The State Of DAOs And What That Can Mean For Web3


Paolo Guida is Head of Investments for Blockchain Valley Ventures.

Decentralized autonomous organizations (DAOs) are growing as the world prepares for Web3.

DAOs are a way of democratizing the management structure for the businesses, projects and communities that employ it. Within this internet-native and blockchain-based operation, members can vote to make organizational decisions by buying into a given project.

The core function of a DAO is to issue a digital currency to users, backers or other stakeholders. This currency, also referred to as governance tokens, provides the voting power for its holder. Its price on the secondary market reflects the amount of voting power.

DAOs Today

As of early 2022, there are about 4,000 DAOs. A recent report from Chainalysis sheds some light on the purpose of many of these DAOs. DAOs are in their early days, but despite that, they are utilized across many types of projects, ranging from DeFi protocols to social media clubs, grant-making, play-to-earn gaming, NFT generators, venture funds, charities and virtual worlds. In terms of total value locked (TVL), the vast majority of assets held in the DAOs are concentrated within DeFi projects such as Uniswap and Sushi.

Measuring Token Concentration

According to Chainalysis, out of the 10 major DAO’s governance tokens, distribution remained very concentrated, with less than 1% of all holders having 90% of the voting power. This means a small number of token holders can easily outvote the remaining 99% on any decision.

Furthermore, the ability to formulate proposals is governed by a process where a minimum number of token holders and capital is required to submit a proposal. In the case of highly concentrated token structures, certain proposals may never make it to vote.

In the same report, between 1 in 1,000 and 1 in 10,000 of DAO holders in the top 10 projects are reported to have enough tokens to create a proposal.

Measuring User Participation

A research paper published in 2021 co-authored by Youssef Faqir-Rhazoui, Javier Arroyo and Samer Hassan from the Department of Software Engineering and Artificial Intelligence, Universidad Complutense de Madrid, Madrid, and the Berkman Klein Center at Harvard University, looked at voting participation for three of the main platforms (Aragon, DAOstack and DAOhaus), which are commonly used to facilitate the creation of DAOs.

Researchers analyzed three main metrics to measure user participation:

  • The percentage of users who vote, which measures the engagement of the DAO community.
  • The percentage of proposals that are approved, to show how the voting system influences results.
  • The percentage of positive votes among those cast.

While data diverge from platform to platform, participation tends to be very low, in several cases with less than 10% of token holders participating in votes. This is a general trend across many blockchain projects, where there is a long queue of token holders who are not active or don’t care much about participating in the community.

Furthermore, the percentage of approved proposals is high across all platforms. According to the same journal article, this is likely because members discuss proposals off-chain before putting only the ones they feel will be approved on-chain. This means that in many cases, the ability to control the process of creating and framing the proposal can matter as much as the percentage of tokens held.

Impact Of High Concentration And Low Participation On Web3

In today’s market, the prevailing narrative is the switch from Web 2.0, the platform-centric web dominated by Facebook, Google and the likes, toward Web3, a world dominated by the ownership economy, where creators and audiences cooperate to create new and fairer ecosystems. This vision could be impacted by the trends in user participation that show high concentration among only a few stakeholders.

This, I believe, creates a risk for another hype cycle. This could mean that few will benefit in the short term, while wild market speculation and lack of real adoption may further hinder blockchain’s reputation as a legitimate technology that can be conducive to sound and scalable business models.

Risks Entailed By Misunderstanding Communities

I believe the prevailing approach to DAOs shows their proponents appear to have a limited understanding of what a community is or stands for. To me, building a community is not simply adding people to a Discord or Telegram channel or promising future financial gains via token rewards.

Communities are about delivering real value and impact to their members. Communities are valuable if members are passionate and share a vision about a common cause. Communities, in many cases, already exist in everyday life and will simply be facilitated by tech. It is tech that has to effectively adapt to facilitate people’s lives, not the other way around. Humans shouldn’t be forced to embrace a particular technology and the new behaviors that come along with it to accommodate the wishes of DAO promoters. This understanding is at the core of any effort to improve the results of DAOs.

Everybody tends to agree that the breakup of tech monopolies could be a good thing. Even giants like Andreessen Horowitz, who contributed to creating Web 2.0, are now promoting the new message of democratization and a fairer economy.

Nevertheless, if the two big problems of high centration and negligible user participation remain unsolved, the risk of a bubble driven by token boom and bust risks maiming or even killing the nascent Web3 movement.


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