Since the beginning of time, humanity has experienced centralized governance through the rise and fall of different types of governments, banks, financial markets and corporations that employ a top-down structure.

This trust-based Agent-Principle governance model throughout history has proved that it benefits a small group of people at the expense of the majority. Time and time again, decisions entrusted to top management in corporations and elected political parties have caused huge recessions and political instability around the world.

An example would be the Financial crisis in 2007–2008 which started with the subprime-mortgage market crisis in the U.S leading to a worldwide banking crisis and economic downturn. Governments had to step in, to bail-out financial institutions to avoid a global failure of financial systems.

The case in point, bankers assigning way more risk to its customers than it should in the form of complicated lending products while customers had no clue of the full-blown implications of the bankers’ actions.

Apart from the human factor, in today’s data-driven world, data privacy and ownership is an increasingly costly issue that has yet to be resolved. The single point of failure of centralized databases put data of millions of customers at risk.

The most well-known example would be Facebook’s security breach that left accounts of 50 million users exposed in September 2018 and last December, reports indicate personal details of 297 million Facebook users were left exposed on the web for 2 weeks due to an unsecured database.

Risk-Based Security (RBS) reported 5,183 breaches in the first 3 quarters of 2019 resulting in 7.9 billion records exposed. The 2019 figures indicate an increase of 33.3% in total breaches compared to the first 2 quarters of 2018. The number of records exposed in 2019 increased by 112% compared to the previous year.

A single point of control and failure in an organization calls for a radical change in our governance models. The solution that is increasingly evident in 2020, Decentralized Autonomous Organisations (DAO). Here’s why.

Introduction to DAO

To understand DAOs, we need to go back to 2008 when it all began with the introduction of Bitcoin. Late 2008, Satoshi Nakamoto released a whitepaper called Bitcoin: A Peer-to-Peer Electronic System. The invention: internet money.

Bitcoin eliminated the need for an intermediary to execute financial transactions and no longer required transacting parties to share their personal information to confirm transactions.

The combined use of Cryptography, Peer-to-Peer(P2P) network and a consensus mechanism in Bitcoin transactions made this possible.

Bitcoin transactions are recorded on a public Blockchain making each transaction transparent for anyone who wishes to inspect the confirmed blocks.

Automated software protocols that execute transactions on the public Blockchain and the Bitcoin ‘miners’ role in confirming transactions through machine consensus and voting on future protocol changes made up the earliest form of a DAO.

Technological innovation paired with Game theory in Bitcoin made it possible for financial transactions to be;

• Decentralized
• Borderless
• Censorship-resistant
• Neutral
• Open
• Permissionless and
• Trustless

The DAO Attack

Inspired by Bitcoin, the Ethereum Foundation created a more elaborate DAO with Smart Contracts and different types of participants.

The ideal of a decentralized autonomous organization is easy to describe: it is an entity that lives on the internet and exists autonomously, but also heavily relies on hiring individuals to perform certain tasks that the automation itself cannot do.— Vitalik Buterin, May 2014

The first version of a DAO built on the Ethereum Blockchain was The DAO. Its purpose was to operate as a decentralized venture capital fund. Launched in April 2016 through a crowdfunding campaign, it collected $150 million worth of Ether from investors worldwide.

But before the world could witness this DAO in action, it was hacked shortly after its launch on 17 July 2016 due to a bug in its code. About $50 million worth of Ether was drained from The DAO into a child DAO, a clone version of The DAO.

The DAO’s code allowed for it to be cloned to serve as a mechanism to allow investors to withdraw their funds if they do not wish to fund a particular project.

Prominent members of the crypto community discussed how this feature could be exploited upon its launch. Despite statements from The DAO’s founders that the bug was fixed, the hacker was still able to exploit The DAO and drain a portion of its funds.

The hack put Ethereum’s development community in a dilemma; to bail out its investors and avoid multiple lawsuits or stick to the ethos of ‘the code is the law’.

The team decided on the former and went ahead with the hard fork and returned the drained funds to its investors. While this was a rational move, it also meant, moving forward, DAO security and audits are a top priority before deployment.

The DAO’s incident undermined Ethereum’s reputation to serve as a foundation layer for DAOs. Overall, The DAO tainted the reputation of a DAO to be used for decentralized governance. However, the aftermath provided valuable lessons and challenged brilliant minds in the community to engineer new and improved DAOs.

Let’s look at a few notable DAOs that are revolutionizing the way organizations are run and how they show promise of replacing the current centralized model of governance.

New and Improved DAOs

Moloch DAO was deployed on the Mainnet last February in an effort to accelerate the development of Ethereum 2.0. It has only 400 lines of code and was created with an intention to keep things as simple as possible drawing from the lessons learnt from the downfall of The DAO in 2016.

There are 2 ways to participate in Moloch; contribute capital or request for funding. Participants of this DAO consist of the creators, members, curators (grant approvers) and contractors who work for the DAO. To become a member to contribute capital, one has to be introduced by an existing member.

Members have 7 days to vote for each new member proposal or grant proposal. After that, there is a 7 day grace period. During that time, any member who did not like the result from the voting can use the ‘rage quit’ function and exit with their Ether. The grace period of 7 days was created to avoid last-minute voting attempting to swing votes.

Moloch, though much smaller than the Ethereum Community fund and Ethereum Foundation grant program, provides an option for proposals that need fast approval, thus creating diversity in funding vehicles on the Ethereum platform.

The fastest grant approved so far took only 10 days to provide feedback, said Ameen Soleimani, co-founder of Moloch, during an interview with Epicenter.

This was possible as Moloch members are mostly familiar with each other, making it easier for curators to conduct due diligence.

