The Pros and Cons of Building a DAO

As the world of crypto and blockchains continues to mature, many compelling use cases are naturally being put to the test. 

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One such opportunity which has recently gained traction is the idea of decentralized autonomous organizations, or DAOs. While DAOs show a lot of promise, the approach has both pros and cons like other hierarchies of communication and management.

If you've been wondering what a DAO does, or if building a DAO is the right choice for your specific business goals, we're here to help! 

Let's dig in. 

What is a DAO? 

Despite only recently making a push to become a household name in crypto lexicon, the first DAO was actually created way back in . 
Here's how Investopedia explains the origins of the first DAO: 

"The [original] DAO was an organization that was designed to be automated and decentralized. It acted as a form of venture capital fund, based on open-source code and without a typical management structure or board of directors. 

To be fully decentralized, the DAO was unaffiliated with any particular nation-state, though it made use of the Ethereum network. Why make an organization like the DAO? The developers of the DAO believed they could eliminate human error or manipulation of investor funds by placing decision-making power into the hands of an automated system and a crowdsourced process."

Using the blockchain, DAOs are structured to where anyone who has voting power can vote and help shape the direction of the project or company. 

Decentralization and being autonomous are widely believed to be critical components of the Web3 ethos, and as such, DAO's make a compelling case for those looking to build in today's consumer-focused environment.

In theory, DAO's allow for a business or entity to be run by a group of supporters in the truest sense, without any one individual having the final say. Backed into the foundation of DAO's is the introduction of tokens that can be used to vote on various improvements or protocols. 

With hundreds of DAOs being created since and a massive increase in developer education, more and more developers and business builders are considering DAOs for their structure in which to operate.  

Benefits of a DAO 

There are many benefits that DAO's provide, and one can reasonably expect those benefits to increase over time for specific use cases. As blockchain technology becomes more user friendly, more users will be able to actively participate in DAO's without the current technical knowledge limitations.

Let's take a look at a few of these benefits.

Decentralization 

By design, DAOs aim to be as decentralized as possible. While it's difficult to reach 100% decentralization in any endeavor, decentralized autonomous organizations emphasize being driven by the collective rather than any one individual. 

Generally, in a publicly-traded company, the CEO and perhaps board ultimately call the shots and users or customers might not have much say.

Take for example, the growing idea that many employees for retail jobs are not making a livable wage. CEOs may say one thing, and the employees may say another. If a retail store was operated in the confines of a DAO, users could vote for what they believe should be fair pay across the board. 

With DAOs, participants have a much stronger say in the organization's direction. Although vote power can be weighted in DAOs, power is significantly reduced compared to more traditional businesses in which leadership determines the company's direction. 

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DAOs Provide "Skin in the game" for Participants     

Part of the underlying mechanisms that allow DAOs to thrive is the idea that each participant has some "skin in the game."

For one, DAOs using governance tokens require users to burn or spend their tokens to cast votes, which encourages each vote to be considered thoughtfully. Governance tokens in essence give users the ability to affect the future of the DAO. 
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Secondly, each vote on the blockchain is public, meaning every time a user votes their reputation is on the line and in full public display. Keeping with the example of employee pay from above, after the vote, it would be clear who wished to keep employee salaries the same, or who was in favor of  increasing salaries across the company. 

Although not foolproof, this literal and figurative cost encourages thoughtful votes and reduces the spamming of 'bad ideas.' 

Community Driven 

DAOs also have the added benefit of making it easy for communities worldwide to connect and build a prospering vision together. With an internet connection and governance tokens, virtually anyone can participate in building the future of Web3. Whether that's shaping the future of domains like with ENS or even creating a popular play to earn cryptocurrency, DAOs are accessible to individuals who may have had the opportunity to participate in the past.  

Furthermore, like with owning stock in a company, participating in a DAO gives you a sense of ownership, further driving innovation and even financial rewards. 

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Disadvantages of a DAO 

While there are many benefits of a DAO, there are downsides that are important to consider.

Reduced Speed of Decision Making 

Particularly, as a DAO scales, getting everyone to vote on proposals in a timely manner can be a challenge. With different time zones and investor priorities, keeping DAO participants up to date and engaged can be challenging. 

While there are ways around this, if every decision needs to be voted on by the majority of stakeholders, the extra coordination can be a challenge. Those who choose a DAO as their organization's business vehicle must be well versed in making decisions based on their specific structure. Especially in a fast-paced Web3 environment, speed is critical in long-term success. Sometimes, having leadership make a decision quickly is the best path forward. 

