DAOs and centralized organizations must work in tandem | Opinion
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Since David Chaum’s 1982 dissertation introduced decentralized blockchains, the goal has been to create systems free from central authority corruption. Decentralized autonomous organizations are now emerging as alternatives to traditional entities like LLCs or non-profits.
However, what if there were a way for DAOs to work in tandem with centralized organizations while still maintaining their fundamental purpose—to operate as self-governing, decentralized entities managed by the collective decisions of their members?
The Wyoming DAO law
In 2021, the state of Wyoming enacted the “Decentralized Autonomous Organization Supplement.” This law allows DAOs to be officially recognized as LLCs, enabling them to enter into legal contracts and own property without the need for off-chain shell corporations. This new status provides DAOs with opportunities to raise funds through both token sales and traditional funding avenues.
Additionally, DAOs can leverage R&D facilities, employ staff, and utilize RegTech, all while preserving their decentralized, transparent, and democratic decision-making processes. This legal recognition opens up new avenues for DAOs to collaborate effectively with centralized organizations, combining the strengths of both models to foster innovation and growth.
The benefits of collaboration explored
Initially, blockchain projects were launched in a monolithic fashion, with everything bundled into a single stack. However, as the technology has matured, specialization and optimization at each layer became crucial for scalability and efficiency.
Centralized organizations possess substantial resources, structured processes, and access to traditional funding avenues. These advantages can significantly aid DAOs in scaling their operations and facilitating legal agreements.
Moreover, one of the most compelling benefits of such collaborations lies in enhancing governance and decision-making processes. DAOs excel in decentralized governance, enabling members to directly influence a project’s direction, thereby reflecting a broader stakeholder base. By integrating diverse voting mechanisms, such as Quadratic Voting, furthers fairer representation.
The opportunities are far from complete
To further grow this collaboration, we can leverage one of the major perks of DAOs and blockchain technology: transparency. By combining DAOs with decentralized finance, we can create systems where every transaction is permanently recorded and linked to a community vote. This ensures that all spending within an organization is fully transparent and accountable to its members.
This transparency can significantly change how traditional organizations track spending. It prevents fraud from going unnoticed and ensures everyone can see how and where the money is being used. For non-profits, this level of transparency is especially influential. Members and donors can see exactly where their money is going and how much is being spent, which can prevent situations like the Arts Center Scheme, where over $1.1 million was embezzled by a low-level accounts receivable employee.
Another major benefit is the use of smart contracts to automate processes. Smart contracts can streamline operations by executing predefined actions when certain conditions are met. This reduces administrative overhead and human error, making things more efficient. Plus, it ensures that everything is done transparently and according to agreed-upon rules, which strengthens trust and accountability in both centralized and decentralized environments.
The potential shortcomings
Anything that looks too good to be true is probably not true. Combining DAOs and centralized organizations presents many challenges and issues, but there are ways to prevent and mitigate many of these problems.
A primary concern with DAOs is the cost of voting. Since votes must be done onchain for the smart contract to execute, the transaction costs can quickly add up, especially with numerous proposals.
One proposed solution is voting off-chain. However, off-chain voting introduces the risk of manipulation and centralization. An alternative approach involves using zk-rollups, which execute transactions on a zk-rollup L2 chain. This method batches transactions and sends them to the L1 chain, drastically reducing fees and increasing efficiency.
Another major concern is that incorporating a centralized aspect into a decentralized system diminishes the value of a DAO and poses significant risks. While Wyoming’s DAO law does not require the main owners to verify their identities, operational and legal considerations, particularly when interacting with financial institutions or engaging in regulated activities, may necessitate individual verification.
The means for the future
The collaboration between DAOs and centralized organizations opens up exciting possibilities for the future. This partnership could transform how we handle governance, transparency, and operational efficiency across various sectors. By combining the decentralized nature of DAOs with the resources and structured processes of centralized organizations, we get the best of both worlds.
Looking ahead, we can expect more regions to develop legal frameworks similar to Wyoming’s DAO law. This will provide DAOs with the legal recognition they need to operate alongside traditional entities, paving the way for seamless collaboration and innovation.
This hybrid model preserves the transparency and democracy of DAOs while bringing in the efficiency and resources of centralized organizations. This blending of decentralized and centralized approaches is set to redefine how organizations operate, making the future of governance and operations more democratic and effective.