Moloch DAO’s structure spurred the creation of MetaCartel DAO that aims to help early-stage Dapps and Yang DAO.

These series of DAOs are empowered by a collective of people with a strong shared vision, collaborating to drive evolution and success of their projects while inspiring anyone interested in Cryptocurrencies and Blockchain to get involved to champion a cause that speaks to them.

The Largest and Most Popular DAO

MakerDAO is by far the biggest and most active DAO. Its purpose is to govern the DAI Stablecoin. DAI has gained immense interest in Decentralised Finance (DeFi) in the last year making it the preferred crypto-backed token for lending with over $ 450 million secured as collateral as off today.

The following highlights MakerDAO’s features that promote community participation to make its platform a success;

• Proposals and voting for DAI are discussed via MakerDAO community calls.
• The Maker platform has forums and chats to enable participants to discuss the product, risk & governance, seek help and much more.
• Bugs are fixed quickly through its bug bounty programs. For example, a bug found during the Multi Collateral Dai update in 2019 was detected and resolved fairly quickly before its launch in November last year.

The mission of the MakerDAO products and the Maker foundation is to create an unbiased currency for the world, which of course means for everyone all across the world. — Rune Christensen, founder of MakerDAO.

MakerDAO’s presence in CES2020 earlier this month further confirms its position to bring forward DAI as an alternative to fiat currencies to the masses. It demonstrated real-world use of the DAI at the show through its integration with Pundi X where consumers get access to a card that they can use to pay for retail goods in DAI.

DAO Governance Framework

In 2016, even though the concept of DAOs showed the immense potential to replace centralization, it was unscalable as it lacked structure and achieving distributed consensus through voting was not clearly defined.

Some of the common problems in voting that deter scalability of Blockchains are;

• Getting a majority vote on a proposal
• Possibility of a 51% hack of the fund and
• The uncertainty if the voters with the most tokens are the best decision-makers.

In 2018, DAOstack was introduced to provide DAOs with an Operating system that would serve as a framework for DAO governance.

Its whitepaper titled ‘An Operating System for Collective Intelligence’ defines the problem with DAOs as ;

‘A central missing element is a solid framework for decentralized blockchain governance, and in particular scalable and resilient governance protocols that can support the processing of large number of crowd decisions effectively.’

DAOstack’s solution to the problem is presented in 3 parts;

1. Blockchain governance using reputation systems and holographic consensus.
2. The DAOstack which provides the tools needed to create and operate a DAO similar to the function of WordPress for the web, and;
3. GEN economy, a circular token economy where Agencies, DAOs and Dapps provide value to each other to grow the DAOstack ecosystem.

To sum it up, the framework provides structure, a voting system that represents the best interests of its participants and interoperability between DAOs in the ecosystem.

DAO Legal System

The DAO hack in 2016 highlighted the need for a legal system to protect investors and the creators of a DAO. Regulators and the members of the legal community sought to determine if the DAO was a general partnership and if the funds in the form of a cryptocurrency, Ether was an Investment fund.

A paper by Laila Metjahic deconstructs the DAO based on the current legal system and recommends that the DAO is a general partnership and an investment fund under the U.S legal system making creators of the DAO and its investors personally liable in case of a dispute.

This possibility makes it imperative to limit the liability of participants of a DAO. OpenLaw DAO was formed to do just that. It provides the tools needed to create legal templates for a click-wrap agreement. Since last year, creators of a DAO can now use this platform to create a ‘limited liability wrapper’ to protect its participants.

The first 2 organizations to form a DAO LLC were OpenEsquire in New York and DOrg in Vermont making them valid under the U.S Law.

The Future of DAO Governance and Legal System

Aragon’s manifesto: ‘A pledge to fight for freedom’ advocates the use of technology as a liberating tool for global non-violent collaborative efforts to end manipulation between people that stems from centralization.

Its platform provides businesses with tools to build their very own DAO governance model and is set to launch the first-ever digital jurisdiction through Aragon Court, a platform to prevent and resolve disputes more efficiently than traditional courts.

Scheduled to launch on 10th February 2020, Jurors are currently being recruited for Aragon Court. This marks an interesting experiment to decentralize the legal system and strengthen the current revolution in motion challenging centralized organizations and governments.

‘Aragon is committed to;

– Building organizational forms that defend self-sovereignty — where a user can always exercise choice, either by participating or exiting.

– Creating collaboration mechanisms in which violence is not only disincentivized, but impossible.

– Decentralizing power in order to dismantle unjustified power — which usually springs from centralization.

– The creation of long-term value versus short-term profit — which in turn, advances sustainability.

– A world in which every person can participate in these new organizational structures.’

The message is strong and empowering. Aragon seeks to build a sustainable decentralized ecosystem that empowers and incentivizes its participants to collaborate on a shared goal and exercise their choice freely without the intervention of a centralized authority.

Conclusion

The rise of DAOs discussed, bring forward a brand new governance system that shows tremendous potential to benefit humanity as a whole.

Now, with its real-world uses, better code and governance framework for scalability, the DAOs discussed, built on the Ethereum platform provides a secure foundation and the tools needed for Blockchain-based collaborations, businesses, and innovations.

It would also be interesting to experiment on how existing models for conducting business and governance can migrate to form DAOs.

Some may say its too early for DAOs to see mainstream adoption. That may be true as DAOs and Blockchain technologies are still in an early phase.

However, one cannot deny that technological innovation has brought forward an opportunity for businesses and society to coordinate and disseminate resources faster and more efficiently, weeding out corruption, manipulation, and violence. Hence, DAOs create a fertile ground for creativity to thrive and for ideas to be set in motion faster than ever.