Why DAOs Will Probably be the Next Big Thing in Web3
If you are reading this, there’s a good chance that you’ve probably heard about the Web3 revolution. Have you heard about DAOs yet?
To start, Web3 is going to be the new era of the internet, defined by cutting-edge technology like blockchain and new digital assets like crypto and NFTs.
But there’s another movement occurring in the world of Web3 that very few people know about… and it could be HUGE.
They are called DAOs.
And while DAOs are currently flying under the radar, they might be the biggest thing to come out of Web3 yet.
Here’s exactly what you need to know…
Table of contents
- What is a DAO?
- Pros and cons of DAOs
- 4 Examples of decentralized autonomous organizations
- The dangers of DAOs
- Final thoughts on DAOs in Web3
What is a DAO?
DAO (pronounced ‘dow’) stands for ‘decentralized autonomous organization’.
Simply put, a decentralized autonomous organization is an organization that is run without any central leadership. It is completely owned and operated by the people within the organization.
This means there are no CEOs, no managers, no central government – just an organization built by, and for, the people!
Sure, there are lots of digital groups on the web, but none of them are decentralized to this level.
DAOs are made possible because of something called smart contracts. Decentralized autonomous organizations are built on the Ethereum blockchain, which means you can embed rules into the organization’s code (aka, a smart contract), which will then self-execute.
How are DAOs being used?
A DAO can really be used for anything! As long as you have a community of people that are passionate about something and want to connect with other like-minded people, then a DAO can be born!
As of writing, most DAOs exist in the financial and investment sectors. Many of the biggest Decentralized autonomous organizations out there are getting members to pool their money together to make crypto or NFT investments.
It’s basically the same thing as a typical investment pool or a mutual fund, just that there is no centralized leadership. Depending on the setup of the DAO, everyone in the organization has equal ownership and representation.
DAOs also give members an unprecedented experience of transparency as all of the organization’s transactions and rules are recorded on the blockchain.
Because of blockchain’s transparent nature, no one can modify the rules of the organization, nor can they hide any transactions without everyone else in the organization knowing.
Technically speaking, Bitcoin can be seen as the world’s first DAO – it’s run on blockchain, therefore it’s completely decentralized and run by the code.
But wait, how DAO-y is the DAO?
It’s important to note that like all things in Web3 – DAO is quite the buzzword, and many projects are claiming themselves as DAOs when they technically aren’t.
There are lots of projects out there that are claiming to be DAOs when in reality, they are just democratizing certain aspects of the organization – not the entire organization.
And it’s not even enough to have a Discord channel where your community votes on important things.
To be an authentic DAO, there can be no centralized power, and there needs to be a transparent smart contract in place that runs the entire organization. A real DAO enables you to have equal access over to treasury, and to vote on governance, legal aspects, marketing, and much more.
Pros and cons of DAOs
While decentralized autonomous organizations are an extremely exciting development in the world of Web3 – they are still very early in their infancy and have their fair share of pros and cons.
Pros of decentralized autonomous organizations
Pro #1 – No central authority
The lack of a central authority is the entire appeal of DAOs. It gives people the ability to create communities with clear goals and to have democratized control over what happens within that community.
Pro #2 – 100% Transparency
If you are a part of an organization of some kind, no matter how transparent that organization claims to be, things still happen behind closed doors. Decisions can be made without others being made aware.
This is simply not possible with a DAO. Everything in the organization (rules + transactions) is recorded on a public ledger. If anyone attempts to make any changes to the code or to do something shady, the all-knowing-ledger will reveal all.
Pro #3 – Automation
Because of the smart contract in place, in some cases, things can move in DAOs very quickly. There might not be the need to wait for a vote, or for the ‘leader’ to make a decision – everything will be run by the smart contract, which will effortlessly self-execute every time it needs to.
Self-executing contracts can also help cut organizations down on administrative and management costs.
Pro #4 – Community-driven
This is probably the most exciting aspect of DAOs is that they help revolutionize what a community-driven organization can truly look like. For example, Reddit is a platform that feels like it is run by the people – but in all reality, Reddit is a corporation with a CEO and a board of directors that is looking to make profits.
A true DAO would be run by the people within the DAO – that’s it.
Cons of decentralized autonomous organizations
Con #1 – No central authority
While this is one of the main features of DAOs, in many ways it is also its greatest weakness.
Leadership can be crucial in any group of people. Nearly all successful organizations – whether a corporation, charity, non-profit, educational industry, or anything in between – have had some sort of leadership at the top making crucial decisions.
Leaders of successful organizations are often experts in their industry and have the vision, experience, and patience to make decisions that they know have a chance of succeeding in the long term.
In contrast, decentralized autonomous organizations can lead to ignorant decision making. This rings true for companies especially. Do you really want a group of random people making decisions about your marketing budgets or product development?
