DAOs undoubtedly are changing the way organizations are created and managed. They allow people from various places to come together and run an organization. Members of a DAO don’t have to necessarily trust each other because their various activities are bound by the Ethereum smart contracts.
Although this sounds very enticing, it can be very risky. This article would help you understand DAOs, how risky they might be, and why you should rather create DAO LLCs.
What Are DAOs?
DAO is simply an internet-based organization that is run by smart contracts and does not need centralized control. According to Ethereum.org, the contract defines the rules of the organization and also holds the group’s treasury. The rules can only be changed by votes from the members.
You can be permitted to join a DAO by either buying tokens or by submitting proposals to join the DAO.
Imagine you want to buy a football club and you created a DAO for you and your investors. It is very much that a stranger decides to invest and therefore is given a membership to the DAO. You won’t need to worry about your investors scamming you, because they might lose tokens or even forfeit their ownership for going against the rules you have in place while creating the DAO.
How DAOs work?
The DAOs are controlled mainly by smart contracts and similarly to the Ethereum blockchain, their activities are made public. If perhaps, the organization wants to decide on particular issues, they can organize a poll for the members, and the results would be compiled and the results would be produced by the smart contracts.
There are two ways of earning DAO memberships; they include
- Token-based membership:
In this form of membership, your right to vote can be earned by trading tokens which can be earned by providing liquidity or showing Proof-Of-work.
- Share-Based Membership:
In share Based Membership, you can earn a membership seat by submitting proposals offering a tribute of some value in form of tokens or work. Your Proposals would then be reviewed and be considered if relevant.
Transparency: Because DAOs are on a blockchain, every activity of its members is recorded in a public ledger accessible to the public. Hence, it is trustworthy.
Ease of collaboration:
Investors or members of the organization might not know each other. Despite this, each of the stakeholders would be able to share ideas and achieve common goals.
Autonomy: DAOs are decentralized. The rules guiding the organizations are stored and enforced in the form of smart contracts, so the members can perform their various duties effectively without any form of authority or management.
Disadvantages of DAOs
Just like traditional organizations, the decision of stakeholders largely affects a DAO. If they have a lot of misunderstandings and cannot make the right decisions within an appropriate period, the DAO would be affected negatively.
An error in the code by the DAO creator can be easily exploited by hackers. Funds can easily be stolen before members/stakeholders of the organization would be alerted. This was what happened in the case of The DAO which was created in 2016. The DAO after just being funded was hacked. A total of 3.6 Million ETH (equivalently $150 million) was stolen.
If a customer files a lawsuit against a DAO, investors or members of a DAO stand the chance of losing their personal assets. DAOs are regarded as just general partnerships and are capable of exposing stakeholders to a lot of risks.
DAO LLCs are created when a DAO is registered as a Limited Liability Company. The registration of DAOs as LLCs (Limited Liability Companies) would allow DAOs to legally incorporate, hire employees, scale, and grow. This means the DAO would have to be registered in its state and would also have to be a member or algorithmically managed.
The smart contract would involve how the DAOs would govern members, their rights, duties, and distributions. It must also be clearly stated the steps that should be taken for amendments.
The creation of DAO LLCs would help protect investors and stakeholders against legal liability. If a DAO were to be sued, only assets of the DAO would be affected.
Finally, there has been an exponential growth in the adoption of DAOs over the last few months and it is of no doubt that this type of organizations would experience more growth and would replace a lot of traditional organizations in the a few years.