is dao a utopia? - its past, ongoing practice and the future

Socity
Written By Xinrou Mao

is dao a utopia? - its past, ongoing practice and the future

What is DAO?

You might have already heard the term dao/daoism - an ancient Chinese philosophy to explore the way of being and seek approaches to live in harmony and balance with the world. When it comes to the modern cyber era, an emerging way of working and interaction with people around the world has gathered attention - decentralized autonomous organization (DAO). This new organizational form provides a space for its members to collaborate for a common goal/value without a central governing body. The DAO is operating based on multilaterally agreed smart contract and is able to mobilize efficient and transparent bottom-up governance through blockchains and cryptocurrency technology. The DAO features some distinct characteristics:

  • Decentralized - in contrast to the traditional hierarchical organizations such as company, DAO is a structure that is community-owned, and managed through bottom-up approach. Each member is able to showcase their voice and participate in the decision-making and governance.

  • Autonomous - the shared community rules are encoded on the blockchain via smart contract, a DAO community is able to implement automatic operation or financial transaction with few people management.

  • Transparent the blockchain technology enables DAO to create a trusted and transparent environment for every member. All information is publicly viewable including proposals, votes and decisions etc. Every member is encouraged to participate in the community building.

  • Borderless - in this digital native community, like-minded people around the globe regardless of their background are able to join the borderless collaboration for a shared goal.

  • Diversified - other than investment and fundraising purpose, DAOs are experimenting their scope through diverse activities: redefining social network and community, innovating digital arts, entertainment and culture, and initiating philanthropy and social good practices, you name it.

The rise of DAO - A brief history

The DAO story dates back to the concept of Decentralized Autonomous Corporation (DAC) and the advent of Bitcoin in 2008, which is considered as the prototype DAO. The original purpose of Bitcoin was to facilitate global payment based on peer-to-peer network without centralization or a third party. It featured a pioneering decentralization model that inspires the future DAO practice.

In 2014, the Ethereum founder Vitalik Buterin clarified the definition of Decentralized Autonomous Organizations(DAO) in his article, stating that

DAO is an entity that lives on the internet and exists autonomously, but also heavily relies on hiring individuals to perform certain tasks that the automation itself cannot do......a DAO contains some kind of internal property that is valuable in some way, and is has the ability to use that property as a mechanism for rewarding certain activities.

The first functional DAO - The DAO was established in May 2016 as a venture capital platform to fund ideas pitched by the community members. It has raised a treasury of 12.7 million ETH (equals to $ 44.4 billion in today’s value). However, The DAO was hacked shortly after its debut with a loss of fund around $ 70 million dollars. The failure of The DAO has raised discussions and reflections on how to strengthen blockchain security.

Though the hack has devastated some people’s trust in the Ethereum community and cryptocurrency, new experiments around DAOs were still taking place, expanding the DAO scope to a next level. During 2019, new concepts and projects around service-oriented DAOs emerged, mainly focusing on providing basic tools and resources to create DAOs. Some examples include Aragon, DAOStack, MolochDAO etc.

Year 2020 marks the explosion of DeFi (decentralized finance)as liquidity mining and governance token have come into popularity. According to the Messari 2022 report, the DeFi boom in 2020 has created improved infrastructure for permissionless trading, and it led to increasing demand of the digital goods NFTs (non-fungible tokens) in 2021, which represent programmable on-chain identity and reputation for DAO members.

Players on the ground

The evolution in DAOs infrastructure and landscape is still in the early stage. Regardless of the community size, new players are emerging in the DAO ecosystem that gather around specific purposes or values. The DeepDAO database reveals that to date, there are 11,044 DAOs managing over $12 billions in assets. DAOs are implemented in diverse fields such as investment, fundraising, creative arts, philanthropy, and social network. Based on different DAO missions, some key categories are listed below: (there’s no clear boundary to differentiate the DAOs, and different functions may overlap)

Investment DAO - this kind of DAO allows members to pool capital and invest in projects to earn profits. Featured operation model include asset management and venture capital. Individuals are able to join together to make large scale investment with low barriers for entry.

One of the top DAOs in terms of asset management scale. BitDAO develops DeFi product and allocate funds to support partners and projects, as well as to promote DeFi governance and ecosystem growth.

Arts & Culture & Entertainment DAO - members join the community with shared interest in creative arts, culture, music or gaming. The activities usually relate to collective collects and funds of NFT art, collects of culturally important works, building metaverse platform for gaming, or creating music NFT etc.

A gamified metaverse platform for gaming, trading and building over the NFT lands. Members are able to create tokenized content with possible profits.