It will be fascinating to see if a corporate entity can run effectively as a decentralized organization.
Con #2 – Slow movement
While smart contracts can self execute themselves instantaneously – they can only do so based on things that are actually written into the code.
Everything else that is NOT in the code needs to be voted on by the members of the organization.
And depending on the rules of the DAO, that vote will have different requirements. Some DAOs require a 70% majority. Other DAOs require at least 50% of their members to vote before a decision is made.
This can present some glaring problems – especially when decisions need to be made quickly.
For instance, what if a security gap was spotted in the code of the smart contract? This means that the DAO would need to get the necessary votes before fixing the problem, which could take time, and the entire time the DAO would be susceptible to being hacked in the meantime.
Con #3 – Legal gray area
While DAOs can be slow in execution, the same can be said about governments. Many political institutions aren’t even aware of the existence of decentralized autonomous organizations, which means that very few laws have been passed about their legal rights and restrictions.
There are some important questions about DAOs that are being asked across the interwebs… Are financial DAOs overstepping their boundaries with regard to securities laws? Are DAO creators liable for problems that occur? Are DAO token holders aware of the responsibility they are agreeing to?
4 Examples of decentralized autonomous organizations
Let’s take a look at a few different DAOs in a few different industries so you can see how the Web3 revolution is unfolding across the world.
Example #1 – Pleasr.org
One of the most prominent and exclusive DAOs in the world, Pleasr is a collective of Defi leaders, early NFT collectors, and digital artists who have the goal of acquiring culturally significant NFTs.
With less than 100 members, Pleasr has been dubbed as an art collecting empire – everyone votes on what to do with the community-pot, and everyone also owns a fraction of the NFTs that are purchased.
Example #2 – Uniswap
Uniswap is a growing network of DeFi apps and is the largest decentralized exchange on Ethereum.
In September of 2022, Uniswap launched its governance and system tokens (called UNI) which allow holders to vote or delegate votes.
This means that users have direct control over the organization’s direction, treasury, fees, and much more.
Example #3 – Moloch
One of the OG’s of the DAO scene, Moloch is a share-based DAO that provides grants for projects being built on the Ethereum network.
The framework for Moloch is simple but effective, and it has inspired a new wave of other grant and Defi DAOs like the hugely popular MetaCartel.
Moloch empowers their community to submit proposals for where grant money is invested – even if they are holding just a few coins.
Example #4 – Bored Apes Yacht Club
That’s right! You can’t seem to escape BAYC anywhere in the world of Web3 – DAOs included.
While Bored Apes started as an NFT project, the roadmap for the project specifically mentions the creation of a DAO… although it hasn’t been implemented just yet.
Having said that, there is speculation that the DAO will serve as a utility for the social aspect of BAYC. This means that BAYC NFT holders will have a certain amount of funds to play with, and they can vote on how those funds will be used IRL (in real life) BAYC events that are hosted around the world.
The dangers of DAOs
While all things in Web3 seem incredibly promising, the truth is that the tech is new, and we are only scraping the surface of what to do with it.
Because of this, there are security risks involved with being a part of, or starting, a DAO.
One common problem in DAOs is the danger of ‘flash loan exploits’.
In essence, many DAOs are set up in a way that gives governance rights based on token holdings. Therefore individuals who own larger amounts of the organization’s native tokens have more voting power than individuals who hold smaller amounts of the tokens.
So, one loophole hackers have found is using flash loans. To pull this heist off, the hackers acquire a substantial amount of crypto (often millions or billions worth), use that crypto to purchase a majority stake in the DAO, and then use that overwhelming voting power to do basically whatever the heck they want.
Normally, this means cleaning the DAO out of all its crypto.
Which we’ve seen happen many times already.
Cream Finance DAO was attacked 3 different times, losing nearly USD200 million in crypto.
PolyNetwork was hacked and cleaned out of USD600 million in crypto.
And just a few weeks ago a hacker walked away with USD80 million in crypto from the Bean Stalk DAO – which only took the hacker 13 seconds to accomplish.
To combat this, DAOs are going to have to get more sophisticated, not only in the way they structure their governance, but especially in the way that their codes are written.
Final thoughts on DAOs in Web3
The world of DAOs is one that has unlimited possibilities. Blockchain technology is giving us the ability to do things that were never before considered possible.
So while the space has a LONG way to go in terms of maturity, development, adoption, and security, it’s safe to say that we are only witnessing the beginning of what DAOs (and Web3 as a whole) will look like.
If you are considering starting your own Web3 project – whether a DAO or an NFT – be sure to reach out to a Web3 strategist at First Page today. We are helping bridge the gap between Web2 and Web3, and we are ready to take your project to the moon today. Please also look at our NFT marketing services, if you are planning on launching an NFT soon.