• Establishing a coherent governance structure for crypto is imperative in protecting existing users as well as fostering confidence levels for future onboarding
• Work needs to be done to upgrade existing DAOs to include better corporate governance procedures and company-related systems, like payrolls. Voter apathy is also an issue that existing DAOs need to solve.
• Regardless, DAOs have the potential to revolutionize the way communities and institutions organize ourselves

Fostering a greater uptake of crypto has been a conundrum faced across the industry since time immemorial. Many have suggested that allowing for better accessibility and having more household or reputable brands enter into the space could amp up crypto’s adoption rate. This looks like Starbucks’ new NFT loyalty rewards program that offers its caffeine lovers new and innovative ways of engagement in their brand-new web3 community.

Yet for most within and outside the industry, one of the main points of concern is still regulation and security. Especially in light of recent high-profile attacks such as Binance’s BNB smart chain hack that occurred earlier this month, anxiety levels in the space are running higher than ever before. Unfortunately, even with over $560 million worth of BNB stolen from the smart chain’s liquidity pools, it sadly accounts for just another statistic amidst a sea of repeated attacks within and outside crypto institutions. According to New York-based blockchain research firm Chainanalysis, a reported $718 million has been stolen in October this year alone.

In the wake of such devastating hacks especially in a crippling bear market, many institutions are already ramping up their firewalls and safeguards to protect their digital assets. Activities on bug bounty websites are buzzing like never before, and asset custody solutions are selling like hotcakes. Yet despite these safeguards, it would perhaps be wise to address the long-standing elephant in the room – regulation. Indeed, it would be fairly intuitive for many to believe that working with state regulators and enforcing traditional corporate governance within DeFi platforms may potentially be the obvious answer towards potentially make things safer for users, at least on the accountability front.

Yet this precisely goes against the ethos of decentralization that many in the crypto community enshrine as gospel – that decision-making capital in these networks ought to be distributed across the network as opposed to being solely concentrated within a centralized entity. Herein lies the dilemma: how does governance in the crypto space then operate in a safe and effective manner while maintaining a healthy level of decentralization?

To find out more about decentralized governance, we spoke with Bobby Ong, the COO and Co-Founder of CoinGecko, the world’s largest independent cryptocurrency data aggregator which tracks over 13,000 crypto assets from more than 500 exchanges worldwide. Bobby, who oversees all non-engineering functions on the CoinGecko team, is focused on staying on top of current crypto trends in order to equip users with reliable and accurate data for making well-informed decisions in the space.

“Bad actors and the various hacks in crypto have tainted external perceptions of the industry,” Bobby agrees. “As projects innovate through code, loopholes sometimes emerge, and these become vulnerabilities that are then exploited by hackers. Greater regulatory clarity, along with an appropriate regulatory regime, can instill greater confidence for users who are new to crypto.”

While decentralized governance structures may not be able to fully ward off attacks and exploits for DeFi platforms, they are crucial in the lead-up towards ground zero, as well as post-attack reconciliation. For instance, having an efficient and fair governance structure is important in ensuring that quorum is reached as soon as possible once the attack sets in, so that the organization can quickly carry out appropriate necessary actions to stymy further attacks or deploy necessary safeguards to protect any remaining assets. Having a solid governance structure also ensures that accountability and transparency is maintained at all times, which contributes towards establishing clear action plans in the event of potential attacks in the future.

A DAO, or Decentralized Autonomous Organization, is a fully autonomous organization that is governed through smart contracts on the blockchain, Bobby explains. DAOs allow participants to co-operate with each other without having to rely on a central authority. Additionally, since DAOs run on code, their operations are transparent to all users and cannot be easily tampered with.

However, DAOs in their current state are far from perfect, I argue. Due to the complex nature of organizations, it becomes almost impossible to properly capture and express the entirety of the organization in code. As such, DAOs are oftentimes reduced to menial code-appropriate tasks such as digital signature verification and on-chain asset management.

“DAOs are effectively a first iteration of a business enterprise on the blockchain,” Bobby agrees. “DAOs often do not have the benefit of regulation and other core company-related systems like payrolls and corporate governance procedures.”

Bobby on a panel discussion during Token2049

As Bobby says, it might be too early for DAOs to serve as substitutes for standardized and institutionalized corporate governance and compliance (CGC) due to the nascency of the technology. However, even technological complexity is only but one point of concern regarding DAOs, as Bobby tells us.

