The Limitations of DAOs

Some thoughts on how DAOs will impact the future of work and the problems that we need to solve first


Hey DEFI TIMES community,

DAOs are the future of work - no doubt about that. What we are building here is truly revolutionary.

You can imagine DAOs like companies, but they are open for anyone to join. - no applications, no contracts, etc.

If your work is valuable, you get paid.

If not, you don’t get anything - It’s as simple as that.

We are building a whole new type of corporation here. DAOs are all about community and culture. People are joining DAOs because they love to work for them - not because they have to!

DAOs will truly change the way we will work in the future.

But there are some problems that we need to solve first and we still have a long way to go.

Today I will give you some thoughts on how DAOs will impact the future of work and the problems that stand in the way!


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The Future of DAOs

What are DAOs?

Can you imagine a world where humans organize without knowing each other? It would be totally different from what we know today. Today, we organize by joining a company (LLC, public company, etc.).

The working environment we know today is based on trust and personal relationships. What if I told you that there’s a different way? A world where anonymous people from all over the world work together in a productive way?

DAOs are a new type of corporation. They are member-owned communities without centralized leadership.

Anyone can join and give value. If your work is valuable enough, you get paid by the DAO’s treasury. A treasury is a pool of funds - usually, the DAOs own token - rewarding contributions by its members. No one has access or control over the treasuries without the approval of the group/community.

If you want to work for the DAO, you have to write a governance proposal, which the community can either approve or disapprove. Any token holder of the DAO’s token can participate in the governance process.

As you can see, DAOs are completely open and inclusive. The incentive structure rewards value and discourages free-riders.

DAOs are said to change the way we work but there are problems we need to solve first. 

Let’s go through some of the problems!

Unexplored Incentive Structure

DAOs are just a bunch of people doing stuff together. One of the biggest problems is organizing these people in a decentralized way.

In traditional companies, people are organized by their superiors and have to report to them.

With DAOs, there is no such thing. Only flat hierarchies: no bosses, no reporting, no accountability.

Sure, DAOs will outsource responsibility to project leaders, who will try to organize their teams. But the incentive structure to finish a project is pretty much unexplored. If you participate in a DAO’s project, there is nothing at stake.

  1. As an employee, your main incentive is not to lose (getting fired).

  2. As a DAO community member, your main incentive is to get paid.

Most people are used to the former incentive structure. Employees receive regular paychecks - DAO members only get paid if they get things done!

DAO members are just a bunch of entrepreneurs doing stuff together.

The question is whether people are willing to switch from safety to uncertainty.

Everything Becomes Politics

Another problem is that everything becomes politics and nothing gets done. Here’s a great tweet by Nansen Co-Founder Alex Svanevik:

We need to get stuff done!

You can imagine DAO like little democracies. Finding consensus is one of the hardest problems to solve; and the more members, the harder it is to make decisions.

Governance proposals have to go through endless iterations of adjustments. Anyone who has ever been active in a DAO knows that you should expect long nights in community forums to get stuff done.

It’s the same trade-off all over again: decentralization vs. centralization!

  1. Centralized systems are fast but corrupt

  2. Decentralized systems are slow but honest

DAOs need to sacrifice a little bit of decentralization in order to gain speed and efficiency - otherwise, productivity is lacking!

A possible solution would be to outsource more responsibility to community members. They should have the power to push things through without having to write endless governance proposals.

I believe there’s a chance that DAOs could just turn into companies in the future - with CEOs, board members, employees, etc.

If not… everything just becomes politics and nothing gets done!

Where Will DAOs be Taxed?

If DAOs truly turn out to be companies on the blockchain, where will they be taxed? Think about that for a second!

A company is a legal entity registered in a specific country. This country has a claim on the company’s profits.

As DAOs want to be profitable entities, their profit needs to be taxed somewhere. It turns out that… Well, there is no country to tax them.

A possible solution would be to register the DAO in a specific country. We could register the DAO in the US or Switzerland and tax them accordingly. However, there is one problem:

Imagine the following scenario: An anonymous person creates a DAO without registering it. No country on earth could have a claim on it because the founders are unknown. Where will it be taxed?

I can't answer this question. My best guess is: nowhere!

The DAO would be just sitting on the blockchain, which has its own rules of taxing it: Transaction fees, fee burning, etc.

In fact, the country is the blockchain itself!?

Conclusion

There are many problems we need to solve for DAOs to scale. Incentive and legal problems are the core hurdles standing in the way of mass adoption.

How we will solve them is yet to be seen, but I remain optimistic!


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DISCLAIMER: All information presented above is meant for informational purposes only and should not be treated as financial, legal, or tax advice. This article's content solely reflects the opinion of the writer, who is not a financial advisor.

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