DAOs Explained: What Are The Benefits of DAOs?

Previously we discussed the basics of DAOs, but what are their benefits? And what can they be used for? Previously we discussed the basics of DAOs, but what are their benefits? And what can they be used for? In this article, we tackle the benefits of a decentralised autonomous organization, from how DAOs differ from a traditional company to the governance mechanism that underpins them.

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DAOs have gained incredible popularity within the Web 3.0 space over the last year. It seems wherever you look, there&#;s a new DAO popping up. DAOs that function as a social network, DAOs that give you a chance to win a million-dollar jackpot, DAOs that set out to buy a rare private copy of the US Constitution (if you are interested, Constitution DAO successfully raised over $47 million within 72 hours but failed at the auction). While DAOs are very fascinating (and it&#;s understandable why more and more companies want to use them) DAOs are not everyone&#;s cup of tea - or at least, they shouldn't be! This blog examines what DAOs are good for, and when it&#;s better to use traditional business structures.

DAO meaning

Before we get started, what is a DAO? Decentralised autonomous organisations lack a central authority, and are used as a means of managing an organisation or a collective. DAOs differ greatly from traditional business structures and are collectively owned entities.

Is a DAO right for you?  

Before we deep dive into when it&#;s a good idea to use a DAO, it&#;s important to understand that DAO is a broad term that encompasses a huge number of different types of business. Two collectives can be vastly different, but still both be a DAO. With that in mind, you should take the below suggestions with a pinch of salt and evaluate your business model with legal and tax advisers before saying &#;yes&#; to a DAO. Trust us, you don&#;t want to make a wrong decision here, as it could cost you more than heartbreak, tears, and a few sleepless nights!

The benefits of a DAO

Why small communities make a DAO

The main idea behind most DAOs is to create autonomous, decentralised organisations for like-minded people where every member has a vote on what the DAO does. Therefore, DAOs are well suited for communities of 10-20 individuals who have a common goal in mind. Not only should it be simple to get members together to vote on a proposal, but members should be incentivised to work on the project to facilitate the development of the DAO.

Transparency is the key to DAOs

Compared to traditional organisations, DAOs offer greater transparency. DAOs eliminate human error and the manipulation of funds which, unfortunately, happens often. As such, DAOs are well suited for fundraising projects such as UkraineDAO which was set up to collect and distribute donations to assist those affected by the war in Ukraine. Because the DAO&#;s balance sheet exists on a public blockchain, members can understand what happened to each transaction and ensure that the funds are used for the purpose for which they were raised.

Specific use cases of a DAO

Another reason why the structure of a DAO is suited for UkraineDAO is because their business has one specific use case. DAOs have been used for many purposes so far (such as investment, charity, fundraising, borrowing, or buying NFTs), and have seen much better successes than DAOs with multiple purposes. Another great example of this is LexDAO, whose purpose is to create smart contracts capable of automating aspects of legal services, including arbitration. With many DAOs existing in a grey area of legality, a DAO like this may see a lot of success.

The global benefit of a DAO

Traditional organisations and the regulations that govern them often limit an individuals&#; ability to join businesses outside of the country of their location. On the other hand, DAOs come with ease of global access and a lower barrier to entry. DAOs are designed for access for anyone from anywhere in the world and they support anonymous operations.&#;As such, DAOs might be the only option for a community which is spread all around the world especially for those operating in jurisdictions where privacy is important.

When should you say no to a DAO?

While the above outlines when using a DAO might make sense, there will be scenarios where a traditional business model will be more appropriate. So, when should you say no to a DAO?  

Large organisations

One of the biggest issues DAOs are facing is related to the decision-making process. If a DAO has over 100+ participants, it can be extremely difficult to coordinate all members to make a decision (even if the voting mechanism does not require every member to participate in the voting). This can significantly slow down the development of the DAO and in the Web 3.0 space where everything is moving at the speed of light, this can be detrimental for many projects.

High-risk purposes

One of the main downsides of DAOs is that they are presumed by law to be general partnerships, and their members, as partners of DAOs, could be jointly exposed to personal liability for all the actions and debts of the DAO. Therefore, businesses that could potentially have a high risk of being exposed to some losses are better suited for traditional limited companies&#; structures, where all liabilities will sit with the business rather than its members.

Business as usual  

DAOs are not well-suited for organisations with multiple departments and sub-departments. While the decentralisation and automation features of DAOs might work for some elements of such businesses (such as paying invoices), they will not work for all of them. For example, good luck automating the responses to member complaints. As a result, many DAOs have an overarching limited company that makes most of the DAO decisions. However, this  adds an element of centralisation to a DAO, which raises the question as to whether a DAO is the right structure for the businesses after all.

The bottom line of DAOs

While DAOs may seem like the ideal future of organisations, they are still a work in progress. Most DAOs are still testing their governance systems and trying to understand the best way to deal with imbalanced voting rights and reach full decentralisation status. Moreover, until the legislators decide how to regulate DAOs, they will continue existing in grey territory.