The Bikeshed Effect 

The community-driven effect of DAOs can be both a blessing and a curse. While DAOs allow for more users to participate in decisions equally, it comes at the cost of what's known as the bikeshed effect. 

As the DecisionLab explains, "Bikeshedding, also known as Parkinson&#;s law of triviality, describes our tendency to devote a disproportionate amount of our time to menial and trivial matters while leaving important matters unattended."

Farnam Street shared an excellent example of it in effect: 

The Law of Triviality states that the amount of time spent discussing an issue in an organization is inversely correlated to its actual importance in the scheme of things. Major, complex issues get the least discussion while simple, minor ones get the most discussion.

Parkinson&#;s Law of Triviality is also known as &#;bike-shedding,&#; after the story Parkinson uses to illustrate it. He asks readers to imagine a financial committee meeting to discuss a three-point agenda. The points are as follows:

• A proposal for a £10 million nuclear power plant
• A proposal for a £350 bike shed
• A proposal for a £21 annual coffee budget

What happens? The committee ends up running through the nuclear power plant proposal in little time. It&#;s too advanced for anyone to really dig into the details, and most of the members don&#;t know much about the topic in the first place. One member who does is unsure how to explain it to the others. Another member proposes a redesigned proposal, but it seems like such a huge task that the rest of the committee declines to consider it.

Should the DAO discuss implementing a more technical protocol that may generate more revenue at the cost of alienating current users? Or should the color of a logo be updated? 

Contact us to discuss your requirements of XDAO. Our experienced sales team can help you identify the options that best suit your needs.

"Bikeshedding can have negative consequences on personal productivity because it causes us to manage time inefficiently," writes DecisionLab. 

While no structure is immune to the Bikeshed effect, DAOs are ultimately more susceptible to the downsides of human bias. 

Security 

Although a DAO can be theoretically launched with a few lines of code, security remains a vulnerability as it requires significant technical expertise to implement. Given the immense tech stack a well-run DAO requires to operate effectively, it can be cumbersome and expensive to keep best security practices implemented. In addition, many participants of DAOs choose to remain anonymous, which creates additional security risks. 

While the tools needed to run DAOs continue to improve, without a heavy security foundation, DAOs are at the risk of being exploited or worse. Although multi-signature signing can considerably reduce the risk of misused funds, there's no sure thing, especially in the wild west of crypto. 

For example, a user interface exploit helped allow hackers to exploit BadgerDAO for the tune of $120m. 
&#;&#;As core contributor Tritium told Decrypt, &#;It looks like a bunch of users had approvals set for the exploit address allowing [the address] to operate on their vault funds and that was exploited.."

From phishing attempts in Discord to user interface exploits, online threats remain real with so much money on the line. Fortunately, security remains a strong focus for some of the brightest minds building the future of DAOs and will likely improve significantly over a long enough time scale.

The Bright Future of DAOs  

Despite the inevitable setbacks that DAOs will face over the upcoming years, dozens of incredible projects and businesses have launched using this promising structure. 

From Constitution DAO's attempt to raise funds to buy a copy of the U.S. Constitution to the future of domains being built on the back of Ethereum Name Service, or ENS, there is ample opportunity for entrepreneurs to involve builders from all around the world. 

We'll continue to see novel and unique use cases for DAOs spanning music, art, purchasing high-value assets, and more.

Though we have a ways to go before DAOs can work out their kinks, we aren't far off from sports fans banding together to buy a sports team or investors buying empty land and letting participants have a say in what should be built. 

You can&#;t launch a DAO without building and deploying the smart contracts that form the backbone of the organization. At Alchemy, one of our primary goals is to help educate blockchain developers on the tooling available in the space, and to provide resources to help you become a better developer. 

If you&#;re looking to learn how to connect to the blockchain and deploy your DAO smart contract, check out this article here: Why Use Alchemy? 

And finally, we're always available to help 24/7 on our Alchemy Discord. Stop by and say hi - we'd love to help you on your journey to becoming a full-fledged blockchain developer!

DAOs are a new way of managing companies, teams, organizations, or other formal groups to make important decisions and operate efficiently. DAO stands for decentralized autonomous organization, and it uses blockchain technology to enable large groups to manage themselves automatically. These futuristic organizations make self-management efficient and make it possible to do some very cool things for modern businesses or organizations. Let&#;s learn how DAOs work and understand the pros and cons of DAO organizations to decide if they are the option for you. 

