Web3 and DAOs – the next hype?

Both technical and associated organizational decentralization are taking on an ever-increasing role due to the disruptive technologies DLT and blockchain, and continue to advance as new use cases and application areas are established [1]. DLT and blockchain enable companies to establish new relationships and business models in an inter-organizational context and thus meet increasing demands resulting from factors such as globalization, rapid technological progress, intensified competitive environment or increased cost pressure. Interorganizational relationships are not a new phenomenon [2]. On the contrary, their relevance is increasing as a result of the factors mentioned. But which blockchain and DLT-based use cases and application areas will establish themselves in the long term? This question is currently still up in the air, although the technologies have already established themselves in many respects in application areas such as P2P payments, tokenization of assets, crypto trading or tracking and tracing [3]. New trends and application areas are emerging at a rapid pace, and the implications for the financial sector are in some cases enormous [1].

A new and increasingly growing trend are decentralized autonomous organizations (“DAOs”) [4]. In my opinion, the relevance of DAOs can be determined by two important developments. First, DAOs are leveraging blockchain technology, which has already established itself in many application areas and will continue to gain relevance in the future. Second, DAOs are emerging in the new phase of the Internet: Web3.

The Change from Centralization to Decentralization

In the article “Does Decentralization Guarantee Stability?“, I reported on the shift toward an increasingly decentralized information technology infrastructure, which is being driven forward by Web3 [5]. For this purpose, the social media networks Twitter and Facebook served as examples of increasing decentralization.

Web1, Web2, and Web3 refer to the developmental phases that the Internet has undergone since its inception and, in the case of Web3, is currently undergoing [6]. Web1, the first iteration of the Internet age, also known as the “read-only web,” was primarily used for purely static information retrieval [7]. Web2, on the other hand, enabled the emergence of dynamic interaction and communication platforms, some of which have developed into powerful players, such as Facebook, Instagram, Uber or AirBnB [8] [9].  Examples of the Web2 era are social media, podcasts, or social networking [6]. The next evolutionary stage, Web3, is also called “read-write-execute”, “executable web” or “semantic web” [7] and uses new, innovative and disruptive technologies, such as AI, DLT and blockchain, for a personalized digital experience [8].

Figure 1: History of the Web [10]

Web3 is characterized by the following three main features:

  • Open: apps, also called “decentralized apps” or “dApps”, use blockchain technology (for example, Ethereum for the development of dApps) and can be developed and deployed using open-source software. They are no longer deployed in a centralized way (for example, by a company) but in a decentralized way [11] [12]. Developers are compensated for the development [12].
  • Trustless: no intermediaries are needed for interactions. These take place directly between the actors [8] [13] [12], i.e., Web3 is no longer controlled by large players who provide suitable platforms for exchanging and generating information, but by the users themselves [14]. As a result, the data belongs to the users and no longer to the big players.
  • Permissionless: use is not regulated by a central authority, but is open to all interested parties [12] [8].

The driving force behind Web3 is blockchain technology, which also ensures that in the new age of the Internet, data is managed in a decentralized rather than centralized manner [16]. This means that currently large players of Web2, also called “BigTech”, can no longer dispose of data in its current form, which will significantly limit their power in our digital age [17].

Figure 2: Twitter post by Elon Musk and Jack Dorsey. [15]

Web3 should ultimately lead to a smarter version of the Internet we currently know, as it enables even more customized content through the use of disruptive technologies and also links humans and machines even more closely [11]. Rather abstract, but reality in the near future!?

What Are DAOs and How Do They Work?

A DAO is a “decentralized autonomous organization”, an exclusively virtual and decentralized form of collaboration based on the Ethereum blockchain [18] [19] [20]. In simple terms, it is essentially a form of virtual collaboration between users or groups of users who pursue a common goal [21]. In comparison to listed companies, the right to participate in decision-making processes is not acquired through the purchase of shares, but through the purchase of tokens [4] [18]. The proceeds of the issued tokens serve the common goals, which are implemented within the DAO [4]. The goals of the DAOs are implemented through the voting of the token owners and the accompanying execution of smart contracts [22].