Nevertheless, DAOs have a lot of potential: from putting power into the hands of its members and offering huge scalability to organisations, to giving them global accessibility by removing geographical barriers and providing a great platform for funding investments.  

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Have you ever wondered if it&#;s possible to have an organization where there are no leadership positions and everyone has a say in all of its developments? A democratic group that makes changes and decisions based solely on votes by every member? If you answered yes, you are right.

This kind of organization exists and it is happening virtually, in the new world of Web3. The DAO or Decentralized Autonomous Organization, provides a democratized organizational structure that is run on the blockchain network. It is a collective of like-minded people with a shared financial account, working on a shared goal. It is similar to a digital cooperative but instead of having select leaders at the board, every member is given voting rights.

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DAOs may have equal governance for each member or weighted votes depending on how many tokens each member holds. A DAO is run by its own members through the crypto tokens it issues.

For example, Decentraland uses Decentraland DAO where they hold their very own MANA tokens to govern all the transactions, land, assets and many others within the virtual world. Rules governing a DAO are coded in the blockchain in the form of a smart contract. The smart contract automates processes, transactions, data storage and other changes and functions. Currently, there are over a thousand DAOs being used for many purposes like investing, charity, fundraising, managing stablecoins, and borrowing or buying NFTs.

The World Economic Forum and other analysts and experts see the power and potential of DAO, it coming to prominence, and even the possibility of it replacing some traditional companies.

Benefits of a DAO

With opportunities and growth in DAO ever expanding, it is important to note the advantages and disadvantages that come with it.

Transparency

Traditional organizations keep much of their operations internal, but DAOs are operated on a decentralized blockchain network where processes and transactions are transparent, stored permanently, and are viewable by the public.

Democratization

All members of a DAO can vote on moves and changes, which encourages accountability and careful thinking among members. This creates a flat, fair and equal organization without the hierarchy hurdles. DAO members vote directly to make moves, changes and developments within the organization rather than electing members to make decisions on their behalf.

Automation

DAO rules are embedded codes in the blockchain. As the program runs, the rules are enforced without the labor, manipulation, discrimation, or errors associated with human intervention.

Removal of Third-party Institutions

Members can carry out transactions without the help and cost of outside institutions such as regulatory bodies, law practitioners, and other middlemen. If for example members want to invest in a start-up or change the code of the program they run, DAOs can directly execute these plans via voting and subvert the need for banks, legal counsels and other mediators.

Meritocracy

Members can work anywhere and be evaluated solely on their work. DAO operates virtually so members can work anytime at any place, even by the beach. Anyone can hold a DAO&#;s crypto token and have voting rights. Members are valued by their work output, not by how they look or how their credentials stand out. This prevents discrimination and fosters freedom to choose for every member of the DAO.

Risks of a DAO

Stories like Beeple&#;s or the Bored Ape Yacht Club may make some in the fine art community believe NFTs aren&#;t The clear benefits of DAOs don&#;t mean that the organizations aren&#;t with their own risks and challenges, which need to be considered before choosing to form a DAO and while developing the underlying contracts to govern it.

Slow Decision Making

When all members are involved in every move within an organization, it can result in sluggish developments and progress. Members may take a long time to understand and decide on project changes and development. For example, if the DAO wants to buy a non-fungible token (NFT), they might need to explain the NFT to some members. Sometimes, other members don&#;t understand it, and members who are explaining it might have difficulty in explaining it to everyone.

It creates bottlenecks that can potentially lead to them losing the NFT to someone else interested in buying it who can act swiftly. Also, the program cannot read votes intuitively as with traditional voting with a human touch. Some might argue that automation dehumanizes and removes the aspect of critical thinking, which is crucial for some pivotal organizational changes.

Majority Wins

Being democratized and decentralized, DAO members abide by the opinions and decisions of the majority. It may get rid of manipulation, but there is still a risk of conspiracy.

Security

Being democratized and decentralized, DAO members abide by the opinions and decisions of the majority. It may get rid of manipulation, but there is stil The developers cannot ensure the flawlessness and security of the code which is the foundation of the DAO. Codes may be imperfect and susceptible to hacking. In , an incident led to the demise of the DAO of German startup stock.it, where the code had loopholes in it for hackers to exploit.

They ended up losing $50 million out of the $150 million funds that were raised for the creation of a decentralized version of Airbnb. Although a major setback, instances like this have led to the improvement of technology and increased the security and auditing standards of DAOs. As Web3 expands and potentially becomes ubiquitous in the future, the DAO has an important role in driving growth and governance systems within blockchain ecosystems.

Final Thought

Risks must be addressed and benefits be enhanced to develop superior technology that can give way to optimized user experience, security and scalability within Web3. Gigster works with major enterprises in their venture into the Web3. Through its pool of specialized talents, Gigster provides guidance on Web3 technology and applications, as well as the technical execution of an enterprise&#;s Web3 strategies whether it be in blockchain, NFTs, or DAO, among others. If you plan to launch your own DAO for whatever purpose, let Gigster help you better, seamlessly develop and execute your DAO plans, and do away with trial-and-error.

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