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What are the various DAO governance challenges?

What are the various DAO governance challenges?

How do decentralised autonomous organisations work?

Smart contracts are used to build the DAO’s rules, which are set by a core team of community members. These smart contracts are visible, verifiable, and publicly auditable, and they serve as the foundation for the DAO’s functioning. They enable any potential member to completely understand how the protocol will always operate. 

Once these rules have been properly written onto the blockchain, the DAO will need to figure out how to acquire funding and how to exercise governance. 

To do this, a token issuance technique is typically used, in which the protocol sells tokens to raise funds and replenish the DAO’s treasury. Token holders receive voting rights proportional to their holdings in exchange for their money. The DAO will be ready for deployment whenever funds are secured.

DAO code is written in the “Solidity” programming language. A DAO is activated when it is deployed on the Ethereum blockchain. Once deployed, the code of a DAO requires Ether (ETH) to engage in Ethereum transactions. A DAO cannot accomplish anything unless it receives ETH; thus, the first order of business for a DAO is to receive ETH. Following the deployment of a DAO’s code, ETH can be sent to the DAO’s smart contract address during the code’s initial construction phase. 

Once the code is in production, it cannot be changed without a consensus established through a vote by members; that is, no specific authority has the capacity to change the DAO’s rules. It is entirely up to the DAO’s token holders to make this decision.

DAO’s tension triangle

A DAO’s tension triangle can be viewed as a difficult balancing act between three distinct but equally important components: voice, exit, and loyalty. The extent to which a DAO respects an individual’s sovereign nature is reflected in the extent to which they are permitted to leave. 

Individuals value the ability to participate in decision-making. Individuals can choose when to join and leave a DAO, as well as whether to participate in and vote on all other DAO options (i.e., use their voice). 

It is analogous to the concept of free will. A governance mechanism is a DAO-specific design space associated with voice. Participating in protocol-related decisions and developing the DAO through engagement is what governance entails. Increasing governance necessitates increasing participation and limiting exit incentives.

Governance (voice)

Governance rules control the legal structure, membership, purpose, operations, and off-chain and on-chain voting that permit the organization’s existence and destruction.

Individual (exit)

Individuals are people who believe in self-government and the common good and are willing to accomplish things for themselves. They do, however, want individual rights to be respected. Corporations, whether registered or unregistered that operate under the sovereignty of their respective territories and are legally considered or classified as individuals may also be included in the definition.

Decentralization (loyalty)

Decentralization is a synthesis of technological and political components designed to create a belief system that defines the qualities of people who choose to join the DAO. When all else is equal, loyalty determines whether participants in a DAO will speak out or depart. 

Decentralization, as well as the individuals and their intentions behind the DAO, are critical factors influencing the project’s credibility. Furthermore, the degree of decentralisation of any DAO varies and is defined by its capabilities, purpose, and participation costs.

Why do corporations need governance?

The principal-agent problem occurs when one person or central entity (the agent) makes decisions and executes plans on behalf of another person or entity (the principal), exactly as it does in traditional organisations. 

Moral hazard arises when agents act in their own best interests in ways that contradict their ideals. One example of this behaviour is public firms’ recent and widespread share buybacks to enrich agents disproportionately through incentives at the price of the corporation’s long-term health. 

As a result, DAOs must be structured in such a way that management is suitably motivated to work for the DAO’s and all of its stakeholders’ long-term advantage. Otherwise, they risk contributing to the principal-agent dilemma, which has spread throughout many firms. As a result, the government is required for the general welfare! 

Even if the main function of employing blockchain technology via a digital registry for DAO governance is record keeping, this is still a major improvement in transparency over traditional infrastructure. Individual voting decisions on corporate affairs can be conducted more efficiently if proxy advisory services directly counsel individual investors and give oracle services to smart contracts (for smart votes) to automate individual voting.

What are the various DAO governance challenges?

DAOs face a variety of problems from time to time, and the most prevalent ones are discussed in the sections below:

Governance systems

All DAOs must have a decentralised governance structure consisting of hundreds of millions of people making mutual decisions. As a result, the most significant difficulty for a DAO is controlling the dissemination and sharing of information and findings with all members.

Master nodes empower centralization

Those with the most tokens are known as master nodes, and their votes in governance are weighted more heavily. In theory, it overcomes the loyalty issue because the stakeholder nodes with the most tokens stand to lose the most due to poor governance decisions. However, large parts of the network are underrepresented. 

As a result, the network becomes increasingly centralised, with a disproportionately dominant minority making decisions. Two voting systems that try to alleviate the problem are quadratic voting and conviction voting. 

Quadratic voting is a method of collective decision-making in which participants not only vote for or against an issue but also express their strong views about it. Similarly, conviction voting is a game-changing decision-making process that funds ideas based on the aggregated preferences of the community, which are expressed in real-time.

Shadow voting

A token holder with no economic interest in the protocol casts a shadow vote by borrowing a governance token to vote and then returning it to the lender, weakening the DAOs. 

Shadow voting occurs when an attacker creates a flash loan without incurring any interest payments or absorbing the cost of capital. 

Other instances of manipulating governance processes include decentralised cartels or dark DAOs that buy on-chain votes in an opaque manner. In the best-case scenario, the attacker is forced to pay long-term interest, capital-carrying expenses, or penalties on their collateral. 

Although protocols have no impact on second-market interest rates, they can alter the “cost of governance” by adjusting the time it takes to complete the voting process. Any system that allows a token to manage governance exposes the voting process to bribery and conspiracy around critical choices. 

This is one of the most crucial attack paths within a DAO. As a result, in order for a DAO to be a successful, well-functioning, and resilient entity, cartel-like behaviour must be addressed in the rulebook from the beginning.

The future of DAOs

In the future, the average person is unlikely to work for a corporation. People will instead earn money in unusual ways, such as by acquiring new skills, creating art, playing video games, or curating information. 

This innovative future of work is enabled by the networks that form around cryptographic protocols, which are developing new ways of coordinating, quantifying, implementing, and rewarding contributions. 

This change is already opening passive income prospects for individuals, and it is resulting in a growing transfer of value capture from companies to individuals participating in crypto networks as individuals, such as DAOs. 

DAOs will eventually replace the traditional governance model. Furthermore, even if they are still in their early stages of development, they are no longer merely a hopeful notion. This is due to the fact that DAOs are transparent enterprises that manage billions of dollars in assets and create new ways for contributors and network participants to profit. 

DAOs are becoming increasingly popular, and the time has come for industrial and organisational specialists to handle this new phenomenon with new theories and practical research. Furthermore, brands must stay current with advancements that may affect how they interact with customers or vice versa. While DAOs aren’t currently mainstream, they look to be gaining popularity among many hopeful creators.

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