Talent Service DAO - mainly consists of talents and professionals such as developers, designers, engineers who are ready to contribute to the open web 3 community. Labour service DAO provides resources for online creators, leverages the human capital in a new pattern, and promotes the ownership economy.

A community-governed coding network that facilitates collaborative coding in an inclusive environment with designated development tools. Platforms like this offer resources and support for the digital nomad, and diversified modern way of working



Social DAO - if you would like to step out of your comfort zone and make new connections or reach out to field experts, a social DAO might be a good spot to explore. Designed for shared interest, almost every DAO is embedded with social functions.

Cabin is building a network for online knowledge workers via both online and offline approaches. It runs residency and summer camp projects in different cities for members and open to other digital nomads.

Philanthropy DAO - two significant features of DAO: transparency and collective decision-making have led to the philanthropic movement of collective giving. This new model for social good practice enables the public to pool resources and democratically decide what to do with them.

Big Green is the first non-profit led philanthropic DAO that mobilizes resources and fund to support other nonprofits focusing on food or gardening programmes. Members can engage in a collective decision making process to allocate the grants.

How do DAOs work?

In the past centuries, we’ve seen industrial and internet revolutions greatly advancing social development, while enlarging the economic disparities between the group with control over capital, information, discourse power and those with little. DAOs rise as a necessary democratic experiment against those traditional bureaucracy and unequal power dynamic. It is becoming an important part of the Web 3.0 evolution to reconstruct a decentralized digital ecosystem based on blockchain technology.

How do the DAOs establish the community and operate to reach balance and sustainability? Here come the critical components that define a DAO in different phases:

  • Idea initiation

DAOs are formed by like-minded people who may be based in different locations but share a common goal. The original concept is usually discussed through web 2 or web 3 channels such as Twitter, Telegram, or Discord. Once the idea is agreed upon a group of participants, they start to collaborate, build and experiment to finalize a prototype. This is quite similar to the early stage of a startup, with a small team of pioneers navigating the direction and best solutions to fit the market.

  • Progressive decentralization

As discussed earlier, one of the main characteristics of DAO is decentralization. Some web 3 researchers pointed out that the initial stage is yet too early to adapt a fully decentralized model. DAOs will go through a progressive decentralization process before reaching community autonomy. Once a DAO is open for wider participation, incentive mechanism will be introduced to encourage new members to join community building and decision making through bounties, grants or other fun activities. Raise the awareness of ownership through the above interactions eventually help transform the dynamic from team-led to community-led.

  • Community autonomy

As members are getting familiar with a DAO mission and vibe through briefings and activities, they will better understand how collective decision making and self autonomy work. Once the DAO token mechanism is finalized to allocate tokens (rules to define how to distribute token, the voting rights associated with the token ownership etc.) the sufficient decentralized stage comes into being where the whole community will determine the future development of the DAO.

To promote a DAO’s healthy development and maintain vitality, a well-designed system and engaging mechanism are critical in real practice. The listed components below are often the backbones to support DAOs’ operation:

Crypto Governance

Governance protocols are the fundamental operating rules for a DAO system to facilitate collective and decentralized decision-making. These multilaterally agreed rules are encoded into the smart contracts - programs that run on blockchain and execute agreements without intermediaries. Protocols determine how a DAO will function in different aspects, ranging from daily administration, voting mechanism, token distribution, to treasury management etc. Without appropriate DAO governance, the community may be unable to sustain its operation in the long run.

Incentive mechanism

Incentive is considered to be an effective tool to drive commitment and collective effort for a common goal. A DAO community often consists of people from diverse background and expertise, thus each member is able to leverage specific skills to support DAO development. They can earn incentives by completing tasks/researches, creating digital assets, or simply by learning a course and playing games. Governance token is one of the usual incentives distributing ownership to members. The tokens represent the individual’s contribution to the community and are bound with predefined voting rights to vote for future proposals and other community affairs such as resources allocation

Voting mechanism

In real practice, community members can submit proposals on DAO operations or new initiatives seeking funding, then the community will vote on these ideas. Different voting mechanisms are adapted to support the operation. Voting procedures range from token-weighted voting to quadratic voting. For token-weighted voting, one token equals one vote, while quadratic voting allows members to place more than one vote for proposals they strongly support. Information and data related to the proposals, decisions and transactions are publicly viewable to everyone based on blockchain. The transparency in voting procedures strengthens the trust and collaboration within the community.

