DAO is a decentralized organization that enables individuals to work together without relying on any centralized authority. A DAO consists of many stakeholders who have a relationship with each other. These stakeholders could be individuals, organizations, groups, institutions, or even governments. In simple terms, a DAO would be a group of people working towards a single goal.
DAOs are different from traditional corporations
DAOs are different from traditional corporations in two ways. Firstly they do not require shareholders and secondly, they are completely decentralized. If we look at Blockchain technology, using cryptography the blockchain ensures the immutability of data. Hence, if a transaction takes place then no one can revert it back. Even though the transactions take place between parties directly, they are still recorded chronologically. Therefore, they cannot be reverted.
How can a DAO be self-governing?
If a DAO were to be self-governing then how? Let us assume that all the stakeholders agree to vote on the members of the governance committee. How can a DAO be governed and operated autonomously? To answer this question, let’s understand what happens when a DAO operates autonomously. Imagine a scenario where we have 2 different stakeholders in the DAO. One stakeholder wants to sell his shares of the company to the other stakeholder for $10,000. The other stakeholder agrees to buy the shares of the company for $10,000 and hence the deal goes through successfully. Both stakeholders receive $10,000. Here both the stakeholders had agreed to the price and hence the transaction took place. However, if we stop here. We know that the agreement was struck but still there is no way of knowing whether both the stakeholders are satisfied with the outcome or not. The only way you can find out is if both the stakeholders discuss their opinions about the outcome of the transaction. And once the discussion comes to a conclusion, the decision becomes final. Thus, these are some of the major steps taken by a DAO if it were to be self-governing.
Would stakeholders follow the proper procedures?
But, how can we ensure that the stakeholders would follow the proper procedures? We need a mechanism in place that forces them to adhere to certain rules and regulations. For example, if a DAO was to decide to create tokens and issue them in exchange for money then it should have been declared by the government or the central bank of the country. But, since it does not fall under the jurisdiction of either the government or the central banks, it cannot be regulated. Also, if someone owns 51% of the votes in the DAO then he/she will control operations and decisions of the DAO. Even though the majority of the stakeholders would want to change something, they cannot. Any changes will have to go through the 51% stakeholder. So, if a DAO doesn’t have a set of rules and regulations defined then it means that it is totally dependent on those stakeholders and their interests.
Self-governance can be achieved if the cryptocurrency’s code is open-sourced
Self-governance can be achieved if the cryptocurrency’s code is open-sourced and people have control over it. We saw in chapter 1 how Bitcoin was not decentralized due to its closed-source nature. Ethereum could actually be considered a DAO tooling since it is based on Bitcoin and uses the same blockchain technology. However, just because they could be considered DAOs does not necessarily mean that they would be good examples of DAOs. As a matter of fact, many people argue that these types of cryptocurrencies are not truly decentralized due to their centralization on a few people/companies. And while DAOs theoretically give us complete decentralization, they still leave much room for corruption.
A DAO can only be as strong as its weakest link. If something goes wrong with the code of the DAO, then everything else falls apart. Therefore, self-governing a DAO requires constant monitoring of the code and its updates. Since anyone can access the blockchain, it is imperative that the developers make sure the code is running properly and correct any issues before launching. If there is no clear way to do this, then the DAO should be reevaluated.
Many people claim that a DAO is inherently centralized
Many people claim that a DAO is inherently centralized because of the decision-making power given to a small group of stakeholders. However, this argument is false since the system works best when there is a wide range of stakeholders. If a DAO is run by a small set of individuals who hold nearly all of the voting power, then that DAO will fall under the category of centralized rather than decentralized. If there is a diverse pool of stakeholders, then the DAO becomes much stronger.
When designing a DAO, the goal is to prevent collusion between stakeholders. Collusion happens when the stakeholders agree on a specific outcome prior to reaching a consensus. This creates a situation where one person controls the entire system instead of being a true stakeholder in the process. To avoid this problem, DAOs should be structured in such a way that all stakeholders can reach a consensus. Stakeholders should be able to propose ideas, vote on proposals, and choose the best proposal to move forward. Only once the majority of stakeholders agree on a plan should the stakeholders execute the plan.
The Structure of a DAO Should Be Designed Around Efficiency
Lastly, the structure of a DAO should be designed around efficiency. Efficiency deals with how well a DAO performs tasks, especially in comparison to alternatives. One factor that determines efficiency is the number of votes that are cast. More votes mean that more stakeholders are involved, which makes it easier for a plan to get passed and implemented. But, the fewer the votes, the less likely it is that everything will go smoothly. If a DAO’s structure doesn’t promote efficiency, it should be redesigned.