Decentralized autonomous organizations (DAOs) have the potential to offer a number of advantages, particularly in relation to arts, media, and entertainment businesses. For example, DAOs provide a new way for groups of people to invest in and own high-end assets such as rare artworks and collectables. Additionally, DAOs can help reduce the power that industry insiders have over these businesses and potentially shape the future landscape of these sectors if they become widely adopted.
According to a recent report, Investment DAOs hold the potential to challenge the venture capital industry.
DAOs have the potential to be very successful, but some people are skeptical about them. They see DAOs as being full of risks and challenges that could lead to problems in the ecosystem of businesses.
Issues and Risks associated with a DAO
- Governance Issue
The DAO is a decentralized autonomous organization that is run by the people. The DAO is essentially a smart contract that allows individuals to create and vote on proposals. These proposals can be voted on by everyone who is a member of the DAO, which means that anyone can participate in the decision-making process of the DAO.
The problem with this type of governance is that it is not always clear how the funds should be used. For example, if you want to use your money for something like charity, then you must first get approval from other people who want to use their funds for different things. This leads to a situation where there could be multiple competing interests for your money, and no one person can get their way because everyone else has an equal vote on what happens with your money.
- Front Running New Opportunities
Front running is the practice of entering into a trade in advance of the actual transaction. This practice can lead to an increased profit as well as an increase in the trading volume.
In the case of a DAO, if someone was able to front run and put their funds in an opportunity that was not as good, they would be able to make more money than the people who put their money towards that opportunity. This would be similar to how some people buy stocks before they are released, or how some people try to sell before the price has gone up too much.
The problem here is that there is no way to know if someone else has already invested in an opportunity before you have. This means that it could be possible for someone to invest in something that could be very profitable, but then never reap any of the rewards from it.
- High Operational Costs
The blockchain technology requires high operational costs, which makes it difficult for small businesses or individuals to use it on their own. There are many reasons behind this problem:
The first reason is that running a full node requires a lot of resources, such as electricity, storage space and an Internet connection. This makes it difficult for small businesses or individuals to run their own nodes unless they have enough financial resources or technical knowledge.
Secondly, the ERC20 token holders need to be paid for their contribution to the network and so the DAO will have to come up with an appropriate funding mechanism. Maintaining it can be costly because it is inefficient for the DAO to run itself.
- Choosing the Right Tools to Operate a DAO
The next issue is choosing the right tools to operate a DAO, and this is a very important one. In principle, it’s not so hard to make a DAO, but you have to be careful when choosing the right tool. The reason is that there are many tools that claim to be suitable for such purposes, but they can’t offer all the necessary features.
In order to have the smooth working of DAO, it’s important to have tools that can ensure efficient DAO treasury management, pay-outs, reimbursement, community interaction, decision making and effective governance.
- Poor Engagement from the Community
It is essential for DAO moderators to receive feedback from the community across all channels (e.g. Twitter, Telegram, Discord, Snapshot). Without this active engagement, it is impossible to gauge whether or not a proposal has enough support to pass. In the event that a proposal does not receive enough votes, a moderator could lower the number of votes required for passage. However, this would move the organization closer to a more centralized structure where decisions are made by a select few (e.g. investors, founding team, executives).
Without community engagement, you lose out on one of the main advantages of decentralization: drawing on the collective knowledge and judgement of a group.
- Legal and Practical Hurdles
The legal hurdles are the most challenging part of launching a DAO. There are a number of laws that govern the use of cryptocurrencies and blockchain technology, which need to be taken into consideration when building a DAO. These include anti-money-laundering laws, anti-terrorism laws and securities laws. Moreover, there are regulatory bodies that oversee various aspects of finance and business within the country.
Practical hurdles include cost, scalability and governance issues. For instance, Ethereum has been criticized for being too expensive compared to other cryptocurrencies. This can make it difficult to get adoption from users who do not have enough money to pay for it or do not want to spend it on something they do not believe in. Furthermore, scaling issues are another challenge that many blockchain projects face today.
Author Bio: Akanksha Malik writes to share her knowledge on crypto trends, investments, and NFT opportunities with her readers so they can stay updated! She works as a digital strategist and content creator for Mesha — an online investing platform that serves as a club where investors from around the globe can meet new fellow investors, compete in money challenges, and invest in NFTs & crypto. Besides finance and fintech, Akanksha loves architecture and discovering cuisines of new places she travels to.