DAOs : The Good, The Bad, and The Ugly.
A concept with unlimited potential that is constantly misused.
INTRODUCTION
Lets start with the basics. DAOs or Decentralized Autonomous Organizations are a way in which many like minded people can come and work together for achieving some task which in most cases is to earn profit that is generated by investing money (Treasury) that has been pooled by its members. They have built-in treasuries that no one has the authority to access without the approval of the group.
THE GOOD
Decisions are governed by proposals and voting to ensure everyone in the organization has a voice. There’s no CEO who can authorize spending based on their own whims and no chance of a dodgy CFO manipulating the books. Everything is out in the open and the rules around spending are baked into the DAO via its code. The DAO membership can be token based or share based.
Some very good use cases of DAOs are as follows:
- A charity — you can accept membership and donations from anyone in the world and the group can decide how they want to spend donations.
- A freelancer network — you could create a network of contractors who pool their funds for office spaces and software subscriptions.
- Ventures and grants — you could create a venture fund that pools investment capital and votes on ventures to back. Repaid money could later be redistributed amongst DAO-members.
THE BAD
“The backbone of a DAO is its smart contract. The contract defines the rules of the organization and holds the group’s treasury. Once the contract is live on Ethereum, no one can change the rules except by a vote. If anyone tries to do something that’s not covered by the rules and logic in the code, it will fail. And because the treasury is defined by the smart contract too that means no one can spend the money without the group’s approval either. This means that DAOs don’t need a central authority. Instead the group makes decisions collectively and payments are authorized automatically when votes pass.
This is possible because smart contracts are tamper-proof once they go live on the network. You can’t just edit the code (the DAOs rules) without people noticing because everything is public.” — Ethereum Docs
An ideal DAO should work as quoted above but in actuality most of the DAOs are built with an anonymous group (The founders)having full control over the smart contracts. Now the people who have created the DAO have full control over the treasury as well. This leads to cases of “rugpull” which is a type of crypto scam where the creators vanish with investors’ money after launching what appears to be a legitimate project. The vote which occurs in the community happens to have absolute zero meaning if the “group” decides otherwise.
THE UGLY
DAOs have a lot of potential to 10x ,20x if you are an early investor hence people tend to forget to get the basics of investing right; That is to do their own research. In a token based membership DAO , as the token is created by the organization itself ,very high and lucrative APY is placed on staking the token so as to attract new users into the DAO. Lambo Calculators, Tesla Calculators that predict the number of Lambos or Teslas you may have at the end of the year are used to fool and attract investors.
Most DAOs have a backed price of USD$1 but that can increase as the value of treasury increases. This backed price indicated the price at which the protocol can buyback the DAO token so as to prevent the value of token from falling below the backing price. But, many a times this buyback at the time when price falls to backing is not coded into the smart contract of the DAO and has to be done manually by the “group”. Hence people who have leveraged their tokens and set their price to backing are most likely to get liquidated because the buybacks are manual and are not triggered automatically which can take some time. Sometimes the buybacks do not even happen and the founders then run away with the treasury.
Whales can dump the token so as to buy below the backing price and then sell it again for profit when the the buyback happens and price reaches backing.
CONCLUSION
DAO is a very transformative concept and has unlimited potential for growth but some issues need to be solved as they are not as trustless as they have claimed to be.
What are your thoughts ?
