Why DAOs Run on Blockchains
An on-chain DAO has a smart contract at the center. So, when a vote passes, actions are automatically executed.
You may be wondering, why can’t you just have a DAO without a blockchain? Why do you need to go through the extra steps of deploying your organization to an immutable ledger?
Being deployed on a blockchain is a key feature of what makes a DAO a DAO.
An on-chain DAO has a smart contract at the center. So, when a vote passes, actions are automatically executed. For example, funds are automatically sent to the wallet specified in the vote. We believe DAO should operate more like a vending machine, with automation at the center.
A DAO isn’t truly decentralized or autonomous until it’s on-chain.
So, why do DAOs run on blockchains? We’ll cover five key reasons:
- “Don’t be evil” becomes “can’t be evil”
- The blockchain is a single, transparent source of truth
- Global, permissionless assets make for unstoppable organizations
- On-chain incentive alignment can reduce coordination failure
- We have data that centralized crypto custodians often fail
“Don’t be evil” becomes “Can’t be evil”
Google is famous for its “Don’t be evil” slogan that was displayed in its company headquarters. This slogan was to remind people of the power they had—to give or restrict access to the world’s information—and to not abuse it.
However, this means we need to trust the people working at Google to choose not to be evil. This means we have to put extremely high amounts of trust in humans and how they respond to incentives that might not always be aligned with the best interests of the organization, the purpose, and the people it serves.
With a smart contract at the center, incentives are more programmable and predictable. Humans cannot intervene to change the rules of the game after its already up and running. With smart contracts, there is less of a gray zone and less opportunity to be swayed and get compromised.
“The only API you should trust is one controlled by a blockchain. Can’t be evil > don’t be evil.”
— Chris Dixon on Twitter
Just like a vending machine doesn’t care who is on the other side paying for a candy bar, a smart contract doesn’t care who is sending and receiving funds. The only way to change the way the vending machine works is to take it apart and start over.
Many DAOs today have to trust a multisig of just a few signers. All the members of the DAO are trusting just five people with their entire treasury. This is not a “can’t be evil” situation—this is “don’t be evil,” just like in web2.
“There is no CEO who can spend funds on a whim or CFO who can manipulate the books. Instead, blockchain-based rules baked into the code define how the organization works and how funds are spent.”
— “What are DAOs?” published on Ethereum.org
The blockchain is a single, transparent source of truth
You can’t fool the blockchain. No one can edit the blockchain retroactively, making it a source of truth for everyone in the organization.
Running operations on-chain means key decisions and transactions are all transparent. The entire history of the blockchain is viewable and searchable, therefore you can see the history of a DAO’s payments and asset changes.
This saves us from getting into the problem of not knowing how much money an exchange has, and then finding out later that they didn’t have enough!
We believe organizations run better when more people have access to information. This is the “building in public” mindset that has made for a more composable, transparent ecosystem.
Global, permissionless assets make for unstoppable organizations
On-chain DAOs have on-chain treasuries. That means they hold global, permissionless assets like Bitcoin, Ethereum, and stablecoins. They also might hold their own native token, if they chose to mint one!
This means that DAOs are unstoppable organizations, because their currencies are held by the DAO itself and exchanged directly between parties, outside of the control of intermediaries. It also makes it much easier to work with and pay DAO contributors from all over the world, because you don’t need to have different bank accounts with different currencies all over the globe.
On-chain incentive alignment can reduce coordination failure
DAO smart contracts, and the on-chain incentive alignment that come with them in the form of tokens, are designed to reduce coordination failure. That means it’s supposed to help people make decisions and act collectively as a group.
When we say incentive alignment, we mean that the DAO members are incentivized to act in a way that furthers their shared goals. When DAO members all hold the same on-chain asset, the DAO’s native token, they’re incentivized to act in ways that sustain the token’s value. Their on-chain incentive alignment—meaning the shared token—means they are more likely to coordinate to help the DAO succeed at its mission.
The fact that all of this is baked into immutable smart contracts is also important in reducing coordination failure. No one can tamper with the contracts or change settings on their own. There’s no single person who holds the entire treasury—members hold it collectively—and any changes can only be made by reaching of certain level of consent
“DAO software works in service of [the DAO’s] goal, and any group using the software is using it to reduce coordination failure. And DAO software is really good at reducing coordination failure.”
—“What is a DAO and what is it for?” published by DAOhaus
We have the data to prove that centralized custodians can’t be trusted (unfortunately, too much data)
We’ve seen time and time again that centralized parties fail to keep your crypto safe. This is an unfortunate fact of the centralized side of the crypto industry. It’s all too common for centralized players to fail and take their user’s assets down with them.
When you rely on an exchange to custody your assets for you, you’re putting your money into nothing more than an unregulated bank.
From FTX and Celsius in 2022 to Mt. Gox all the way back in 2014, centralized exchanges failing is all too common in crypto. The best way to protect yourself against centralized failure is to hold your crypto assets yourself and govern shared assets on-chain with smart contracts at the center of incentive alignment and decision making. You might’ve heard the phrase “not your keys, not your crypto” and unfortunately it’s all too true.
Read our guide to learn how to set up a crypto wallet.
Running on-chain is what makes DAOs truly decentralized and autonomous
We believe it’s important to take your DAO on-chain from the start. That’s why we’re building modular, adaptable tools to help your organization do just that. With tools like the no-code Aragon App and its underlying protocol, organizations can adapt and grow to build structures we can’t yet imagine today!
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