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Pitfalls and considerations that cause DAO inefficiency

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All that shines is not necessarily gold. Treat DAO rationally and avoid falling into the efficiency traps and loopholes of DAO.

Original title: "The Inefficiency Trap of DAOs "

Original author: Ouija

Original compilation: Dewei@DAOrayaki.org, DAOrayaki

DAO inefficiency background

DAO promotes its commercial goals by incentivizing user participation; at the same time it enables individuals to work together, minimizes trust, and maintains resistance to censorship and coercion.

To facilitate this, DAOs require different layers of complex smart contracts, organizational structures, and governance. As such, DAOs are often exposed to many vulnerabilities and inefficiencies. Kelsie Nabben describes many of these DAO vulnerabilities in her article "DAO Vulnerabilities". A multi-scale DAO ecosystem mapping tool for computer-aided governance.

Decentralized decision-making and how decisions are made can have some negative consequences. For example, many current DAOs feature multivote voting. Majority rules cause voters to compromise on the lowest common denominator, which in turn may produce suboptimal outcomes.

The structure of the organization can also affect the decision-making process; for example, MakerDAO's "flat" nature and lack of Hierarchy can lead to it lacking a common goal or purpose. However, this cannot necessarily be remedied by simply imposing hierarchies; there are subtle interactions between many different factors. Different perspectives on this topic can be seen in MakerDAOs’ recent “Crypto Governance First Principles” forum post.

In order to better understand the inefficiency of DAO, let's take a look at the limitations behind it :

01 Path dependencies

Many DAOs are affected by forking or duplication. They fork/copy structures and processes rather than creating or iterating specific designs to suit their own unique needs. This is not only in terms of governance, but also in tokenomic design and any other area. The common denominator of the current DAO Token seems to be the addition of DAO Token value intent. For this reason, the performance of any DAO is evaluated through value optimization, not in government procedures and other areas.

The prioritization of values can mess with Token The efforts of holders and contractors, and their work towards a common goal (provided one has been established). This disruption is caused by the constant need for value extraction caused by short-termism.

02 Regulatory issues

Uncertainties in regulation Another major limitation. After "The DAO" interacted with the SEC in 2017, the SEC issued a statement stating that the federal security law applies to those who issue and sell securities in the United States, regardless of the issuing entity, regardless of the form of value used in the transaction. How is the distribution method. Currently, the SEC is trying to apply the Howey test to the emerging digital economy.

The Howey Test determines whether a vehicle qualifies as an "investment contract" under the Securities Act Condition: "a contract, transaction, or scheme in which a person invests his money in a common enterprise and is led to expect profits.”

Another issue for regulators is that of jurisdiction. Depending on the applicable jurisdiction, DAO participants may be held legally liable for the DAO if the DAO is malformed and has no formal off-chain legal entity.

It is worth noting that no US statute authorizes the creation of a legally distinct entity. Through interactions with smart contracts, DAO members combine their efforts and resources in pursuit of a certain goal; this satisfies the legal definition of a partnership. Accordingly, DAO participants are potentially liable for all debts, obligations and other liabilities of the partnership.

We have seen some groups create a foundation that operates a limited liability company. This LLC will then be the only party liable for the debt, obligation or other such liability. We can see it functioning as a "responsibility shield". Additionally, legal anchors have been considered and used as lawyers may analyze systems and apply jurisdictional principles. Including "The DAO" registered as SARL in Switzerland, or Tokemak's foundation registered in the Cayman Islands.

03 Design of incentive mechanism

Human participation itself Or through any effective machine derivatives need incentives to overcome opportunistic attempts by internal and external members to game the governance system. These rewards must sufficiently incentivize participants to increase their utility while being beneficial to the long-term health and success of the DAO.

When fungible assets are utilized and distributed as the main form of incentive design in DAO governance, Internal and external actors, rational or otherwise, tend to seek to corrupt and profit for their own goals, thereby harming the DAO or application.

By using a third party, non-forgeable Token , Merit Recognizers, Character Proofs, etc., can reduce many of these elements of corruption.

Conclusion

Decentralized applications rely on dynamic governance and are bound by the same fundamental principles as any organization. Best practices, standards, and framework compatibility are all yet to be established. The above should be considered along with seven key fundamentals when it comes to DAO inefficiencies.

Suffrage. Suffrage is the right to participate. Those who have been granted the right to vote can participate in the decision-making process. It can be divided into active voting rights and passive voting rights, the former is the right to vote, and the latter is the right to participate in elections and elected representatives.

Pareto efficiency. Alignment of intent between policy makers and community members is not just a matter of electoral rights and accountability. Pareto efficiency refers to the situation where no individual or preference criterion can be made better without making at least one person or preference criterion worse.

Confidentiality. When considering confidentiality, it is best to first distinguish between confidentiality and anonymity. True confidentiality can be difficult to achieve on a decentralized project or protocol, and even more so on a blockchain.

Verifiability. Verifiability is an essential component of any governance system, ensuring legitimacy.

It can be broken down into:

Personal Verifiability - voters can audit themselves

Universal verifiability--everyone can audit recorded votes and verify They are extrapolated from qualified voters and are correctly created, stored and counted.

Responsibility. One is used to imply that certain actors have the right to hold other actors to a set of standards and values, to judge whether they meet their responsibilities, and to impose sanctions if those responsibilities are not met.

Sustainability. Sustainability differs from accountability in that it rewards development and engagement regardless of outcomes. The incentives set up to satisfy the two factors of sustainability can be considered as the cost of participation, which leads to more contributions, suggestions, and voter participation.

Validity. To be effective, a blockchain or protocol must be able to adapt to urgent issues through the decision-making process, allowing termination within a reasonable time frame based on the urgency of the matter at hand. Quick decisions are highly desirable.

This article comes from Stablenode, recognizing the complexity and interplay of the above constraints, the key basic elements and the domains they must satisfy. Reduce these inefficiencies and vulnerabilities by providing unbiased, professional and customized support to help optimize any particular DAO or project.