The Evolution of DAOs: How to Build New Governance Models in the Web3 World

Decentralized autonomous organizations, or DAOs, are becoming very popular in Web3. DAOs are governed by smart contracts and blockchain principles rather than relying solely on human management. Here, we look at different generations of DAOs and how they experimented with governance mechanisms to design a world of decentralized collaboration.

What is a DAO?

In the 1990s, discussions around decentralized autonomy emerged in fields like information sciences and social sciences, laying the groundwork for the emergence of DAOs in blockchain technology via smart contracts.

A DAO is an entity that operates through smart contracts on a blockchain, enabling participants to make decisions and contribute to its activities, as opposed to a centralized organization like a business or charity. We’ll discuss more about how DAOs utilize token-based governance. These models promotes transparency and equitable influence, as transactions and voting power and stored on-chain. DAOs have applications across various sectors, including finance, technology, and social organizations.

The Emergence and Development of DAOs

In 2013, Vitalik Buterin popularized Decentralized Autonomous Organization (DAO) to describe self-driven entities operating on the blockchain. However, earlier ideas inspired the notion of decentralization with robots and automation working for the greater good. These concepts stem more recently from innovations, though their high-concept foundations trace back to influences like science fiction.

One early attempt at decentralized governance was made in 2016, when "The DAO" was introduced on the Ethereum platform. This first attempt was to become a decentralized venture capital fund, meaning investors could vote on endeavors and receive possible profits. The Ethereum crowd sale raised more than $150 million in Ether. The DAO rapidly became risky when a hacker exploited a reentrancy bug in smart contract, leading to a hard fork in the Ethereum blockchain.

While a major setback for the general adoption of DAOs, it was only a short time before improvement and innovation in DAOs were back on the way. Next came new blockchain-based governance models, prompting the development of more robust systems in Aragon and MakerDAO to establish DAOs.

Innovative Governance Models

Over time, DAOs have adopted complex governance mechanisms, evolving from simple voting to address challenges like voter apathy and excessive power concentrated among a few leading members. They have introduced innovative governance models, such as:

• Token-Weighted Voting: This standard model allows members to vote based on the number of tokens they own, increasing participation. While simple and common, this model is exposed to potential centralization risks if one participant holds too many tokens.

• Quadratic Voting: This approach enables participants to make multiple votes for their preferred proposals, with the cost of each extra vote raised to the power of two. It prevents synergy effects and ensures that the influence of majority and minority shareholders remains decentralized.

• Liquid Democracy: This model combines features of direct and representative democracy, encouraging participants to vote directly on submissions or delegate their votes to others.

• Reputation-Based Systems: These systems assign voting rights in proportion to the amount of contribution one has made and the amount of acceptance the participant enjoys in the community.

• Hybrid Models: For instance, Polkadot DAO has included on-chain and off-chain governance with representative and direct democracy to overcome some of the experience problems such as voter apathy and slow action involving proposals.

Real-world examples of successful DAOs implementing these innovative governance models include:

1. Uniswap is a decentralized exchange in which the token UNI gives its holders a say in any changes or updates to the protocol.

2. MakerDAO: A leading experimental platform in decentralized finance and the creator of the stablecoin DAI, MKR token holders are involved in decision-making.

3. Decentraland: A decentralized social platform that uses the cryptocurrency MANA to allow people to vote on changes to the platform, its land usage rules, and content moderation.

Relevance in The Web3 Ecosystem

DAOs are an essential part of the larger Web3 community, representing decentralization, open-source real-time analysis, and control in the hands of users. Their significance is evident in several key areas:

• Decentralized Governance: DAOs personify the concept of decentralization, as they decentralize decision-making and distribute it among those who possess the DAO-specific tokens.

• Transparency and Accountability: Since DAOs function on blockchain technology, they guarantee that records of transactions and decisions are on a blockchain ledger, enabling trust with stakeholders.

• Community Engagement: DAOs address the problem by providing a way for community members to have input into the future of a project or endeavor through decentralized decision-making processes.

• Cross-Industry Impact: DAOs are revolutionizing organizing, financing, and governing in numerous industries, including the financial sector, arts and entertainment, and technology.

• Global Collaboration: Structurally, DAOs overcome national and regional barriers and help create a decentralized and connected digital ecosystem.

Challenges and Limitations

Despite their potential, DAOs face several challenges and limitations in governance and implementation:

• Voter Apathy: Most DAO members never participate in the proposal consideration or voting, and decisions can made without worrying about the community's well-being.

• Governance Efficiency: This structure has a significant drawback to decision-making. Since DAOs are decentralized, they may take ages to make decisions, significantly affecting an organization's ability to capitalize on opportunities when they occur.

• Security Vulnerabilities: Even though blockchain technology offers some security features, DAOs are still prone to risks, and there are examples of hacking activities, like the Beanstalk DAO security issue.

• Legal and Regulatory Challenges: Due to their highly distributed nature, a significant issue involving DAOs is the legal and regulatory aspects, which most jurisdictions still need to define regarding how they would oversee them. However, some places like Wyoming, USA are leading the way in regulating DAOs, which enacted the Wyoming Decentralized Autonomous Organization Supplement, allowing DAOs to be recognized as limited liability companies (LLCs). 

Future Potential and Ethical Issues

DAOs, as the future in such a context, can redefine traditional organizational forms to a large extent. Through decentralized coordination and correct and aligned incentives, DAOs could improve the various industries by facilitating more fair and sustainable structures. But, to realize this potential, it would take more tried and tested attempts and radical inclusion at the governance level of these DAOs that might solve many of the issues challenging the blockchain-based environment at large.

A smart contract-based DAO has several ethical issues, including daemon inclusionism and fair representation. Continued token-based ballots can cause power abuse problems if one faction has more tokens than others, raising questions about democratic decision-making. To prevent unfair power distribution, DAOs can employ techniques such as quadratic voting, which mitigates the centralization of power.

Conclusion

The progress displayed by DAOs shifting from simple prototypes to complex governance structures is a positive development that brings the world closer to the types of organizations many people aspire to today—decentralized, transparent, and egalitarian. As DAOs grow and prove their worth , they have the means to revolutionize business and governing models beyond Web3.

In that case, tasks such as legitimizing DAOs in legal systems, their security threats, and the effectiveness of governance structures will become paramount for their growth. Web3 organizations are actively navigating these DAO challenges and seizing opportunities to establish themselves as leaders in digital governance and Web3 community engagement, shaping the future of decentralized organization and decision-making.