Are Real Economies Ready For DAOs?
Fabian Friedrich is a series founder and visionary. He is the CEO of BLOCKCHANCE, one of the largest blockchain conferences in Europe.
As big and small players are moving fast into the space of decentralized autonomous organizations, the foundations of Web3 and the metaverse, the question that many ask is: Are we moving too fast for real economies to follow?
The latest in a string of DAO creations, the TRON network completed full decentralization in December 2021 and has now transitioned into a full DAO. The 3-year-old TRON blockchain with over 75 million accounts is now probably the world’s biggest DAO, marking a new era of full decentralization.
Things are moving fast in the world of DAOs. So fast that regulators and investors struggle to follow. Many DAOs are being created by the day, with TRON being one example of many. What makes it stand out is the sheer size of it. TRON may, however, struggle to overcome the same challenges as any other DAO, independent of its size.
DAOs are the latest evolutionary step in blockchain technology. They are organizational structures whose rules and governance are encoded on a decentralized blockchain. Decision-making processes run either automatically or happen when triggered by certain events, which are then executed via smart contracts. Some decisions may require approval by a specific number of tokens, which can then be voted electronically.
DAOs represent a mind shift in how business is done. It is a system of digital cooperation, where ownership is shared for an economic, political or social purpose. Incentives to cooperate are built into a DAO by nature.
Although DAOs still fall out of most legal jurisdictions (as of July 2021, the state of Wyoming is the only jurisdiction that allows DAOs to have limited liability company status) and face several challenges, I also see substantial benefits.
Benefits Of DAOs:
• Democratic participation.
• Flat hierarchy.
• Fluid workstreams and job roles.
• Low barrier of entry and exit.
• Transparency in decision-making processes.
• Empowering of subgroups to solve specific issues.
Challenges Of DAOs:
• Lack of legal personhood.
• Need for attractive incentive structures to retain membership and voter turnout.
• Recruiting structure.
• Income volatility.
• Lack of interoperability standards between DAOs.
• Lack of governance structure.
• Lack of accountability.
• Lack of consumer and investor protection.
The decentralized nature of blockchain allows for a deeper level of inclusion of like-minded members through the formation of autonomous groups that can work on new projects faster and more effectively, almost like a DAO within a DAO. Game-theoretic incentives allow DAOs to motivate and reward members for their engagement. Taking the case of TRON, members can use tokens to interact with decentralized applications, or dApps, with the two most important application areas being gaming and decentralized finance.
During the transition, game-theoretic incentives that keep members participating become increasingly important. By staking and gaining resources such as bandwidth or energy, users can get free transactions or interact with smart contracts without any fees. They can also use tokens to vote for their favorite super representative, so these continue to deliver good projects to the community. These interactions foster a sense of individual and cooperative ownership and a communal identity, while fulfilling the overarching mission of the DAO, which is to continue to decentralize the web.
The Link Between Open Source And Monetization
DAOs are gaining traction. According to a report from Consensys, more than $6 billion worth of digital assets are held by the 20 biggest DAOs. Venture capital firms are investing more in DAOs, but as they lack the legal construct that would allow them to interact with real-world economies, we are far from reaching DAO maturation.
DAOs are often described as open containers for collective creation. In opposition to the current internet, DAOs—through blockchain as a decentralized technology—provide the much-needed business model for open-source creation that links to monetization. DAOs are essentially the fundamental structures of the metaverse. They allow people to own parts of the value they create, and with that comes the incentive to continue to create. DAOs can leverage their output into the unlimited, as they are open and decentralized. In comparison, traditional organizations are limited in their output to their structural constraints.
Regulations Playing Catch-Up
With legal challenges underpinning DAOs, regulators’ focus is on the protection of consumers and investors and anti-money laundering regulation. Regulation in different countries is mainly scrutinizing crypto trading, investments and token sales. How DAOs will be regulated in the future may depend on the country they are registered in or the nature of their mission (an investing DAO would then be treated differently, for example, to a not-for-profit DAO).
TRON founder H.E. Justin Sun stepped down as CEO to allow for DAO transition and has now become a crypto diplomat for the World Trade Organization in Geneva, pushing for blockchain regulation and implementation in developing countries such as Grenada. Sun is pushing for closer collaboration between regulators, blockchain experts and entrepreneurs to enable a pragmatic approach toward regulating DAOs. DAOs require additional structures that act as middlemen to interact with the real economy. This is a severe setback to DAOs and undermines their true potential. Fast movers such as TRON DAO will need to find ways to manage treasury, compliance, tax and other challenges, including incentivizing high voter turnout to ensure true democracy within the DAO.
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