of online communities, which have always been wild, insane places, and try to apply financial and technological rules to them. We’re not sure this improves anything. We created great things like Wikipedia and other open resources out of the sheer will to build cool things. Many in Silicon Valley believe this be heresy. According to them, everything needs to be tracked and monetized. Smart contracts finally give the tool to do so.

Without going into Luddite territory, we must have an open discussion about whether the internet is meant to be open and free, as it was in the 90’s, or if it needs to be endlessly monetized for the sake of “democratization”.

DAOs allow us to experiment with new concepts that are solely needed if we want to save capitalism. We need to learn from them and from the people that aim to build them.

However, one thing needs to be fixed. Founders, must realize that large corporations are not inherently evil. They have good elements; things we can learn from and improve on. At the end of the day, DAOs are a sign of growth in the system, not a break in it.