Web3 is in the nascent stages but has seen strong interest from some of the world’s top investors like Sequoia Capital and Andreessen Horowitz.
Just look at the funding of Alchemy, who is building an AWS-style platform for Web3. In early February, the startup raised $200 million at a valuation of $10.2 billion, up nearly 2,000% since April 2021. Yet, the company has less than 50 employees.
Web3 is a decentralized internet and is built on blockchain and crypto. But there are still many details to work out. For example, there is a need for management systems to handle governance. DAOs (Decentralized Autonomous Organizations) have emerged to do this.
So how do these work? Let’s take a closer look.
What are DAOs?
In simple terms, a DAO is similar to a true democracy. The members of the organization represent and control it. This is done with smart contracts on blockchains—and the most common is Ethereum. These smart contracts have the rules for the DAO and allow members to vote. There is also transparency, which allows for more trust in the system. This means that the details of the governance, votes, and decisions are publicly available on the blockchain.
A DAO has a funding mechanism. The organization will usually sell tokens, and each will have voting rights.
“Many DAOs are different from corporations due to the lack of formal hierarchy, pseudonymous participation, and a more egalitarian decision-making structure,” said Nick Casares, head of product, PolyientX. “DAOs can focus on a single objective as in the case of the ConstitutionDAO, which recently attempted to purchase a copy of the U.S. Constitution. Or a more general outcome, as in the case of ATX DAO, which is increasing community awareness for cryptocurrency in the city of Austin, Texas.”
Pros and Cons of DAOs
In today’s Web2 world, platforms like Facebook, Apple, SnapChat, and Twitter dominate the online world. They are essentially walled gardens that have traditional corporate management structures. With super voting rights, it’s not uncommon for the mega platforms to have founders that control the decisions, which are often far from transparent.
In a Web3 world, the management of platforms and systems is through the consensus decisions of its users. They also have ownership and control of their data.
“Early adopters believe that DAOs have the potential to completely change the way that humans think about cooperation, collaboration, and collective resources,” said Casares. “DAOs present an opportunity for communities and organizations to rethink how we work together to provide more equitable participation and incentives.”
If anything, with the trend towards remote work because of the pandemic, DAOs are much more amenable to people. They essentially provide for operations across any geography at any time.
Yet there are certainly challenges. After all, can a consensus model allow for innovation? For example, if Steve Jobs were just one voter in a DAO, would his amazing capabilities have been realized? Probably not.
Another issue is that Web3 is still in the early stages, and the underlying technology needs much more work.
“Some companies are offering millions in bounties to find bugs,” said Chris Clark, founder of DAOBnB. “For example, someone figured out how to print infinite amounts of Ethereum. In this case, it wasn’t stealing because the smart contract allowed it to happen.”
Of course, there are hackers that are focused on DAOs. These systems are a rich target because of their growing monetary value.
Because of the decentralized nature of DAOs, there is also a lack of direct business relationships, which can be risky.
“Since there are multiple parties involved—such as the buyer, seller, the marketplace—the coordination of who pays who, and how much, isn’t a simple as issuing a purchase order and waiting for payment,” said Murali Saravu, founder and CTO, Monetize360. “There are also the potential complications of currency conversion and taxes.”
The Future of DAOs
Given the momentum of Web3, DAOs are likely to see strong growth in the coming years.
“First, the tools to support decentralized collaboration will expand, such as for project management, accounting and voting,” said Casares. “Second, the legal interpretation of DAOs will evolve to provide more clarity on the protection afforded for participants.”
Such things will take time. If anything, one of the most difficult parts will be the need to change people’s traditional perceptions of leadership and governance of organizations.
“There will be a number of foundations or other organizations that create a set of processes, principles, values, and ethics that Web3 projects must follow if they’re to be supported by the organization,” said Dan Kirsch, managing director, Techstrong Research. “Individual members will contribute their experiences, thoughts, and what works and doesn’t work. And there will be an advisory board that oversees the general direction of Web3 platforms.”
Read next: Web3: A New Catalyst for Enterprise Software