We have the invention and evolution of technology to thank for some of humanity’s most significant advances. The invention of the telephone in 1876, the aeroplane in 1903, the computer in 1937, and the internet in 1974 all completely changed how we live our everyday lives. As technology advances, how can the likes of web3, the metaverse, blockchain and DeFi change the future of fintech?
This week, our coverage focuses on DAOs, decentralised finance (DeFi), virtual assets and blockchain. To kick things off, we got in touch with a number of industry experts to ask: ‘What is a DAO and how does it function in today’s marketplace?’
‘Pooling resources in pursuit of a common goal’
Joshua Bate is head of DeFi business development at Spool, a DAO looking to support the growth of DeFi.
Bate offers a brief explanation and introduction to what a DAO is and what it has to offer the space.
“A DAO, technically, is a Decentralised Autonomous Organisation. In reality, however, a DAO is fundamentally a decentralised group of people pooling resources in pursuit of a common goal, bolstered by the use of the Web3 tech stack.”
‘Plagued by Smart Contract vulnerabilities and exploits’
James Hiester is a senior consultant at Capco, a global management and technology consultancy dedicated to the financial services and energy industries. Hiester also helps lead the digital assets practice at Capco, spearheading the development of prototypes focused on different use cases including tokenisation, digital identity, and ESG.
“Decentralised Autonomous Organisations (DAOs) are digital communities that operate using Smart Contracts on blockchain networks. Often, DAOs are used to manage funds stored on the blockchain like a digital treasury. DAOs are also typically structured around a digital token that grants the holders voting rights. Instead of relying on a centralised group to run elections and execute the results, token holders can vote on proposals directly through the Smart Contracts which can then transfer funds automatically based on the results. In other cases, votes can be used to direct the operations of a DeFi platform.
“For example, the decentralised exchange UniSwap allows its token holders to vote on proposed fee structure changes. While DAOs claim to democratise finance by providing more direct access to decisions, they also come with many challenges around consumer protection and regulatory compliance.
“DAOs have been plagued by Smart Contract vulnerabilities and exploits that have cost users hundreds of millions of dollars. Without a centralised party to hold accountable in the case of malfeasance or illegal behaviour, there is little legal recourse. The tokens used to govern DAOs have also come under scrutiny from the SEC, which has tended to consider them securities despite few DAOs registering as such.”
‘Governed by its members’
Clémence Cazeau, CEO of digital art gallery 37xDubai, also offers her definition of a DAO and how these organisations work:
“A DAO is a type of organisation that operates through smart contracts on a blockchain network. It is a decentralised and autonomous entity that is governed by its members. These members collectively make decisions through a consensus mechanism.
“In a DAO, members hold tokens that represent their ownership and control in the organisation. These tokens are used to vote on proposals and elect members of the organisation’s governing body, known as the ‘core team’.
“The core team is responsible for executing the decisions made by the members, as well as managing the organisation’s assets.”
‘Inclusive and democratic method of operating an organisation’
Andrew Saks is a senior executive at The People’s SCE, a decentralised organisation helping members take control of their financial well-being.
Saks describes how a DAO’s structure differs from other types of organisations:
“A DAO is a type of organisation that differs from the traditional commercial structure of the corporate world, as it is controlled by the organisation’s members and not influenced by a board of majority owners, senior executives or central government.
“In general terms, DAOs are member-owned communities without centralised leadership in which members vote on actions before they’re passed. It is therefore an inclusive and democratic method of operating an organisation or building a product.”
Operating ‘autonomously, without the need for human intervention’
Gordon Bell, president of Legacy Suite, discusses how DAOs offer a type of organisation that is more “transparent, decentralised, and resistant to censorship and corruption”:
“A DAO is an organisation that is run through computer programs called smart contracts on a decentralised blockchain network. It functions without the need for a centralised authority or intermediary, and its rules and decision-making processes are encoded in smart contracts.
“In a DAO, members can vote on proposals and decisions using tokens that represent their stake in the organisation. Tokens can be traded on exchanges, allowing anyone to become a member and have a say in the organisation’s decisions.
“One of the main advantages of a DAO is that it can operate autonomously, without the need for human intervention. This makes it possible to create organisations that are transparent, decentralised, and resistant to censorship and corruption.
“Today, DAOs are being used for a variety of purposes, including decentralised finance (DeFi), social networks, and gaming. Some of the most popular DAOs include MakerDAO, which is a DeFi platform that allows users to create and trade stablecoins, as well as Uniswap, a decentralised exchange that allows users to trade cryptocurrencies without the need for a centralised intermediary.
“Overall, DAOs could revolutionise the way organisations are run, as well as create a more decentralised and equitable economy. However, they are still a relatively new and experimental technology. There are many challenges and risks that need to be addressed before they can become mainstream.”