What’s Holding DAOs Back? | Nasdaq

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In 2021, DAOs have moved out of their blockchain confines and into the real world. Until then, most decentralized autonomous organizations were stuck with managing financial protocols or maintaining digital assets.

A wave of crypto-collectives, spurred on by a batch of new DAO laws in Wyoming, Vermont and Tennessee, has begun boldly acquiring real-world assets, including rare art, a golf course, a copy of the US Constitution, and the National Basketball Association. and real estate. (Disclaimer: Your author founded CityDAO, which bought 40 acres of land in Wyoming.)

Scott Fitsimones is the founder and editor of CityDAO “The DAO Handbook.”

However, once DAOs collided with the real world, it became clear that these powerful new vehicles for crowdfunding and organization were constrained by enormous coordination and regulatory costs that negated the benefits of using a DAO in the first place. By understanding these costs, entrepreneurs, researchers, and regulators have an opportunity to help DAOs fulfill their promise of creating a fairer Internet.

On the coordination side, DAOs add friction to the use of resources by sending members proposals. Naturally, most DAOs today are at risk, as Ethereum co-founder Vitalik Buterin calls it. Vetocracy, the default result is “no” unless a proposal sponsor provides sufficient support for their proposal. In some cases, the fact that the democratic process adds friction is a feature, not a bug.

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For financial institutions that manage millions of user deposits, changing systems that affect tens of thousands of users can be difficult. However, in the earlier stages of value creation, a core team should be empowered to take dozens of small steps toward a goal without the friction of writing proposals.

Many projects were eager to relinquish that power and adopted the “DAO” moniker early in their life cycle to gain community interest, burdening themselves with the burden of coordinating hundreds of people to take baby steps. Also, most DAO infrastructure and tools are built on the assumption that DAOs will primarily interact with smart contracts, meaning there is a lack of thought for members to take action in the real world.

On the regulatory side, launching a DAO is easy – in minutes you can create a multisig (a multi-signature wallet that requires multiple people to sign transactions together). However, the cost of launching a compliant DAO is huge.

Everything from incorporating a company to paying contributors in jurisdictions around the world can take weeks of legal work and rack up huge bills. If a DAO requires a lawyer and an accountant, that’s a big barrier to entry.

When it comes to raising money, unclear securities laws can make crowdfunding a risky venture. When spending money on anything off-chain, a DAO must open an institutional trading account, or “off-ramp,” which can be a months-long affair.

If the DAO owns real-world assets, such as land and trademarks, the cherished property of forking, which allows a group that disagrees with the core group to break away, becomes even more difficult or impossible.

Making DAOs Work

Many of these coordination and regulatory costs can be addressed through innovation. Entrepreneurs are building tools to ease the burdens of DAO payroll, compliance, and administration. Some of these obstacles need to be addressed at the policy level, for example by clarifying DAO laws and securities laws. Further research is also needed on governance mechanisms to move DAOs away from vetocracies and toward meritocracies.

However, sometimes, the higher coordination and regulatory costs are simply worth paying. For example, critical Internet infrastructures that touch many people’s lives must be decentralized. MakerDAO, which acts as the Federal Reserve custodian of the stablecoin DAI, is a good example of something that needs to be more decentralized because trust in the protocol is established by (theoretically) being held by a large group and immune. An individual’s preferences. The success of Bitcoin, Ethereum, and the Internet is largely due to decentralization, which has brought them strong and passionate communities.

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Making DAOs work is an important project for humanity because they promise us a democratic future where we own and govern the city squares of tomorrow. One thing is clear – the demand for democratic institutions is growing, and people are skeptical of the few platforms that rule the Internet.

By reducing coordination and regulatory costs, we can make DAOs more viable and help fulfill their original vision of creating a more level playing field and a more democratic Internet.

The views and opinions expressed herein are those of the author and those of Nasdaq, Inc.


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