Understanding DAOs

A DAO or decentralized autonomous organization is formed through the use of smart contracts, DAO governance tokens, and a communication platform such as Twitter, Discord, or Telegram. You can begin developing your DAO by launching a governance token, launching a Discord, or creating smart contracts that help manage business operations. From there, you can organize your members into a community and get a voting management tool such as Snapshot to monitor and track how members vote. These organizations can be formed quickly and with a modest investment by their members to get things going. Now that you understand to start DAOs, you should consider the DAO pros and how creating one of these organizations can improve your life and business. 

Understanding DAO Pros and Cons

A DAO is a unique organizational structure that offers significant benefits. These modern organizations are convenient, trustworthy, and efficient but also have some serious drawbacks. Learn about the pros and cons of DAO organizations before considering one. 

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Looking at the Benefits of a DAO

If you're interested in building a sizeable organized group or already running an organization, forming a DAO would come with significant benefits. Few options exist as capable as the DAO structure to make people trust an organization, reduce administration costs, and unite users worldwide. Learn more about these powerful benefits, and you'll quickly see the potential of the DAO model for a business or large-scale group. 

Decentralized Power

One of the most significant benefits of a decentralized autonomous organization is that power is spread between all the shareholders. Everyone has a vote that influences what happens in the organization. By including everyone, the company is more likely to operate in a way that shareholders agree with. 

Excellent Trust and Transparency

Every decision that's made regarding a DAO is a public record to everyone in that organization. Whether you have one token or 50% ownership in the company, you have full access to the decisions made by other members. This helps build trust in an organization, and it helps encourage the leading members to make decisions that benefit the community. 

Lower Administrative Costs

A DAO is operated by smart contracts that launch themselves automatically. Computers run the company, reducing the amount of time and effort that real people must spend managing the organization. With less administrative demands DAOs are more efficient and affordable. Code and user votes control your company, giving it an automated feel you cannot get from any other organization model. 

Globally Accessible

Because of how DAOs work, they make it easy for investors to buy in worldwide. With support from members anywhere on earth, it's easier to grow these organizations, and they are more resistant to economic shifts. 

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Each of these benefits makes a DAO an exciting structure company founders should consider, but not everything about DAOs is perfect. There are real drawbacks to these structures as well. 

The Cons of DAOs

DAOs are highly capable organizations, but they could be better. Every investor or contributor should be aware of some real drawbacks of these automated structures. 

DAOs are Unregulated

DAOs outside of the Marshall Islands are not regulated or legally recognized by many governments. This can lead to uncertainty and legal issues for members. Without official government support that comes with a MIDAO DAO LLC, it is difficult to predict what could happen with DAOs if a foreign government decides the entity is illegal in the future. 

Slower Decision-Making

Compared to one CEO, or a small board of members making decisions, it takes more time for the entire organization to vote on decisions. Even though the voting process is streamlined, change occurs more slowly in DAOs than in a traditional company with a CEO.

Security Vulnerabilities

Each DAO relies on technology to make decisions, vote, manage revenue, and more. The heavy reliance on technology makes the company more vulnerable to hackers and other cyber attacks. 

Company Members Must Understand Technology Well

A DAO is highly technical, and you will only want to be a member if you understand and trust blockchain technology. With so many people skeptical about cryptocurrencies and blockchain in general, getting enough people to agree to be part of a DAO can be challenging, and some members will struggle to interact with the organization if they don't understand the technology behind it. 

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Are DAOs Right For Your Organization?

DAOs are a powerful use of blockchain technology to empower every member of an organization to help control essential decisions. If you believe a government would be better if every member of society could weigh in on important decisions, DAOs will likely appeal to you. If you believe a single wise leader or a carefully selected group of educated individuals make better decisions than the masses do, DAOs probably aren't for you. 

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You must also consider your organization's technical capabilities. DAOs rely heavily on technology, and individuals comfortable with technology will thrive being involved in such a structure. Furthermore, considering your overall risk tolerance before getting involved with a DAO is also essential. Hacker attacks are more of a threat to a DAO than a traditional organization and potential regulatory or legal issues could become a problem later since DAOs still operate in a legal gray area in most countries besides the Marshall Islands. 

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Decentralized autonomous organization structures have some genuine benefits, but you must recognize the drawbacks too. Consider what the benefits would mean for your organization, the speed improvements, efficiency, improved trust, and more, and compare them to any potential drawbacks before deciding if you want to use DAOs for your organization.

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