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By
MIDAO
Decentralized Autonomous Organizations (DAOs) have emerged as a revolutionary way to coordinate and govern online communities. However, as these digital entities evolve, they face several significant challenges that must be addressed for their continued growth and success. In this article, we'll explore three key areas of concern for DAOs: communication, legal structures, and the path to decentralization.
Drawing insights from a recent episode of the "Just DAO It" podcast featuring host Adam Miller, co-founder of Midao, and guest Arnold Almeida, founder of Lighthouse, we'll delve into these challenges and examine potential solutions on the horizon.
One of the most pressing issues facing DAOs today is effective communication. As Arnold Almeida points out:
"A lot of the user research that we did showed that for people who operate in one or two DAOs, it doesn't matter as much because they're highly engaged, and it doesn't take that much effort to stay up to date. But the second you're in three or more, it becomes a real burden—especially when you think about the meetings you need to attend, discussions, proposals."
This observation highlights a critical challenge: as individuals become involved in multiple DAOs, the sheer volume of information becomes overwhelming. Streamlined communication channels are paramount to ensure active participation and informed decision-making.
Almeida's company, Lighthouse, is working on solutions to address this information overload:
"Part of why I built Lighthouse is to streamline that information flow so that people have one place where they know, 'Okay, cool, I've got a meeting tomorrow, I can attend that, then I can vote.'"
Tools like Lighthouse consolidate DAO-related information and activities into a single platform, aiming to reduce the cognitive burden on DAO participants, particularly those involved in multiple organizations.
Adam Miller expands on the communication challenge, noting that it goes beyond just notifications and voting:
"I feel like one of the most common challenges that I see coming up in DAOs is communication in general. Where do we communicate? It seems like you're going after—maybe we could call it—the communication between the DAO and the community. But then there's also the question of how the community members talk to each other. How do the teams communicate with each other?"
This observation highlights the complexity of DAO communication, which includes:
Each of these communication types may require different tools and approaches, adding to the overall complexity of DAO operations.
The choice of communication platform itself presents challenges. As Miller notes:
"Do they use Discord? But there are a lot of issues people have with Discord. Do they use Telegram? Then there are those issues. Some DAOs, like Purple, are trying to have all their communication on Farcaster, which is interesting but doesn't seem perfect either."
This platform fragmentation can lead to scattered discussions, lost information, and reduced engagement. Almeida acknowledges this issue:
"Depending on the DAO, each DAO will generally tend to gravitate towards a particular channel for communication-based on their objective. Historically, a lot of people love Telegram. I think there's a new wave of DAOs who prefer Farcaster."
Another critical aspect of DAO communication is managing different levels of access and privacy. Almeida shares an example from his experience:
"We had a Discord channel for verified members. We had another channel that was for delegates, where only the delegates could speak, so it wasn't cluttered with additional noise, but we also allowed the verified members to view that information. Then we also had another level, which was for signers who wanted to specifically or strictly speak about price-sensitive discussions."
This tiered approach to communication demonstrates the need for flexible systems that can accommodate various levels of privacy and access within a DAO.
Looking to the future, Almeida highlights some emerging technologies that could address the centralization concerns with current communication platforms:
"One of the properties that we need, if we want to do this properly, is an encrypted chat that is composable and can be owned by the DAO. Right, correct. And it's sufficiently decentralized—key point."
He mentions two promising protocols:
These decentralized communication protocols could provide the security, privacy, and ownership that DAOs need for truly autonomous and resilient communication systems.
When asked about significant blockers to DAO adoption, Almeida is quick to point out:
"Legals. Legal issues."
He elaborates:
"I think just ensuring that people have the appropriate legal protections to participate in these innovative structures without fear of repercussion is probably the most important thing."
This concern highlights a crucial challenge for DAOs: operating in a legal grey area where participants may be unsure of their rights, responsibilities, and potential liabilities.
Miller, drawing on his experience with MIDAO, outlines two main approaches to addressing the legal challenges faced by DAOs:
The first approach, which Miller's company MIDAO is pursuing, involves adapting existing legal forms to accommodate DAOs:
"There's the one that we're taking at MIDAO, which is to create legal forms like the LLC—called the DAO LLC or whatever it could be, like the UNA in Wyoming that's coming out soon—where you're basically... Some people have been very critical about this. They say, 'Hey, why are you taking something that was made for a different situation and retrofitting it?'"
Miller argues that this approach is about "taking the laws that were written and adapting them so they work for DAOs and Web3, making it sound very vanilla." The advantage of this method is that it allows DAOs to leverage existing legal frameworks and precedents, potentially providing a quicker path to legal recognition and protection.
