The crypto industry is clear on the benefits of decentralized autonomous organizations; they’re democratized, transparent and governed by agreed-upon protocols. Rather than operating at the whims of a leadership group, they’re shaped and directed by the participants themselves. However, they’re not without inherent weakness. In addition to the vulnerability any tech-based process has to hackers, one of a DAO’s strengths — democratization — could be used against it.
Democracy has famously been described as “two wolves and a sheep deciding what’s for dinner” — that is, stronger, larger parties can end up co-opting what’s meant to be a fair process. DAOs can suffer a similar weakness when “whales” — those with the most keys — end up having an outsized influence. It’s a vulnerability that may allow those who feel threatened by a DAO in particular or the system in general to manipulate the system through heavy, focused investment.
Finding ways to address inherent manipulation risks in DAOs must be a focus of crypto leaders and enthusiasts for the industry to grow. Here, five members of Cointelegraph Innovation Circle discuss ways the crypto industry can come together to better secure DAOs from manipulation.
Discuss the issue publicly
It’s essential for the founders of a DAO to publicly talk about the risks and work with their whole community to try to solve them. It’s also important to come up with plans on how to navigate hard situations. However, it’s always also important to remember that the smaller a DAO is, the more power a few people will hold over the ecosystem. - Tim Haldorsson, Lunar Strategy
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One way DAO manipulation risk can be minimized is through the issuance of nonfungible tokens. By issuing NFTs to contributors’ wallets, DAOs can verify the uniqueness of each individual. In contrast to a token-based voting model, NFT dispersion can allow for better decentralization and decrease the chances of whales securing majority voting rights. - Gabe Frank, Arcade
Ensure long-term incentives are aligned
The best way to ensure DAOs are resistant to manipulation is for incentive systems to be well-designed and kept in a dynamic tension. Bitcoin, the biggest DAO, succeeds because although different user types (miners, businesses, users, etc.) may have different wants, all of them have long-term aligned incentives. - Irina Litchfield, Rizon Labs
Establish KYC/KYB processes
By requiring holders to complete a Know Your Customer/Know Your Business process to verify the identities of the DAO participants, industry players can minimize a party’s ability to manipulate the system. “Know Your” procedures help make sure that the votes being made by participants are indeed being made by a large number of diverse entities and not by a small number of entities that hold large amounts of anonymous voting wallets. - Tomer Warschauer Nuni, Kryptomon
Research fellow DAO members
It’s not just down to the “industry players”; it’s also up to the individuals to patrol and protect the DAO. Research your fellow members, and don’t be afraid to call out bad actors. Everyone in a DAO should be the same as another and should earn respect where respect is warranted. - Rupert Barksfield, Amulet
This article was published through Cointelegraph Innovation Circle, a vetted organization of senior executives and experts in the blockchain technology industry who are building the future through the power of connections, collaboration and thought leadership. Opinions expressed do not necessarily reflect those of Cointelegraph.