Is DAO a Utopia? - challenges come with benefits

DAOs ecosystem thrives in recent years with increasing innovative projects coming into the filed. This novel organization format has shown its potential to transform the way people work and live in the digital era. However, as a movement still in its infancy, some challenges and vulnerabilities are worth noting:

  • security concern

DAOs are spaces that are permissionless accessible to the public, which means that anyone is able to join a DAO. Ambiguity of personal reputation might lead to negative interaction experience within the community or potential hacks. Further, the design of DAO governance via smart contract is always human-engaged, if lacking comprehensive understanding about system operation, the decision-making or voting mechanism may not be considered as legitimate, resulting in programme error and trust loss among participants.

  • Member background

DAOs gather participants from a broad range of backgrounds who may possess various levels of expertise, and comprehension of the DAO operation. One challenge is the time it would take to educate voters, communicate proposals and coordinate community work as a whole.

  • Power dynamics

A fair decision is usually achieved by two principles: 1) meet the best interest of all the shareholders, rather than a small group’s own interest; 2) benefit shareholders equally, a majority group cannot force the others to comply and exploit the minority.  While in DAO system, as the governance structure such as voting mechanism is encoded in smart contract, it is possible that the software programs are not able to identify deliberate manipulation - for example, if a group of members gathered most of the voting weight, they could propose and change the DAO operation to disproportionately benefit themselves. To tackle this issue, it would require open and transparent discussion and evaluation for the governance structure from both internal and external perspectives.

  • Legal liability

In contrast to traditional organization or companies, DAOs are not operated in one specific jurisdiction. As international communities, DAOs are fluid and managed by members from across the world without central governance. There is still ambiguity around how DAOs operate in the real world in terms of tax, contract law, and compliance requirement. Questions are raised such as - should individual member be liable for DAO’s illegal activities? How to protect community contributors in terms of contract compliance and prevent labor exploits? It’s promising to see that legislation system is responsive to this emerging virtual entity: Wyoming has taken a leading step to pass a law that acknowledge DAOs with legal company status - they can operate as a Wyoming limited liability company. In addition, some researchers proposed an alternative solution that DAOs can consider registration as unincorporated nonprofit associations (UNA).

  • User accessibility

According to the Messari 2023 report, one observed challenge is the remaining access gap in mobile devices. To enlarge the impact of DAOs, it would be necessary to provide the public unrestricted access to crypto-related apps in the iOS and Android stores. How to deal with the censorship risk that confronts crypto would be an acute question for discussion. Furthermore, although DAO is a community open to the public, not everyone has adequate digital literacy or access to technology to join and benefit from the DAO because of different socioeconomic backgrounds. Would this lead to another digital divide in web 3 era?

  • Treasury management

Some DAOs would require members to commit entry capital to join the community, and the capital will be pooled as the DAO treasury. With the treasury, DAOs can not only fund new initiatives, but also invest into other digital assets such as NFTs, crypto projects and so on. Some researcher pointed out that one issue for many DAOs is that they didn’t properly diversify their investment and resulted in loss of assets in the volatile market, which might impact the sustainability of the community. Financial service providers such as Coinshift, and Parcel are proliferating to help with this issue.

DAO it or not - a future with possibility

An institutional problem persists - in a world that mostly is based on capitalistic institutions, private power seeks to gain profits rather than taking actions to promote social well-being. The shock of covid-19 pandemic has further exacerbated the imbalance of the political and economic landscape. Cold war mindset reemerges, monopolies continue to benefit disproportionately from those provide the labor...it is time to seek alternative solution for a better world.

The DAO practice shares similar concept with the ancient daoism philosophy in that it explores balanced ways to coordinate people and resources, promotes human-centered autonomy and empowers the community with ownership. One exciting aspect about DAO is the concept of ownership - through decentralized approach, DAOs can share capital and opportunities with every member, while individual value will be recognized and rewarded. What’s more, the community will have the final say to build a customized service/product that benefits all. As Jesse Walden stated in the article “The Ownership Economy”:

As the role of the individual in value creation becomes more commonplace, the next evolutionary step is towards software that is not only built, operated, and funded by individual users—but owned by users too.

With optimized governance, creative contributors, collective efforts, DAOs will transform various aspects of our economy, politics, and society. Some inspiring practices we’ve observed include social impact DAOs which are leveraging capital and participants to support environmental protection and charitable donations.

The journey is only just beginning, and we can’t wait to see more brilliant stories about DAO.







Stay tuned!

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Credit: Xinrou Mao

Special thanks: Charlotte Ge, Ryan Zhang, SoCityDAO







References

Xinrou Mao
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