The legitimacy of government is one of the most frequently discussed subjects in both formal and informal conversation. Which form is the ideal one? Moral risks arise whenever a ruler has the authority to make decisions on behalf of others. The decentralized autonomous organization (DAO) is an effort to address this persistent issue with governance legitimacy. Let's look at what it is and how it intends to complete this challenging task.
What does DAO mean? What is a DAO?
Imagine a shipwrecked group of 100 survivors on a barren island. They'd have to work together to survive, and in order to accomplish that, they'd have to abide by some fundamental guidelines. Rule makers and rule enforcers are present when there are rules to be followed.
The principal-agent conundrum arises at this point. Agents are people who make choices on behalf of principals, who are the people they represent. The danger that the decision-maker—the agent—transfers to others always increases the risk that the principal faces. After all, they must bear the entire weight of the decision's repercussions.
Furthermore, it frequently happens that the agent puts their own interests ahead of those of the principal. Because the principle is unable to completely monitor and regulate the agent's actions, this too invariably occurs. In traditional organizations, moral hazards are mitigated by contracts and the legal system, but in decentralized autonomous organizations, the risks and expenses of controlling them are significantly reduced.
How are DAOs run?
Blockchain is used by a decentralized autonomous organization to provide self-enforcing rules or protocols. Naturally, these rules are stored in the blockchain's smart contracts, and the network's tokens reward users for defending the network and approving regulations.
A DAO is created by the following three steps:
In order to successfully design a smart contract that serves as the DAO's foundation, developers must have a thorough understanding of the governance issue they are attempting to define.
Developers specify the governance's tokenomics, such as monetization, in order to strike the right balance between rewarding good conduct and punishing bad.
The blockchain-powered DAO is launched by developers, ideally with the same token stakes as the other stakeholders. In this manner, there is no power disparity. However, the majority of developers gradually release their stakes.
As a result, DAOs are both open and self-sufficient. The number of tokens a person owns determines the weight behind their voting rights, giving them the ability to influence future governance initiatives. vBy doing this, the DAO is kept from becoming overloaded with suggestions, which can lead to instability. Instead, suggestions for governance are only approved when the majority of stakeholders do.
Each DAO, of course, has its own rules about what constitutes a majority and how votes are cast.
The background of DAOs
In 2016, "The DAO," the first DAO, was developed and launched on the Ethereum network. Unfortunately, The DAO had an issue at this early stage of development that hackers quickly...exploited. Due to $150 million worth of ETH being trapped in DAO pools designated for Ethereum's development, this led to Ethereum's hard fork.
Some Ethereum engineers made the decision to launch a hard fork, which resulted in the current Ethereum, in order to repay those monies. The original Ethereum blockchain and its ETC coin survived as Ethereum Classic. It's enough to say that DAO's reputation got off to a poor start. However, DAO has been a crucial component of decentralized finance since DeFi protocols first appeared in late 2020.
Benefits and downsides of DAO
It is very likely that having equally dispersed voting power is not a good thing. To see why such might be the case, one merely needs to look at the Pareto Principle. Vilfredo Pareto, an economist, observed a recurrent pattern in his research across several economic sectors.
Some Ethereum engineers made the decision to launch a hard fork, which resulted in the current Ethereum, in order to repay those monies. The original Ethereum blockchain and its ETC coin survived as Ethereum Classic. It's enough to say that DAO's reputation got off to a poor start. However, DAO has been a crucial component of decentralized finance since DeFi protocols first appeared in late 2020.
In order to quantify those observations, the Pareto Principle developed the 80/20 rule. In other words, 20% of causes result in 80% of consequences. 20% of an organization, or the "critical few," are in charge of producing a successful result. If they have ever participated in group projects at schools or universities, most people have already seen this.
DAOs would therefore need to take into account the fact that not all votes should be treated equally. As a result, a smaller percentage of users would have tokens than the majority, which would reduce decentralization. In 2016, MIT Technology Review came to a similar conclusion.
The possibility that the DAO's rules could apply in numerous legal contexts is another potential drawback. If a situation arises that cannot be resolved through token voting, one would need to take part in a drawn-out and complicated court process.
But with a well-designed smart contract, DAOs give companies a clear and simple means to run their institutions. This is especially true for organizations when the majority of members are strangers. The situation is best illustrated within the biggest groups of unfamiliar people—nations. It has been universally agreed that a blockchain DAO for voting can protect election legitimacy and transparency.
