Are DAOs Sustainable in the Long Term?

We break down the feasibility of introducing DAOs to systemically important functions in global economies.

“Most people do not really want freedom, because freedom involves responsibility, and most people are frightened of responsibility.”

-Sigmund Freud

DAOs are being integrated with numerous blockchain and NFT projects to promise a user experience that is entirely member driven while being slowly weaned off of the creators of the project and vested into the hands of those that own shares or voting rights (the members).

What is a DAO?

The concept of a Decentralized Autonomous Organization (DAO) hearkens back to futurist expectations of an egalitarian and perfectly democratic society. For those unaware, a DAO is shorthand for a Decentralized Autonomous Organization: an organization represented by rules encoded as a computer program that is transparent, controlled by its members and not influenced by a central government.

NFT minting platforms, investment collectives, videogames and DeFi platforms are adopting the DAO model to incentivize users to become active members in the governance and decision making of the community to disintermediate the existing central authorities that govern projects.

It will likely be difficult for DAOs to permeate into the mainstream because of the requirement of technical user intensive activity and participation required. Analysis by the University of California, Santa Barbara's American Presidency Project found that there were 235,248,000 people of voting age in the United States in the 2016 election, resulting in 2016 voting age population (VAP) turnout of 54.9%. Only half of the general United States public votes for their leader and even less for local municipal representatives, but are going to somehow participate in the active governance of 5 communities that they belong to simultaneously? This is the primary barrier to entry in scaling DAOs to become systemically important. Although there is a possibility that some governance enthusiasts will be interested in maintaining a DAO community, the vast majority of the global population will not.

The issue with decentralization as a whole is that there is no free lunch. When you remove the central intermediaries of large systems, you shoulder the burden of all the administrative, logistical and bureaucratic responsibilities that said intermediaries once managed. This is similar to the paradigm of ensuring privacy in the information age. While it is indeed possible to migrate your digital habits such as search, browsing and communication to more secure services such as DuckDuckGo, TOR, VPNs, or Signal, the use of these services is typically far less convenient than Google which enables cookie tracking and thus helps users keep track of internet properties that they frequently visit or information that they frequently input in websites (login credentials to a social network for instance).

Another issue is the payout matrix of DAOs. Most DAOs do not provide reasonable and adequate compensation for the efforts of their members. Of course there is the opportunity to earn governance tokens, rewards within the platform and possibly monetary benefits, but the amount given is negligible relative to the commitment required by the user.

To be a productive member of a DAO, a user ideally must understand the project and community while researching and dedicating thought and planning to how a potential decision could reshape the metaverse, along with the implications of how changes will impact its members. The commitment and risk in joining a DAO is large because as of now, DAOs create more questions than answers: Which DAO is important for me to become a part of? How will I ensure that my voice is heard with such little voting power? Which DAOs will last and which ones will fail?

Another important issue with integrating DAOs into our current system is the risk of causing more polarization and greater civil unrest than already exists. When controversial decisions need to be made, DAOs could see the same level of corruption as current political systems, involving coercion, rhetoric, propaganda, manipulation and possibly bribery for one side to influence decision making in their favour.

On a larger scale, DAOs can be used for existing global political factions to exploit and manipulate one another as a form of cryptographic warfare, which is discussed among other potential threats in our article Cryptographic Warfare: Everything You Need to Know. A DAO seems to me like a microcosm of a democracy, one where users vote and govern the future of the community or project that they are a part of. This concept of democratic systems with decentralized structures serves as a great segue into our final point.

Since the inception of cryptocurrency, central authorities have been at odds with cyberpunks and evangelists of decentralization due to the economic, legal and financial threats that Blockchain technology poses. If DAOs were to ever become a prominent system of governance, central authorities might step in once again as they did with Bitcoin and so many other projects and place limitations of the extent of disintermediation permissible within an organization or hierarchical structure.

My conclusion as of now is that DAOs have their place in society, and we are excited to see how the current DAOs being introduced evolve and change over the coming years, but there are ultimately barriers to adoption in introducing them to systemically important functions. A better consensus solution in my thinking would be if systemically important authorities, functions or any other matter did what any business that has become successful should; listen to their users and actively ensure satisfaction through optional voting mechanisms. This would allow those that want to vote make their voices heard more notable and those that simply want to reap the benefits of a pre-established community without maintaining significant involvement within it.