Updated: Feb 22
In November 2021 a group of online collectors called Spice DAO bought a copy of a “Director’s bible” for “Dune” for nearly $3 million. In another incident another DAO called PleasrDAO bought the sole copy of album “once upon a time in Shaolin” by Wu-Tang Clan for $4million. This news sent wave across the crypto community earning them praises from the crypto community and media outlets. PleasrDAO already has built a portfolio of multimillion dollar assets. In June 2021 it bought the original “Doge” meme NFT for $4million. What is interesting about PleasrDAO is that it is not a typical investment firm. It is a decentralized autonomous organization that runs on block chain technology.
What are DAOs?
DAOs (decentralized autonomous organization) are the group of people with a mission but no leader who come together to accomplish a common goal using cryptocurrency to execute specific task. They can be buying NFTs, buying land in metaverse etc. These groups can be made up of a few individuals to few thousand individuals communicating on platforms like Discord.
DAO can be imagined as a company that has shareholders but no chairperson. Instead, the rules are written in smart contracts in the block chain. An example of such rule could be a person could be added member only if all members agree. Once the condition is met the smart contract is executed and desired action takes place. Because of this kind of governance structure DAO is said be decentralized and transparent compared to traditional companies.
After the formation of DAO, it’s members will create tokens for the group, they can either use existing cryptocurrency or create their own. This can be brought with real world currency and depending on how much money one invests to get the governance tokens they get the voting rights in proportion to that. If the group wants to take a decision like spend money to buy something or change the name, it is put up to group for voting and each member depending how much governance tokens they have gets to sway the decision. This is like how larger shareholders have more votes at a public company’s annual shareholder meeting.
Why DAO are said to be beneficial?
DAOs tackle the problem of principal-agent dilemma. This occurs when the agent of an organization has the power to make decisions on behalf of, or impact the principal- another person or entity in the organization. Examples of this could be managers using the wealth of the company for their own benefits, taking unnecessary risks that would affect the shareholders. This happens when the agent acts on their own interests rather than the interest of the principal because the principal cannot fully control the agent’s action. This problem is further enhanced by the information asymmetry.
As opposed to the traditional companies which have a top-down structure, DAOs allows a system where people from different parts of the world who don’t know each other to trust each other. All the rules are open sourced that is self-enforced by majority. Members of DAO are not bound by any legal contracts. They are motivated by tokens which they get for working towards the goal of the DAO. The only governing rule is the smart contract.
What are the Hurdles for DAO?
Education is a major Hurdle. DAO is a new concept and implementing it at scale will require substantial knowledge sharing.
Decentralization is a challenge at scale. How to keep the community decentralized once it has reached a a certain number? What exactly is the level of decentralization required? How to prevent wealthy whales from buying their way of power by scooping up a majority of tokens? What are the fail safes if it fall in wrong hands? Because of decentralization there is messy governance structure. How to reward those who are contributing to the community?
Regulations are another hurdle as DAOs will transfer more into mainstream. Will they be taxed just like corporates, will there be rules of incorporations? These rules are still outdated and will be changed as time progresses.
The History has been rather murky. In April 2016, an organization named DAO was launched and raised $150 million worth of Ethereum currency. The firm wanted to act as an investment firm. And the profits would flow back to the token holders. But in June 2016, hackers stole $50 million worth of funds.
What are some popular DAOs?
DAOs are basically classified based on their purpose. Some DAOs are focused on pooling capital together to purchase assets, arts etc. Example could be ConstitutionDAO that raised $47 million dollars in crypto to bid on one of the 13 original copies of the USA constitution. They lost to Ken Griffin, the CEO of Citadel. There are other DAOs like LinksDAO that plans to buy golf course. The Krause House DAO that plans to buy and NBA team. While there is another group of DAOs that is interested in attracting people to spend their time and energy online. F.W.B DAO is an online community with can be considered as a digital VIP lounge for members. Members chat on Discord, participate in physical meetups and develop projects together. agendaDao is a DAO that supports trans and non-binary artists working on blockchain. Flamingo DAO which aims to buy rare and expensive NFTs.
DAOs needs to tackle major challenges like trust, education, credibility, scalability in order to become mainstream but one thing is for sure that it does provide a viable alternative to the traditional organizational structure. It would be interesting to see how DAOs are going to evolve in the coming year.