Common DAO failure points and how to overcome them.
Many believe that DAOs (Decentralized Autonomous Organizations) are the future of work. Done correctly, DAOs offer many benefits, such as flexibility, community, diversity of thought, and a trustless environment. Unfortunately, we do not live in a perfect world, and many DAOs fail. But why? As with any complex system, several common failure points can lead to issues for DAOs.
1. Vulnerabilities in the smart contract code or workflow processes
Smart contracts are computer programs that run on a blockchain, and they are only as secure as the code they are written in. If there are vulnerabilities in the code, they can be exploited by attackers, leading to loss of funds or control over the DAO.
Second, many DAOs operate using a hybrid approach of smart contracts and off-chain resources such as Notion, Discourse, and Google documents. Permissions of these resources granted to the wrong party can lead to disaster. For example, in March 2023, PeopleDAO had their payroll spreadsheets hacked and 76.5 ETH stolen. The hacker added payment rows and then hid them in the spreadsheet. These hidden rows were not detected, and the multisig wallet signers executed the transactions, sending the hacker the funds.
Such operational deficiencies become more apparent with growth. DAOs must be vigilant and adjust their processes in order to remain secure as they scale. Again this is easier said than done. However, it’s a necessary evil that must be addressed.
2. Centralization of decision-making and Governance issues
DAO governance can be challenging when it comes time for implementation. While DAOs are meant to be decentralized, there is still a risk of centralized decision-making if a small group of individuals or entities hold significant voting power. In other cases, the governance and/or treasury management structure is not actually decentralized. For example, the recently launched Arbitrum DAO botched its first vote. Nearly $1 billion worth of its new tokens were sent to the Arbitrum Foundation, an organization established to serve as a steward of the Arbitrum DAO before a formal vote to approve this action had taken place. Rightly so, this led to outrage and distrust from DAO members.
Aside from the above, asking a diverse community to participate in collective decision-making has its own difficulties. The process typically takes longer than in traditional corporate structures. Disagreements and indecision can quickly lead to inaction and frustration. It’s vital that the DAOs governance structure allows for true decentralization and has clear procedures to promptly address disagreement so the community can continue moving forward.
3. Lack of participation
DAOs rely on the active involvement of their members to function and work toward their mission. If there is a lack of participation, DAOs can quickly become stagnant and die out. It is typical for there to be ebbs and flows in participation throughout the lifecycle of a DAO, and maintaining active contributors after the initial hype dies down can be challenging.
So what can DAOs do about this? Examination of onboarding processes and community incentives (not only monetary, think intrinsic and extrinsic motivators) is key to ensuring contributors stick around. Avenues for idea development, creativity, and meaningful contribution should be present for all members. Perhaps most importantly, ensure the human element remains present at all times. It’s easy for this piece to fall by the wayside as most of us operate with some level of anonymity in DAOs. Treating contributors as people first fosters positivity and a welcoming environment that people want to be a part of.
4. External factors
DAOs are not immune to external factors such as market volatility or regulatory changes. These factors can impact the value of the assets the DAO holds, leading to financial difficulties or even collapse. During the bear market that continues to persist, we’ve seen many DAOs dissolve for such reasons. DAOs linked to a single token (native or otherwise) tend to be the most vulnerable. Due to this risk, we’ve seen a shift in treasury management, with DAOs diversifying their assets to avoid financial collapse in the future when the market dips.
Overall, DAOs are still relatively new and experimental in concept, and there are many challenges that must be addressed to ensure their long-term success. To ensure that DAOs can genuinely become the future of work, we must collectively learn from our mistakes by abandoning poor practices and building upon our successes. Let us come together to create a brighter future for us and generations to come.
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