“One of the biggest problems with governance for DAOs is voter apathy,” he explains. “That happens when people do not care to vote on a certain decision unless they are incentivized to do so.” This is particularly dangerous especially when the institution or platform is tasked with having to make important decisions quickly – being unable to act timely due to an inability to achieve quorum may have potentially devastating consequences for the community and organization.

Additionally, DAOs themselves may be exploited for malicious purposes too, such as “government hacks”, where votes are manipulated through an accumulation of tokens or bugs by a particular user. In these instances, a hostile takeover of the organization could theoretically take place if a user holds more voting shares or power than the rest of the collective community within the DAO organization. In February this year, the Build Finance DAO was a target of a hostile governance takeover, wherein a malicious user had proposed and succeeded with a bill to assume control over the organization’s native token. This saw the user gain full control over the platform’s minting keys, governance contract, and treasury, according to Build Finance.

However, Bobby remains confident in the future of DAOs nonetheless: “DAOs should be seen as the next step for corporate structuring,” he says.

“Communities are hungry for effective and frictionless social coordination systems, and DAOs may be just that solution the moment all pieces fall into play.”

In fact, Bobby goes insofar as to suggest that DAOs are the next step for corporate structuring. He argues that existing corporate systems like company registrars often operate in silos and in isolated regions. However, DAOs on the other hand need not be incorporated under a specific country. Important business management tools such as payrolls and HR systems are already being built on the blockchain, which will further galvanize the idea of moving business operations towards a borderless front, Bobby says.

While Bobby may be right that the tools he mentioned are currently in the works – Web3 entities such as Yield Guild Games (YGG) are already implementing payroll systems in their DAO structures – there remains some pertinent questions pertaining to the efficacy of DAOs that demand answers. The existing mechanism of token-based voting is still likely to persist in the future, even if the technological creases could be ironed out eventually, I protest. This is still likely to lead to vulnerabilities of hostile takeovers which hurt the organizational integrity of DAOs in DeFi projects.

“Weighted votes based on token holdings often result in too much power being concentrated in the hands of one or a few whales,” Bobby agrees. “However, this structure is also existent in traditional shareholding structures. Furthermore, we are already observing how various DAOs are experimenting with alternative governance models, such as time-weighted governance, NFT-based reputation systems, and two-house systems.”

Indeed, power consolidation may not be mutually exclusive to just DAOs – hostile takeovers often threaten even traditional and well-established institutions. Nevertheless, this is still a significant point of note especially in light of Ethereum’s merge from a Proof-of-Work (PoW) consensus algorithm to a Proof-of-Stake (PoS) network. Currently, over 30% of all staked ETH lie in the hands of 5 institutions, leading many to speculate over the risks of censorship and centralization over the Ethereum network.

Still, Bobby believes that DAOs herald a promising future.

"There are a lot of experiments being run across various DAOs”, Bobby ponders. “The most successful DAOs are the ones that can attract the most knowledgeable, responsible, and active members from the crypto community.”

Indeed, more and more project developers are becoming more discerning towards the efficacy of decentralized governance. The Metaverse for instance, has stoked this debate on centralisation ever more especially in the wake of abuse and toxicity that have run rampant on platforms such as Decentraland and The Sandbox.

“There’s been a lot of experimentation from Web3 game developers regarding the balancing of how much should be on-chain VS off-chain,” Bobby surmises. “Although, at the end of the day, to have decentralized governance, there also needs to be decentralized infrastructure. So, both these aspects need to be accounted for.”

There definitely remains work to be done, especially on building a reliable DAO that is able to not only be resilient to malicious takeovers, but is also written by and comprised of the community’s best. As the community’s alternative to state regulation, well-developed DAOs are quite likely integral to the onboarding of more users and subsistence of decentralized projects, as well as the continued existence of crypto as a decentralized entity.

“We are still early in the space,” Bobby assures. “There is still more to come.”

This is an Op-ed article. The opinions expressed in this article are the author’s own. Readers should take the utmost precaution before making decisions in the crypto market. Coinlive is not responsible or liable for any content, accuracy or quality within the article or for any damage or loss to be caused by and in connection to it.