The goals agreed upon in DAOs are diverse and are jointly coordinated according to established rules. For example, DAOs exist that position themselves as (NFT) investment communities, fundraisers, or supporters of social projects [23]. Since 2016, several DAOs have already formed, such as “The DAO”, “PleasrDAO“, “MetaCartel Venture” or “Komorebi Collective“. In the following, the terms of the DAO, “decentralized”, “autonomous” and “organization” are explained individually.

“Decentralized”

Decentralized in this context means using blockchain technology to interact within the DAO, i.e., to issue tokens via smart contracts [24], to manage, and to hold or invest their proceeds [4]. The resulting transactions are stored on the blockchain.

“Autonomous”

DAOs act autonomously, i.e. without a central authority, an intermediary or a management as in traditional companies. Decision-making takes place collaboratively. Blockchain technology also automatically establishes trust, as a result of the technical setup and the resulting immutability of data [4].

“Organization”

The organization is the association of various stakeholders in pursuit of a common goal within the DAO. For example, some DAOs consist of groups of developers or investors [19].

There is as much controversy about the advantages and disadvantages of DAOs as there is about blockchain technology itself. The advantages certainly include the autonomous organization and the simplified and shared decision-making, which is controlled automatically by smart contracts. Disadvantages arise from the ambiguous legal framework (how is a DAO to be legally declared?), and potential errors in the coding of smart contracts, which are the core of a DAO. A well-known example of such an error is “The DAO” [25].

Outlook

DAOs allow users to join together and pursue a common goal without relying on a central controlling authority or intermediaries [18]. In my opinion, it is to be expected that in addition to already existing DAOs, for example investment DAOs, social DAOs, game DAOs, music DAOs, art DAOs, media DAOs, and special interest DAOs [26] [27], new kinds of DAOs will emerge. Extreme DAO advocates expect a complete transformation of traditional collaborations. I think this development is unlikely, primarily I would forecast a parallel development of more DAOs. Blockchain and DLT use cases are always accompanied by the drawbacks of unregulated governance structures and lack of oversight [4]. Nevertheless, it can be seen that the potential uses of blockchain and DLT are diverse and new use cases can be expected in the future as well. In this context, it is necessary to evaluate in which application areas and use cases the technologies will establish themselves on the market in the long term.


Sources
[1]      P. Treleaven, R. G. Brown, and D. Yang, “Blockchain technology in finance industry,” Trans. Korean Inst. Electr. Eng. , vol. 50, no. 9, pp. 14-17, 2017, doi: 10.1109/MC.2017.3571047.

[2]      O. Mack, Configuration and coordination of enterprise networks. A general network model. Springer, 2003.

[3]      K. Zīle and R. Strazdiņa, “Blockchain use cases and their feasibility,” Appl. Math. Comput. Syst. , vol. 23, no. 1, pp. 12-20, 2018, doi: 10.2478/acss-2018-0002.

[4]      S. Wang, W. Ding, J. Li, Y. Yuan, L. Ouyang, and F. Y. Wang, “Decentralized Autonomous Organizations: Concept, Model, and Applications,” IEEE Trans. Comput. Soc. Syst. , vol. 6, no. 5, pp. 870-878, 2019, doi: 10.1109/TCSS.2019.2938190.

[5]      S. Richards and et. al, “WEB2 VS WEB3.” https://ethereum.org/en/developers/docs/web2-vs-web3/ (accessed Dec. 17, 2021).

[6]      M. Sharma, “Web 1.0, Web 2.0 and Web 3.0 with their difference,” 2021. https://www.geeksforgeeks.org/web-1-0-web-2-0-and-web-3-0-with-their-difference/.

           [7]        N. Choudhury, “World Wide Web and Its Journey from Web 1 . 0 to,” vol. 5, no. 6, pp. 8096-8100, 2014.

[8]      M. Mersch and R. Muirhead, “What Is Web 3.0 & Why It Matters,” 2019. https://medium.com/fabric-ventures/what-is-web-3-0-why-it-matters-934eb07f3d2b (accessed Dec. 17, 2021).

[9]      R. Brahambhatt, “Web 3.0: The New Internet Is About to Arrive,” 2021. https://interestingengineering.com/web-3-the-new-internet-is-about-to-arrive (accessed Dec. 17, 2021).

