This article is written by @m0xandrew in collaboration with @contentguildxyz.

The 3-Headed Problem

DAOs are a historic shift in how people organize and work together. The way work gets done is a key driver of the economy and society broadly. Even modest improvements in this space will have dramatic implications. Three main factors are restricting the growth of DAOs: identity, replicable organizational structures, and real world applications. This said, solutions are not just possible, but currently in development. The success of these solutions will directly correlate with DAOs becoming increasingly widespread and impactful.

The Identity Problem

The most apparent challenge with the current generation of DAOs is identity. The ideal DAO is fully democratic, with each user or stakeholder receiving equitable voting power. This is not yet possible because a single user can easily create multiple accounts, or addresses, to vote multiple times (aka a sybil attack). As a result, DAOs use token voting to shift decision making to the users who are most financially invested in the project. Token voting parallels Ethereum's Proof of Stake consensus mechanism. Though PoS and token voting have issues, they are currently the best existing options to prevent Sybil attacks and grant ownership to those with the strongest financial stake in the project. Nevertheless, identity remains the end goal for systems that are meaningfully democratic. The lowest standard must at least match that of existing cooperatives. Work is being done in this space; notably, Gitcoin Passport can provide a level of Sybil resistance by providing evidence of humanity through interactions with a number of platforms and protocols. However, this approach does not solve the problem completely. Web2 approaches have existed for years: to a name a few, SMS verification and Captcha. Text verification, used by apps like Venmo, have limitations in the form of the backend infrastructure needed to support this process, and international users without access to a domestic phone number. Even more, burner phones can be accessed fairly affordably using prepaid SIM cards. Captcha also faces issues and is becoming less reliable than it used to be with rapid advancements in computer vision on tasks like object identification. In short, no existing method can dependably prove an account is controlled by a unique human. A democratic DAO needs to answer this problem to prevent votes from being manipulated by duplicate or bot accounts. While a perfect system does not exist, systems already exist that are good enough. Governments depend on ways to identify unique humans using tools like birth certificates, Social Security numbers, driver's licenses, and passports. The remaining uncertainty rests on of it is possible to sufficiently decentralize these processes, if it is possible to integrate the existing structures, as stablecoins do with fiat, or if an entirely new approach is needed for DAOs.

The Replicability Problem

The second challenge faced by DAOs constricting potential growth is the availability of replicable organizational structures: meaning platforms need to exist that can easily be used off the shelf for teams with varied degrees of technical background. In my opinion, this is the largest obstacle to widespread blockchain adoption. There is too much friction compared to web2 and offline alternatives. Problems like managing and navigating wallets, networks, and high gas fees lead many to choose centralized alternatives. The problem becomes even more evident as more sophisticated technology is necessitated, even the technically savvy experience issues easily creating, connecting, and coordinating multisig wallets. Scaling a DAO currently requires a detailed understanding of the bleeding-edge legal world of DAO incorporation to be able to properly interface with existing governmental and corporate structures. Platforms like Tally make the technical side of this process more manageable and provide resources for navigating it. Tally is industry standard for DAO formation, launch, and operations. Protocols looking to decentralize have a vast, battle-tested tool chest to deploy across one or ALL governance compatible chains (see Tally’s announcement of MultiGov™, a multichain governance solution developed with Wormhole). Tally works with OpenZeppelin who created and is continuing to innovate on its Governor contract which enables new possibilities for governance and suit more teams. The contract is battle-tested, modular, upgradeable and trusted by the largest DAOs in crypto (Arbitrum, Uniswap, etc). Teams looking to form DAOs need well-charted paths, platforms, and legal structures that can be easily adopted and are more compelling than centralized alternatives. Progress is being made both on core infrastructure as well as governance-specific tooling.

The PMF Problem

DAOs need to be able to solve real world problems and DAOs have the potential to solve a number of practical problems across the industry. Corporations spend substantial sums on operating expenses like compliance, rights management, and capital distribution. All of these problems can be addressed programmatically using onchain data, allowing businesses to operate dramatically more efficiently and reliably. Tools like CoinTracker already help simplify the process of income tax reporting by scanning the network for your transactions. Traditional investment brokerages require custom tools to offer the same functionality. Onchain verifiability opens new possibilities for interacting and collaborating with others teams too. Workers and contractors will have the ability to check books transparently and know they are being fairly paid. To be fair, total transparency is likely not attractive for most teams, the tension highlights the importance of replicable organizational structures: optionality. Many will opt for some balance of onchain, offchain, and zk operations to enjoy a balance of transparency and privacy to maintain demonstrable fairness, competitive advantages, and user data. Real world applications for others refer to branching out to include more traditional sectors. Forcing to DAOs cater strictly to onchain problems and communities limits DAOs to a small fraction of society; the strategy makes sense for early adopters who are able to navigate the high friction of participation but DAOs will need to expand. Content Guild is a good example of this: initially focusing on developing web3 content, nothing prevents the DAO from using these initial clients as a launching pad to create content in a number of sectors for many different types of clients. The process of business, technical exploration, innovation will introduce the DAO structure to a broader population. DAOs enable more teams, workers, and business partners to benefit from the advantages offered by efficiency and transparency.

Outlook

Just as cryptocurrency brought digital money to a higher paradigm, DAOs can bring collaboration in tow. The significant importance of human capital and cooperation in the modern economy is a unique and potentially massive opportunity for the DAO structure. Best practices are emerging & solidifying, tooling is maturing, and the UX/UI of decentralized governance is beginning to improve. DAOs have many obstacles to overcome but the future is bright & the teams building that future are more than capable.

Onwards.

This article is written by @m0xandrew in collaboration with @contentguildxyz.

To learn more about Tally visit tally.xyz or DM us @tallyxyz.