Are DAOs real?

DAOs (Decentralized Autonomous Organizations) are supposed to be a better form of governance and of corporate structure. “Power to the people” granted automatically and in perpetuity, with a voting mechanism for DAO members to make all the decisions in peace and harmony. That’s the story. But what is the reality?

State of the DAO

As reported to the Harvard Law School Forum on Corporate Governance:

In 2021, the total value of crypto funds held in DAO treasuries reportedly surged from $400 million to $16 billion, and the number of holders of interests in DAOs rose from just 13,000 to 1.6 million. According to SnapShot Labs (a voting platform for DAOs that also provides analytic data), the number of DAOs increased from about 700 in May 2021 to about 6,000 as of June 2022.

The growth is staggering: 1.6 million DAO members is equivalent to the entire population of Philadelphia. And $16 billion is the GDP of countries like Georgia, Jamaica, or Laos.So the growth in both capital and participants is tremendous. But are all these DAOs actually doing anything? Are they actively passing proposals? How many members are actively participating in governance? How many manage a sizable treasury? Let’s dig into some of these questions to see if the DAO revolution is living up to the hype, starting with the most simple question:

Are DAOs achieving their goals?

Remember when ConstitutionDAO was formed to raise enough funds to buy an original copy of the US Constitution (one of only 13 in existence)? They did succeed in raising $47 million worth of ETH from ~17,500 members but were ultimately outbid by Ken Griffin, a billionaire CEO of a hedge fund (oh the irony). ConstitutionDAO tried to return the funds to each member but much of those were lost because of all the fees associated with converting ETH to USD for the auction then back to ETH for refunds. Good intentions, costly logistics.

In contrast, Moloch DAO was formed in 2019 with a mission of providing sustainable and quick capital to open source Ethereum blockchain-based development. Indeed it has been able to distribute over $1.4 million worth of grants to ~70 recipients. They also have a referral-and-verification based membership system to attract and keep members who are both a good fit for the DAO and are likely to care enough about it to be active. The question is whether Moloch DAO can be sustainable in perpetuity, especially since their goal is to give money away (but where is it coming from?). To improve their funding situation and help the DAO’s longevity, Moloch modified their code to include for-profit loan making. Time will tell if that will provide enough funding sustainability without diluting its mission.

Do DAOs have active governance?

Unlike Moloch DAO, joining most DAOs is as simple as buying and holding their governance token. But how many token holders actually vote? According to DeepDAO, out of 3.9M governance token holders that they track, only 698,000 actually vote. That’s less than 18%.

And those are just members who vote at least once. Regular voters and actual proposal creators are much more rare. And even the number of holders is a lot less impressive once you separate the top DAOs from the rest. Only 674 DAOs (out of 4,830 tracked by DeepDAO) have over 100 members. And only 61 (!) have more than 10,000. Suddenly, it’s not so much the power of the people.

Broken incentives

The lack of active participation in DAO governance is damning but certainly understandable. The crypto market is still populated by speculators much more than by true believers. Holding a DAO token could be very lucrative if you believe that the DAO hype is only beginning to form. Holding DAO governance tokens may also give one airdrops or access to other crypto projects, dividends, or other benefits. But the DAOs are designed for participation. So how can DAOs incentivize that?

At this time, there are a number of attempts to reward active DAO members by offering rewards for participation. The most comprehensive one we’ve seen so far is the one by the DeXe DAO Management Protocol where DAO creators set up in a few clicks and DAO members can vote to amend a number of settings for rewarding active members, such as a reward for submitting a proposal, for voting on proposals, for executing the transaction that activates a passed proposal, etc. The DAO can set different reward types for different types of proposals. To prevent abuse, the DAO can distribute awards only for passed proposals and have other measures protecting the reward system from malicious actors while actively encouraging DAO participation.

The DeXe example shows that DAOs can be active and useful as long as incentives are aligned, clear, and transparently enforced.