Namaste Yogis. Welcome to the Blockchain & AI Forum, where your blockchain and artificial intelligence technology questions are answered, mostly correct! Here no question is too mundane. As a bonus, a proverb is also included. Today’s question, comes from Michael in Washington, and he wants to know, what the heck is a decentralized autonomous organization (DAO)?
Michael, you came to the right place. When I heard the term DAO, I too had no idea what it meant. Was it tasty Chinese cuisine? Or maybe the latest fashion from Milan? Perhaps a government document? Let me briefly explain DAOs and summarize what proponents and opponents say.
According to Consensys, a major blockchain player, DAOs are community-led organization with no central authority constructed by rules encoded on a computer program. Proponents say DAOs are transparent and controlled by the organization’s members, not by a central figure. A libertarian utopia? Maybe. Proponents point to smart contracts in setting foundational rules and to execute the agreed upon decisions.
The Emurgo Academy, Cardano’s teaching arm, explains that under a DAO community members create proposals concerning operations and vote on each proposal. Proposals that achieve predefined levels of agreement are accepted and enforced by smart contract rules. Moreover, the very code itself can be publicly audited. Further, DAOs are responsible for tracking the ownership of tokens from point-to-point. Intriguing?
DAO backers say their system produces community collaboration. Their theory is DAOs align incentives; therefore, the best interest of every member is congruent with the best interest of the protocol itself. A healthy, robust protocol will garner more usage, and in turn, increase the value of the DAOs tokens. As the protocol succeeds, so do members. That’s the theory. Opponents say?
DAO supporters are correct, DAOs are built on code that can’t be changed, or not easily changed. Is that a strength or liability? When an Ethereum based DAO was hacked due to programming errors, over $50M was stolen due to there being no central authority to stop the theft. Hence, strength or liability?
Second, to make a major correction or change a programming hard fork is required. Essentially a hard fork means a fundamental modification to the protocol. Think of it as a constitutional amendment in the U.S.A. Difficult under ideal circumstances.
DAOs make extensive use of smart contracts. The problem is “smart contracts” are neither smart nor contracts. The term smart contract is a clever marketing phrase, say opponents. Smart contracts are not enforceable in court and only as smart as the computer engineers who programmed the code. Oh my!
Fourth, DAOs rely on oracles to deliver the information needed to execute. For instance, if the smart contract says pay Yogi Nelson $1,000,000 when the Lakers win, the smart contract is incapable of knowing if the Lakers won. The smart contract relies on oracles to supply the information. What if the oracle is wrong or if the oracle is hacked? What would happen to my $1,000,000!
DAO opponents reject the notion that DAOs improve society by decentralizing power. They note a significant number of crypto projects are highly centralized by founders. DAOs backers are fond of saying code is law! Okay, but who wrote the code? Answer. Small groups of humans with all their faults, flaws, prejudices, bias, shortcoming, etc. Hence, perhaps DAOs hide centralization making the problem worse by projecting a false impression, say DAO opponents.
I conclude by sharing the famous French proverb: “All flatterers live at the expense of those who listen to them.”
Until next time.
Yogi Nelson
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