Decentralized Autonomous Organizations (DAOs) have experienced rapid growth in recent years, fueled by the growing popularity of blockchain technology and the potential for new forms of decentralized governance.

However, as DAOs' popularity has grown, so has the regulatory uncertainty surrounding them. Despite this uncertainty, DAOs are growing and evolving, paving the way for new forms of decentralized governance and collaboration.

What Are DAOs?

A DAO is a blockchain-based decentralized organization run by smart contracts. It is a method of establishing a decentralized community with shared goals and values, with decentralized and transparent decision-making.

A decentralized autonomous organization (DAO) is essentially a digital version of a traditional organization, with the main difference being that it operates on a decentralized network with no central authority or hierarchy.

DAOs have the potential to transform many industries, including finance, healthcare, and supply chain management. They provide a new model for creating and managing organizations that is more transparent, democratic, and decentralized.

DAO Expansion

Despite regulatory uncertainty surrounding DAOs, their growth has accelerated in recent years. Token Terminal data show that the total value locked in DAOs increased from around $50 million in early 2020 to more than $5 billion in early 2022.

A variety of factors have contributed to this expansion, including the growing popularity of blockchain technology, the potential for new forms of decentralized governance, and the rise of decentralized finance (DeFi) applications.

The rise of DeFi applications has been a key driver of DAO growth. DeFi applications have grown in popularity in recent years because they enable the creation of decentralized financial products and services that are more transparent, efficient, and accessible.

Many of these apps are built on top of DAOs, which provide the governance and decision-making infrastructure required to run the app in a decentralized and transparent manner.

Another factor propelling DAO growth is the growing interest in blockchain technology and its potential to transform a variety of industries.

As more companies and organizations become interested in blockchain technology, they are investigating the potential of DAOs as a means of establishing new forms of decentralized governance and collaboration.

Uncertainty in Regulation

Despite their growing popularity, DAOs remain subject to significant regulatory uncertainty. The legal status of DAOs is unclear in many jurisdictions, and there are concerns about their potential use for illegal activities, such as money laundering and terrorist financing.

One of the most significant regulatory challenges confronting DAOs is determining how to define and regulate them. Many traditional regulatory frameworks are intended for centralized organizations and may not be suitable for decentralized organizations such as DAOs.

There is also the risk that overregulation will stifle innovation and limit DAOs' ability to transform industries.

However, efforts are being made to develop new regulatory frameworks for DAOs. The Securities and Exchange Commission (SEC), for example, recently announced plans to create a new regulatory framework for DAOs.

The framework is intended to clarify the legal status of DAOs and ensure that they comply with existing securities laws.

Despite the regulatory challenges that DAOs face, their growth is likely to continue. This is due to the fact that DAOs have several advantages over traditional organizations, including greater transparency, accountability, and democratic decision-making.

As the potential of DAOs becomes more widely recognized, more regulatory frameworks to support their growth are likely to be developed.

Can We Trust DAOs?

DAOs work collaboratively. They can help pave the way to democratizing access to finance and even reshape the future of the business landscape.

However, even with all that potential, it might be prudent to look at them with some skepticism as there are still many risk factors and challenges to overcome.

The fact is that DAOs have the same underlying principles as blockchain tech. As such, their governance models are usually inspired by these very same ideas.

This leads to having multiple actors who interact with their respective communities in the most transparent way possible.

At DAOs core lies a democratic voting structure, in which usually the rule is one token equating to one vote.

And, while these principles sound fair and transparent, they too are flawed.

The inherent flaw is easy to pinpoint as decisions which might be expertise or specific knowledge or skill on a subject aren’t decided solely by those who have the relevant technical know-how. This in turn leads to the community’s best interests not being represented nor aligned with the decisions made.

Some DAOs have found a way to bypass this issue by having the most accurately qualified people to handle the decision-making processes in their respective fields.

However, this leads to another inherent problem in decentralized governance which is slow decision-making processes. Given how long voting mechanisms take to function and consensus to be established, DAOs are likely to move slowly (even the ones that embrace the progressive decentralization methodology).

And, while moving slowly might be an inconvenience, the worst hazard when trying to take a sober look at DAOs is how bad actors are likely to find a way to overthrow the system. Overriding governance and finding a way of doing a hostile takeover through the DAOs own voting system might sound hard to accomplish, but it is certainly a possibility.

In fact, Build Finance DAO just saw it happen as a member managed to have a proposal slip past everyone. And, after flying below their members’ radar, that proposal gave that member full control of both their treasury and the capacity to mint tokens.

Build Finance lost an estimated $470,000.

So, while the system shows a lot of promise and might even be useful outside of the crypto universe, it still has a lot of improvement to do. Luckily, crypto enthusiasts and blockchain-related companies have made a habit of coming up with innovative and clever solutions, so we're sure that DAOs won't be the exception.

Wrapping Up

DAOs are a new and innovative type of decentralized organization that is reshaping a variety of industries. Despite the regulatory uncertainty surrounding them, DAO growth has accelerated in recent years. The increasing popularity of blockchain technology, the potential for new forms of decentralized governance, and the rise of DeFi applications are all driving this growth.

While DAOs face significant regulatory challenges, efforts are underway to develop new regulatory frameworks that are more appropriate for decentralized organizations. As these frameworks mature, the growth of DAOs is likely to accelerate even further, paving the way for new forms of decentralized collaboration and innovation.

One of the primary benefits of DAOs is their ability to form decentralized communities with common goals and values. This can help to promote greater transparency, accountability, and democratic decision-making, all of which are necessary for any organization to build trust and credibility.

DAOs can also be used to develop new types of decentralized financial products and services, such as lending platforms, exchanges, and insurance products. These applications can help to improve the accessibility, efficiency, and transparency of financial services, which can benefit both individuals and businesses.

The rise of DAOs has far-reaching consequences for the future of work. Traditional organizational structures are likely to become less relevant as more organizations become decentralized and distributed. This could result in new forms of work in which individuals can contribute to decentralized organizations while earning income in a more flexible and autonomous manner.

Overall, despite regulatory uncertainty, the growth of DAOs is a positive development for the blockchain industry. These organizations provide a more transparent, democratic, and decentralized way of creating and governing communities.

While there are still regulatory hurdles to overcome, the potential benefits of DAOs are clear, and they are likely to play a growing role in the future of business and finance.