May 16, 2020 Trends in DAOs

While the events of 2016 initially deflated many in the cryptoasset industry’s aspirations for DAO-like structures, the industry saw a resurgence of DAOs starting in late 2018, with 2019 referred to as the ‘Year of the DAO’ by some. Broadly speaking, DAOs attempt to manage resources in a decentralized structure, aiming to offer improved organizational efficiencies, enhance transparency around decision-making, and reduce the barriers to governance participation. The ability to substitute paper contracts and human resources for programmable smart contracts that execute autonomously promises to collapse the costs of traditional organizations.

Overall, the central thesis around the ability for DAOs to disintermediate legacy organizations is well-founded, at least in theoretical terms. However, the practical implementation of DAOs, unsurprisingly, have many second and third-order consequences for other aspects of a system. Such repercussions can include the relationship between a DAOs code complexity and its corresponding security, to the facilitation of off-chain coordination between DAO participants and the risks this can engender or the role of domain-specific experts versus completely open participation. These considerations represent just a small fraction of the complex interactions between different components of what are incredibly complex systems, that combine governance, economic, behavioral, political, and technical considerations.

The past 18 months have seen much experimentation around many of its components. However, perhaps the two most interesting trends have been the emergence of legal wrappers and the introduction of quasi-judicial systems for DAOs.

In an attempt to bridge the blockchain ecosystem with legacy industries, several DAOs and their respective communities have attempted to merge DAOs with traditional legal structures such as LLCs. Likewise, for-profit DAOs have attempted to incorporate legal structures in an attempt to fulfill the original vision of ‘The DAO’ in creating a decentralized investment vehicle, akin to a venture capital firm. Whether such attempts will be successful in the long-term remains an open question, although if successful could present one of the greatest opportunities for the industry to both interact with and integrate conventional organizations into more decentralized, borderless, and code-oriented structures.

Even more radical, has been the attempt to replicate judicial and court systems via smart contracts. Programmable courts have been a goal of the Aragon project, an Ethereum-based modular DAO framework that uses crypto economics and smart contracts to oversee and settle intra-DAO disputes. Aragon courts allow any bearer of the ANJ token to participate as a juror, with cases settled by majority rule whereby jurors lose their bonded ANJ stake, should they vote out of line with the majority of their peers and are financially rewarded for their juror service. A notable concern with this approach is that the focus on majority rule paired with financial punishment risks jeopardizing objective judgment, while the selection of jurors solely from the set of ANJ token holders combined with financial rewards for participation will inevitably result in radically differing juror sets relative to traditional court systems.

Despite such concerns about Aragon’s specific approach to DAO arbitration, it does highlight the difficulties of encouraging participation in governance processes and the potential role of cryptoeconomics in incentivizing participation.