[10]     S. Voshmgir, Token Economy: How the Web3 reinvents the Internet, 2nd ed. BlockchainHub Berlin, 2020.

[11]     W. Vermaak, “What Is Web 3.0?,” 2021. https://coinmarketcap.com/alexandria/article/what-is-web-3-0 (accessed Dec. 17, 2021).

[12]     J. C. Martinez, “The Future of the Internet: Web3 and Why Developers Should Learn It,” 2021. https://livecodestream.dev/post/web3-intro-for-devs/ (accessed Dec. 17, 2021).

[13]     Investopedia, “Web 2.0 and Web 3.0,” 2021. https://www.investopedia.com/web-20-web-30-5208698 (accessed Dec. 17, 2021).

[14]     B. Allyn, “People are talking about Web3. Is it the Internet of the future or just a buzzword?,” 2021. https://www.npr.org/2021/11/21/1056988346/web3-internet-jargon-or-future-vision?t=1639745865463 (accessed Dec. 17, 2021).

[15]     Https://twitter.com/, “No Title,” 2021. https://twitter.com/elonmusk/status/1473165434518224896 (accessed Dec. 23, 2021).

[16]     S. Voshmgir, “Tokenized Networks: Web3, the Stateful Web,” 2021. https://blockchainhub.net/web3-decentralized-web/ (accessed Dec. 23, 2021).

[17]     K. Canales, “The next age of the internet could suck power away from Big Tech while living on the same backbone as cryptocurrencies. Here’s what to know about Web3.,” 2021. https://www.businessinsider.com/what-is-web3-internet-blockchain-cryptocurrency-web1-web2-future-2021-12?r=US&IR=T (accessed Dec. 23, 2021).

[18]     ethereum.org, “Decentralized autonomous organizations (DAOs).” https://ethereum.org/en/dao/#what-are-daos (accessed Dec. 16, 2021).

[19]     Aragon, “What is a DAO?” https://blog.aragon.org/what-is-a-dao/ (accessed Dec. 17, 2021).

[20]     Q. Dupont, “8 Experiments in algorithmic governance A history and ethnography of ‘ The DAO ,’ a failed decentralized autonomous organization,” vol. 2016, 2016.

[21]     Y. El Faqir, J. Arroyo, and S. Hassan, “An overview of decentralized autonomous organizations on the blockchain,” PervasiveHealth Pervasive Comput. Technol. Healthc. , 2020, doi: 10.1145/3412569.3412579.

[22]     M. A. TOMASULO, “DAOs: Understanding the Basics,” 2021. https://www.winston.com/en/the-playbook/daos-understanding-the-basics.html (accessed Dec. 23, 2021).

[23]     T. Locke, “What are DAOs? Here’s what to know about the ‘next big trend’ in crypto,” 2021. https://www.cnbc.com/2021/10/25/what-are-daos-what-to-know-about-the-next-big-trend-in-crypto.html (accessed Dec. 17, 2021).

[24]     A. Norta, “Creation of Smart-Contracting Collaborations for Decentralized Autonomous Organizations,” in Perspectives in Business Informatics Research, 14th Inter., Springer International Publishing, 2015.

[25]     D. Smartcontract, “Example of Smart Contract Failure: The DAO Attack,” 2019. https://medium.com/@drsmartcontract/example-of-smart-contract-failure-the-dao-attack-c2295ca9f214 (accessed Dec. 23, 2021).

[26]     J. Lasica, “The different flavors of DAOs in Web3,” 2021. https://digitalcultureworks.com/the-different-flavors-of-daos-in-web3/ (accessed Dec. 19, 2021).

[27]     C. Hackl, “What Are DAOs And Why You Should Pay Attention,” 2021. https://www.forbes.com/sites/cathyhackl/2021/06/01/what-are-daos-and-why-you-should-pay-attention/?sh=662cd7b47305 (accessed Dec. 19, 2021).

Benjamin Schaefer
Latest posts by Benjamin Schaefer (see all)

Was sind Deine Erfahrungen mit dem Thema? (Kommentieren geht auch ohne Anmeldung oder Einloggen; einfach kommentieren, auf Freigabe warten und fertig!)