Advantages of a DAO structure
While most organizations operate using decision-making models where power is concentrated in the hands of a few stakeholders, one of the purported benefits of ceding control and adopting a more decentralized model is that it minimizes the risk of human error. This is possible for two main reasons:
- DAO rules are enforced by code rather than by physical persons. Stakeholders no longer need to trust physical persons to implement decisions, and can instead rely on the sanctity of the code, to automate decisions according to rules that stakeholders have previously agreed upon. Code is arguably more trustworthy than people because it is publicly available and can be extensively tested before release; and
- DAO decisions are made by a collective of members, rather than a select few. Proponents of DAOs argue that decisions made by a collective will be better informed and more likely to succeed.
DAOs are also touted as a promising vehicle for engaging a community around common goals, for-profit or not-for-profit, as they not only allow their members to have a say in decision-making, but can also be used to reward members for participation. With DAOs, the community is both owner, manager, customer and/or advocate of the product or service.
A decentralized model can also provide a solution to the principal-agent problem, which is characterized by conflicts that arise between the principal (a person or a group of persons, ex. shareholders) and their agent (managers of a company, ex. CEO). ), who may have conflicting priorities and be tempted to act in their own interests. The community governance offered by DAO structures is arguably better suited to align stakeholder incentives.
Disadvantages of a DAO structure
Community governance can be inefficient and uninformed. Additionally, the pseudonymous nature of membership can have a deleterious effect on member relationships, which could encourage bad actors, lead to less effort in DAO initiatives, and/or result in a general lack of engagement. CAD. The risk of DAO members “caring less” would be magnified by a DAO structure that allows members to come in and exist on demand without repercussions (as is typically the case with most existing DAO structures today). today).
DAOs also introduce significant challenges in establishing accountability. DAOs are inherently decentralized, which means that control and decision-making capability is distributed among a network of entities, rather than a single controlling entity. However, the more decentralized the organization, the more difficult it is to assign responsibility for the actions of one or more particular groups or individuals, which can lead to significant problems in case the DAO faces challenges. Difficulties in establishing accountability are exacerbated by the pseudonymous and often international nature of DAO members. These same risks are at the center of the multitude of compliance challenges that impede DAO’s development and overall ability to integrate into the global marketplace.