DAO: THE IMPACTS OF DECENTRALIZED AUTONOMOUS ORGANIZATION IN DECISION-MAKING

DAO: THE IMPACTS OF DECENTRALIZED AUTONOMOUS ORGANIZATION IN DECISION-MAKING

Introduction

Reference to decentralization or the lack of a central authority in blockchain raises questions on the process of decision-making. Furthermore, blockchain, as a technology used to facilitate cross-border transactions and interactions, raises significant concerns about how the affairs of connected yet separated users are managed within an ecosystem. To resolve lingering questions, blockchain adopts a decentralized decision-making process known as DAO.

What is DAO?

A Decentralized Autonomous Organization (DAO) is a structured and member-owned organization governed by set of rules encoded in its smart contracts and used by blockchain-based protocols to facilitate decentralized decision-making. With a DAO, an ecosystem vested in all its members or token-holders a decision-making power for management and governance. Hence, to make any changes in the ecosystem, a voting process is initiated where all token-holders can vote for or against the proposed development or change.
The concept of Decentralized Autonomous Organization was first introduced in Vitalik Buterin’s writing in 2013, where he proposed the use of blockchain and smart contracts to facilitate autonomous operations. This idea was extensively developed in 2014, enabling a decentralized decision-making and governance process for blockchain networks through voting.
Following this development, we’ve seen this technology evolve and adopted by several ecosystems, including APECOIN DAO, introduced by Yuga Lab for its NFT project - Bored Ape Yacht Club (BAYC), AaveDAO, and MakerDAO. Additionally, we’ve seen the use of the DAO for decision-making in these ecosystems. For instance, in January 2024, MakerDAO, the Ethereum-based decentralized finance protocol, proposed and voted for the reduction of stability fees for DAI-backed ETH loans.

What Are the Impacts of DAO On Decision-Making in Blockchain?

  • Autonomy: A Decentralized Autonomous Organization eliminates the need for a central point of control by placing governance power in the hands of the ecosystem’s users. While there are specific qualifications, such as token-holding, the core principle of a DAO is to make users a distinct and autonomous body that collectively decides for an organization.
  • Self-execution: DAO relies on smart contracts to execute operations. Hence, the entire process of making decisions is already written in self-executing rules that even project developers cannot manipulate. Thus, when the conditions written in the contract are met, the contract automatically executes the desired result without the need for human intervention. For instance, in the Yuga Lab’s APECOIN DAO, users are required to hold Apecoin or NFT collection to participate. As there is no minimum holding requirement, having any amount of Apecoin equals automatic qualification.
  • Transparency: Combining the following features- decentralization, autonomy, and self-executing smart contracts- can only create a transparent decision-making process. Voting essentially ensures the will of the majority is fulfilled, while a blockchain-backed voting process ensures that the process is tampered with and subject to public scrutiny.
DAO

How DAO works

  • Proposal submission: Any user that meets the ecosystem’s requirement is allowed to submit a proposal regarding features they believe are essential and may benefit the ecosystem. Once a proposal is submitted to the right channel, it moves to the next stage.
  • Voting: This is the stage where token-holders or those who fulfilled any laid-down criteria can vote for or against the proposal submitted in step 2.
  • Execution: Once a proposal is approved, the smart contract facilitates the execution recommendation, change, or development contained in such proposal

Conclusion: Is there any setback?

While DAO operates as an efficient decision-making tool, many have raised concerns about the ability of the market whales to manipulate the process and pass a proposal that favors them. For instance, voting is usually done based on the number of tokens a user holds. While there is no minimum requirement, the amount of token a user is holding is proportional to the voting power vested in them. This means that holding more tokens grants more power. When top token holders pull their resources together, it is clear that they can propose developments that are more favorable to them than the entire ecosystem.