Decentralized organizations redistribute power to all of its people, eliminating a single point of failure. In Messari’s Crypto Theses 2023 report, the market intelligence company says DAOs will even change countless aspects of the economic and political status quo. Although DAOs promise to usher in an idyllic decentralized new world, the report outlines three central concerns for the long term viability of the model: the state of governance, lack of policy, and treasury mismanagement.
We’ve only scratched the surface of what DAOs can do, and 2022 previewed what the organizations can offer. Single purpose autonomous communities (SPACs) like Constitution DAO showed us how easily they could rally around a cause. The DAO raised roughly $49 million from 17,000 individual contributors in a few days in a bid to secure the last privately held copy of the US Constitution at a Sotheby’s auction. They were ultimately outbid for the artifact but the viral coverage of their experiment shined a light on what was possible for DAOs.
Balaji Srinivasan’s The Network State imagines a world where DAO communities not only transcend borders but create new network states of highly-aligned online communities with a “capacity for collective action that crowdfund territories around the world and eventually gain diplomatic recognition from pre-existing states.” DAOs promise us a golden future—but getting there won’t be easy.
Though many DAOs struggle with overcoming governance apathy among their members, Messari’s report uncovers deeper flaws in governance that reflect the power imbalances and decision-making paralysis that can come with decentralization. Recently, Nouns DAO’s two largest delegates were accused of leveraging their voting power to approve their own $32,000 per month salaries out of the community’s treasury.
Noun 22, the DAO’s highest-paid member, earns 360 ETH per year and controls 19 votes. Toady Hawk, the DAO’s second highest-paid member, earns 148 ETH per year and controls 23 delegates. Their 42 combined delegates make up about 8% of the total eligible voting members, highlighting a gross imbalance in power. The imbalance is exaggerated considering the average votes per proposal is 100, which makes their combined votes account for 42%. With a 41% pass threshold to execute, the DAO’s governance structure allows Noun 22 and Toady Hawk to pass proposals by themselves.
Inhibiting bad actors within DAO governance structures demands innovation in governance technology. Protocols like Fractal will offer features like custom governance for subDAOs with on-chain veto power for the overseeing “ParentDAO,” as a way to perform on-chain checks and balances. Similar innovations will further decentralize governance to prevent individual accumulation of power.
DAO policy, however, will continue to develop more slowly. There is little legal precedent for decentralized organizations, how they operate, and the extent of liability for each token holder.
Messari refers to Ooki DAO v. the U.S. Commodity Futures Trading Commission (CFTC) as a crucial example of the power that early DAO cases hold in shaping how future cases are determined. Tom Bean and Kyle Kistner, the founders of decentralized trading platform bZeroX (predecessor to Ooki DAO), settled charges with the CFTC in 2022 for illegal commodities offerings on the platform. The CFTC later charged Ooki DAO token holders for their shared responsibility in the illegal offerings. This lawsuit is unique because it creates an opportunity to establish legal precedent in an uncharted industry. At the time of publishing, this important case in DAO legal history is in danger of default judgment as a result of the DAO failing to respond to the suit in time. A decision this consequential to the future of the industry could go down without a fight.
In December, a California federal judge in the case ruled that the DAO was capable of being sued as a collective because it met California’s definition of an unincorporated association in that it consists of token holders who share the goal of operating the protocol. This legal interpretation of a DAO and its token holders creates real ownership for those who participate in DAO governance. By disincentivizing token holders from participating in governance to avoid sharing legal liability, the courts pose an existential threat to the DAO model.
A DAO’s treasury, just like a user’s wallet, is the DAO’s identity, storage, and business account rolled into a single central command.
“DAO treasuries now hold just $8.7B, with a mere 60 DAOs holding $10M or more in assets…[with] native tokens represent[ing] 80% of these treasury assets,” says Messari in its 2023 Crypto Theses. The majority of DAOs have less than $10M in assets and are holding over 75% of that in a volatile native currency. If mismanaged, a DAO’s treasury can leave the DAO highly vulnerable to market conditions, highly illiquid for operating budgets, and highly exposed legally. Financial uncertainty as an industry threatens the future of DAOs as a nimble and new-age business model.
While there are good reasons to hold large amounts of native tokens—like governance sway, signals of community health, and reserves for M&As and partnerships—some DAOs didn’t diversify their portfolios during the bull market, which now leaves them struggling to take advantage of opportunities in the bear market.
By enabling true decentralized decision making and coordination, DAOs can create more efficient and fair systems for everything from finance and supply chain management to voting and governance. DAOs have the potential to disrupt traditional institutions such as corporations and governments by giving power back to the people—and that makes them worth fighting for.