Over 10525 DAOs (Decentralized Autonomous Organizations) have been established since the first DAO was launched in 2016 on Ethereum, and collectively they control about ten billion dollars worth of treasury assets. A DAO enables collective decision-making via on-chain governance, most commonly through voting, where DAO token holders interact with the DAO smart contract to vote for an outcome that affects the future of the assets the DAO holds or the path the DAO takes. DAOs are a breakthrough for the governance and organization of otherwise unconnected participants. However, DAOs with a ‘one token=one vote’ model are inherently flawed as wealthier DAO participants who can afford more tokens are able to exert more influence over DAO decisions.

Not all DAO participants will share the same incentives or long-term goals as the DAO founders due to a misalignment of incentives. While founders will fully understand the best intentions for the DAO and may even have an ideological reason for founding the DAO, this is often not shared amongst all participants. Many non-founder members participate in the DAO by purchasing tokens with financial gain as their primary priority, with DAO goals and ideological reasons coming second. In turn, this influences their participation by making their DAO interactions based primarily on their investments instead of the ideology or long-term goals of the DAO.

Furthermore, voter apathy, a common effect in real-world political elections, often decreases voter participation. A drastic decrease in participation due to voter apathy can lead to a voting result that did not truly reflect the wishes of the members as a whole. Poor DAO leadership and a lack of community engagement can lead to information asymmetry, where all DAO participants do not know the same amount of information about the consequences of a DAO decision. A combination of the aforementioned wealthier participants buying more votes with voter apathy and information asymmetry can lead to suboptimal voting outcomes, and bad consensus decisions can result in problems arising for the DAO in the future.

Some recently formed DAOs attempt to provide a better solution for on-chain governance. An example is AirDAO, which combines a traditional hierarchical structure commonly found in conventional organizations with a decentralized DAO-based democracy to provide community-owned governance over their blockchain. Their dual, hybrid approach means an experienced leadership team is elected to efficiently execute decisions and avoid the pitfalls that DAOs face. In return, the community is more incentivized to engage with the decision-making process and empowered to collective decisions on the path AirDAO takes as a project.

Whilst DAOs present an egalitarian and idealistic approach to democratic governance, they are not without their inherent flaws. It is clear that projects that try creative solutions to combine decentralized governance with hierarchy structures stand a better chance of having the most prosperous outcome and long-term viability.