The second approach involves creating entirely new legal structures designed explicitly for DAOs. Miller describes an initiative in New Hampshire:
"Rather than creating a company that people necessarily need to register with the state the way they would a traditional company, instead, maybe we need some basic protections automatically written into the law that automatically apply to DAO members and give them those benefits, even without any kind of registered company on the books."
This approach aims to provide legal protections to DAO participants based on the organization's characteristics rather than requiring formal registration. Miller elaborates:
"If you could create a set of characteristics and say, 'Okay, if you're a token holder of a sufficiently decentralized system, and here's what sufficiently decentralized means, and there's maybe no one with too much power, and everything is really done on-chain, and A, B, C, D, E, F, G, whatever the considerations are, then we're going to give that legal protection to the token holder—to the member—that they would have otherwise had to register a company to get that protection.'"
Miller acknowledges the ongoing debate about which approach is more suitable for DAOs:
"I'm not sure which one will win. On one hand, yes, obviously, DAOs are different; DAOs are unique. Maybe there should be some different default treatment. But the fact is that every organization for the last several decades, and even hundreds of years, is unique and different, and organizations are doing all kinds of different stuff."
This observation highlights the tension between creating entirely new legal frameworks for DAOs and adapting existing structures that have proven flexible enough to accommodate various organizational types over time.
A key concept emerging in the discussion of DAO legal structures is "sufficient decentralization." This concept is crucial not only for legal considerations but also for the overall governance and operation of DAOs.
Almeida highlights the complexity of this issue:
"A lot of DAOs will face a cold start problem with a few individuals leading it, right? But I guess the real question is how can we demonstrate, or how can they prove, that there is a sufficient pathway to decentralization and hold them accountable to that?"
This observation points to a fundamental challenge in DAO development: balancing the need for initial leadership and direction with the long-term goal of decentralized governance.
Almeida warns about the potential pitfalls of failing to achieve sufficient decentralization:
"If that doesn't happen, and it's like the five people who started a DAO are going to keep control for the next three to five years, that's probably a problem—that's an issue."
This scenario highlights the risk of DAOs becoming de facto centralized organizations, potentially undermining their core principles and losing the trust of their communities.
While the podcast doesn't delve deeply into specific strategies for achieving decentralization, several approaches have been discussed in the broader DAO community:
The development of new technologies and protocols, such as the decentralized communication tools mentioned by Almeida, can play a crucial role in facilitating true decentralization. By reducing reliance on centralized platforms and services, DAOs can better align their operations with their decentralized ethos.
As DAOs continue to grow and evolve, addressing the challenges of communication, legal structures, and decentralization will be crucial for their long-term success and adoption. The insights shared by Miller and Almeida highlight the complexity of these issues and the innovative approaches being developed to tackle them.
In the realm of communication, tools like Lighthouse are working to streamline information flow and reduce contributor fatigue. Meanwhile, emerging decentralized communication protocols promise to provide more secure and autonomous platforms for DAO interactions.
On the legal front, the debate between adapting existing structures and creating new frameworks specifically for DAOs reflects the broader challenge of integrating these novel organizations into the existing legal and regulatory landscape. The outcome of this debate will likely have far-reaching implications for the future of DAOs and their ability to operate with clarity and confidence.
Finally, the path to decentralization remains a critical concern for DAOs. Balancing the need for initial leadership with the long-term goal of distributed governance will require careful planning, transparent processes, and innovative technological solutions.
As Almeida eloquently puts it, speaking about the potential of DAOs:
"I strongly believe that DAOs are an important innovation akin to the limited liability company. When limited liability companies first came on the scene, I believe they were created so that when ships went out to sea, and people had to spend a lot of money on these voyages, the capital would be somewhat constrained regarding how it was lost. I think that DAOs are basically the next level up. It means that, for me, the more quickly we can coordinate capital efficiently and without any geographical boundaries, the more DAOs will win."
This vision of DAOs as a revolutionary form of organization, capable of coordinating resources and efforts on a global scale underscores the importance of addressing these operational challenges. As the DAO ecosystem continues to mature, the solutions developed to tackle these issues will play a crucial role in shaping the future of decentralized governance and collaboration.
The journey ahead for DAOs is undoubtedly complex, but it's also filled with immense potential. By confronting these challenges head-on and developing innovative solutions, the DAO community can pave the way for a more decentralized, transparent, and participatory future of organization and governance.
