DAOs and centralized organizations must work in tandem

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Since David Chaum introduced decentralized blockchains in his 1982 thesis, the goal has been to create systems free from the corruption of central authority. Decentralized autonomous organizations are now emerging as alternatives to traditional organizations such as LLCs or nonprofits.

But what if there was a way for DAOs to work alongside centralized organizations while maintaining their core purpose of operating as self-governing, decentralized entities governed by the collective decisions of their members?

Wyoming DAO law

In 2021, the state of Wyoming enacted the “Decentralized Autonomous Organization Addendum.” This law allows DAOs to be officially recognized as LLCs, allowing them to enter into legal contracts and own property without the need for off-chain shell companies. This new status provides DAOs with opportunities to raise funds through both token sales and traditional funding avenues.

Additionally, DAOs can leverage R&D facilities, employ staff, and utilize RegTech, all while maintaining decentralized, transparent, and democratic decision-making processes. This legal recognition opens up new ways for DAOs to effectively collaborate with centralized organizations, combining the strengths of both models to drive innovation and growth.

Benefits of collaboration discovered

Initially, blockchain projects started out in a monolithic format, with everything bundled together in a single stack. However, as the technology matured, specialization and optimization at each layer became important for scalability and efficiency.

Centralized organizations have significant resources, structured processes, and access to traditional financing channels. These advantages can significantly help DAOs scale their operations and streamline legal agreements.

Moreover, one of the most compelling benefits of such collaborations lies in improving governance and decision-making processes. DAOs excel at decentralized governance, allowing members to directly influence the direction of a project and thus reflect a broader stakeholder base. Fairer representation is achieved by integrating various voting mechanisms, such as Quadratic Voting.

To further scale up this collaboration, we can leverage one of the biggest benefits of DAOs and blockchain technology: transparency. By combining DAOs with decentralized finance, we can create systems where every transaction is permanently recorded and tied to a community vote. This ensures that all spending within an organization is completely transparent and accountable to its members.

This transparency could significantly change how traditional organizations track spending. It prevents fraud from going undetected and allows everyone to see how and where money is being spent. This level of transparency is especially effective for nonprofits. Members and donors can see exactly where their money is going and how much is being spent, which can prevent cases like the Arts Center Plan, where more than $1.1 million was embezzled by a low-level accounts receivable employee.

Another major benefit is the use of smart contracts to automate processes. Smart contracts can streamline transactions by executing predefined actions when certain conditions are met. This makes work more efficient by reducing administrative overhead and human error. It also ensures that everything is done transparently and according to agreed-upon rules, which strengthens trust and accountability in both centralized and decentralized environments.

Potential deficiencies

Not everything that seems too good to be true probably is. Combining DAOs and centralized organizations presents many challenges and problems, but there are ways to avoid and mitigate many of these issues.

The primary concern with DAOs is the cost of voting. Since votes must be made on-chain to execute the smart contract, transaction costs can add up quickly, especially with a large number of proposals.

One proposed solution is off-chain voting. However, off-chain voting carries the risk of manipulation and centralization. An alternative approach involves using zk-rollups, which run transactions on a zk-rollup L2 chain. This method splits transactions into groups and sends them to the L1 chain, significantly reducing fees and increasing efficiency.

Another major concern is that introducing a centralized aspect into a decentralized system diminishes the value of a DAO and creates significant risks. While Wyoming’s DAO law does not require primary owners to verify their identities, operational and legal considerations may require individual verification, particularly when interacting with financial institutions or engaging in regulated activities.

Tools for the future

Collaboration between DAOs and centralized organizations offers exciting possibilities for the future. This partnership could transform how we address governance, transparency, and operational efficiency across industries. By combining the decentralized nature of DAOs with the resources and structured processes of centralized organizations, we get the best of both worlds.

Looking ahead, we can expect more jurisdictions to develop legal frameworks similar to Wyoming’s DAO law. This will provide DAOs with the legal recognition they need to operate alongside traditional organizations and pave the way for seamless collaboration and innovation.

This hybrid model brings the efficiency and resources of centralized organizations while preserving the transparency and democracy of DAOs. This blending of decentralized and centralized approaches is set to redefine how organizations operate, making the future of governance and operations more democratic and effective.

Neil Shah

Neil Shah is a visionary entrepreneur passionate about AI, web3, finance, and computer science. He founded InSight3D, a company at the forefront of technological innovation. Neil is also the co-founder and president of The Brave Heroes Foundation, a nonprofit organization dedicated to supporting pediatric cancer patients and their families. His journey into the world of web3 began with an early project where he built a paper trading platform for cryptocurrency. This initiative aimed to introduce more people to crypto and spark Neil’s deep interest in web3 and DAOs. Through his work with InSight3D and The Brave Heroes Foundation, Neil continually strives to use technology to create meaningful societal impact while exploring new frontiers in the digital realm. His commitment to innovation and community service defines his approach to entrepreneurship.