DAOs: The Next Blockchain Frontier?

Decentralized Autonomous Organizations (DAOs) came back into the news in 2021, generally falling into two categories: blockchain projects generally centered around the issuance of Ethereum-based tokens, and blockchain-powered crowdfunding ventures for investors.

To say that DAOs got off to a rocky start would be something of an understatement. The original DAO, formed in 2016 under simply that name, lost more than $50 million dollars in Ethereum to hackers within a month of their formation, and for a time it seemed like the organization was just another crypto dead end—a place to lose money.

But with the explosion of DeFi over the course of 2021, DAOs are back in the public eye – they’re being used to buy NFTs, for charity, or purchasing rare memorabilia from a rare Wu Tang Clan CD to an attempt to pick up a rare copy of the U.S. Constitution.

And on paper, it’s an idea that makes sense – a DAO’s financial transactions and rules are recorded on the blockchain, eliminating the need for third parties and pushing a fully democratized structure through smart contracts. If Web 2.0 was defined by crowdfunding offerings like Kickstarter and GoFundMe, then DAOs could make sense as the evolution for Web3.

In practice, a number of concerns continue to make this a murky area for investors looking for the next frontier. OlympusDAO, along with a number of forked projects based on it, lost nearly 53% of their token’s value since January 10, including a staggering 32.6% drop over a 24 hour period.

It’s the kind of volatility that drives burn rates through the roof in the Ethereum market, and that’s without even considering legal hurdles – regulatory compliance remains a real question in the space, with the ability of DAOs to meet basic Anti-Money Laundering criteria still something of a problem in the DeFi space in general. The immutability of smart contracts is one of the big appeals of working on the blockchain – and by far one of the biggest issues in a regulatory environment where modifications may be necessary to meet changing laws.

But innovation is key in these spaces, and there’s reason to hope that DAOs can meet the promise of a transparent, democratized cooperative environment in the future. For now, though?  It’s a risky proposition.