What is DAO – Will It be an explosive trend in 2022?
The blockchain landscape has grown immensely. With the invention of smart contracts, decentralized applications and protocols have become rampant. A few years back, decentralized autonomous organizations were created. Since then, they have played a big part in changing the way we structure our organizations. This article is going to delve deeper into what DAOs are and how they are playing a big part in a major explosive trend in 2022 and beyond.
What is a DAO?
A DAO is a coordinated organizational structure created by a group of blockchain developers. It has automated decision-making that includes assigning voting rights to the community who then steer the direction of the platform.
DAOs are designed to be decentralized, acting as a form of venture capital fund. They are open source and they do not have the typical management structure of no normal businesses. DAOs are not affiliated with any government or need any nation. They are made and run using the power of the Ethereum network.
How do DAOs work?
DAOs work using smart contracts. The organization is represented by rules that have been written in a smart contract program. This code controls the organization and gives the members of the DAO ability to influence its direction.
DAOs use a blockchain network, a secure digital ledger, to run. This digital ledger tracks interactions across the blockchain network and is hardened against hacks by trusted time stamping. With this form of high security, the need to involve intermediaries is eliminated.
Vitalik Buterin, the creator of the Ethereum network, the chain on which DAOs are based, proposed that “DAOs can be organized to run without any human managerial activity provided that the smart contracts run on a Turing complete platform.”
It is also important to note that DAOs work through governance that is coordinated using native assets or tokens. These assets grant community members voting powers.
People who have confirmed ownership of these governance tokens are given admission into a DAO. Members can create proposals that can then be voted on through the blockchain. Members who possess more governance tokens often have greater voting power.
Limitations of DAO
For all the benefits that they offer, DAOs are also not 100 percent full proof. These innovations have certain limitations that may affect how they are executed and employed within the blockchain. Here are some of these limitations:
Smart Contract Security
While DAOs present a frontier in organizational structure, they also come with serious security issues. For example, in May of 2016, ‘The DAO’ was discovered to have several potential security vulnerabilities.
By that time it held a massive percentage of all ETH tokens issued up to that point on the Ethereum network. The Economist magazine estimated the stack at 14% of total ETH in circulation. There was a risk that this crypto could have been stolen.
In June, the same year, hackers managed to break into the DAO by exploiting these vulnerabilities. They stole 3.6 million ETH (about $50 million at the time). This evolving threat remains even to this day.
This hack presents one of the most problematic limitations of the DAOs. DAOs, being mostly based on smart contracts, have inherent vulnerabilities. The hackers only need to take time to find and exploit these vulnerabilities which result in humungous losses.
Additionally, DAOs experience disruptions in the functionality because of inactive shareholders or nonvoting community members. If the community-driven organization does not move as one, then there will be lagging in the implementation of proposals and growth of the DAO.
Legal Implications and Hurdles
Furthermore, DAOs do not have a clear legal status, as to what type of business organizations they are. Because of this, DAOs have had several clashes with state regulatory bodies, such as the US Securities and Exchange Commission (SEC) as to whether they are offering securities or tokens.
DAOs need to establish a clear standing as to what type of business organizations they are. These pressing limitations and challenges facing decentralized autonomous organizations may make it harder for DAOs to become more decentralized.
Important Trends in DAO 2022
DAOs are on the path towards mainstream adoption in 2022. Mark Cuban, a US billionaire, and businessman, called DAOs the perfect combination of capitalism and progressivism. Here are some trends to keep your eyes on this year:
The Constitution DAO
In November 2021 Constitution DAO raised more than $14 million to bid on the rights to acquire an official copy of the US Constitution document in a Sotheby’s auction. The DAO managed to get support from over 17,000 donors before the day of the auction.
Though it was not successful, the experiment itself was a massive success. It showed that a company could be formed so fast without going through the arduous legal processes and could function successfully and participate in real-world events.
This is one of the disruptive trends that will be gaining traction in 2022. Where people as young as 15 years old, can form digital companies on the internet and participate in heavyweight investments. It will be a true social movement in the business world.
Friends with Benefits
In September 2021, Andreessen Horowitz invested $5 million in ‘Friends with Benefits. This was a discord chat for crypto enthusiasts, NFT collectors, and artists. In total, the group raised $10 million and afterward decided to operate as a DAO.
This demonstrated how large online communities can generate value and become functional business communities and organizations profiting each member equally. We will see more of this in 2022.
MetaCartel Venture DAO
In the world of investing, DAOs are disrupting traditional VC or venture capital. DAOs allow groups of web 3.0 users to pool together the resources and deploy their capital in such a way that will allow normal individuals to compete with mega venture capitals. This year, more success in this area will be seen.
How to invest in DAO projects
Investing in decentralized autonomous projects is quite easy. Several of the most important DAOs includes:
Collects various NFTs and invests in other assets. The profits are shared among the community members.
A DAO that collects and funds projects that are proposed by black women and non-binary artists.
The Komorebi Collective DAO
A DAO that has dedicated itself to funding women in non-binary crypto founders.
MetaCartel Venture DAO
A DAO that is keen on for-profit businesses and invests in early-stage decentralized applications
It is one of the first projects that is attempting to build a venture capital investment group using a DAO structure.
To invest in DAOs such as these, membership is by ownership. If it is a DAO, then anyone can invest in it. Hence, anyone can invest in any DAO by purchasing the native governance token of that particular DAO.
For instance, in the MetaCartel, if you purchase the CHILI token, then you have successfully invested in the MetaCartel venture DAO. For AAVE, Compound, and Uniswap, purchasing AAVE, COMP, and UNI respectively, allows you to participate in these DAOs. You can acquire these tokens from Centralized or Decentralized exchanges such as Binance and Uniswap respectively.
The world strives for socialism and equality by the day. As we near the end of capitalism and embrace equality, DAOs, blockchain technology, web 3.0, and DeFi will be some of the most common household names globally. It is important to understand the power of DAOs, and how to harness them to help restructure the global financial landscape.
* We hope this information will help you in your investment process, but this is not investment advice. Every investment carries risk, especially in this industry, so DYOR before making a decision.