DAOs will prevent another FTX

Plenty of people have shared differing opinions on what the FTX debacle means for crypto, for the good or the bad. Still, few have suggested how crypto might help to prevent future, similar events down the road. 

Enter the DAO.

No, I don’t mean the Ethereum-based organization that was hacked in 2016, but the  organizational framework that consists of a shared cryptocurrency wallet, a vision and a group of people who believe in working together to see that vision through.

Prosecutors in the criminal trial of Sam Bankman-Fried are trying to show that FTX failed because of the greed of a few individuals who held the keys to all user funds. What if that didn’t have to be the case? Can’t exchanges be profitable and protect the user at the same time?

Fraud predates the rise of the crypto industry by many years. You don’t need to use crypto to steal other peoples’ money. But a DAO, as a structure, gives us a unique set of tools with which to fight fraud. 

Many may think that a DAO works by just using a token to vote on all major decisions. In reality, however, DAOs and token-based governance are much more complicated than they seem. And as we’ve seen across many DAOs, token-based voting can end up concentrating the bulk of power with only a few, a problem exacerbated by far lower participation across the board than in traditional elections.

We need better safeguards, both for ensuring DAOs don’t turn into plutocracies and for ensuring that one person can’t abscond with any on-chain organization’s funds. That includes exchanges —  whether they’re run by a leadership team or run by their community. 

Imagine if any movement of user funds was locked at the smart contract or software level, without any backdoor. Mix in a third-party audit that proves that user funds are locked as early as pre-launch. Throw in a safeguard that any changes to code related to user funds have to be approved via a vote involving all users. 

Read more from our opinion section: Swipe right? SBF’s ‘Love is Blind’ approach to politics was never real

An aspirational analogy for this hypothetical DAO structure is Coinbase, except that this exchange would be run by its users, who even elect the executive team. These executives’ terms would be limited by yearly performance metrics. If the elected executives of this DAO exchange engaged in activity that goes against the exchange’s rules, they would lose their office early. By rules, think about something like a mix between a DAO’s manifesto and a traditional exchange’s terms of service. 

This type of DAO would put users’ rights directly in its code of conduct, with something as simple as the following in its rules — “User funds will never be used as liquidity for trading with other institutions.”

Because no one’s really done this before, we’d be bridging the gap between traditional and decentralized financial services by turning an exchange to a DAO. An exchange both led and not led by the people. The basic building blocks would be a matching engine, an order book, a token and carefully embedded logic to slash token stake under certain conditions. The key differentiator would be true user leadership. DEXes are not run that way now. The bulk of DAOs are not either.

If a majority vote from users can always oust members of the core team when they go against user interests, then the core team has a mandate to always put those interests first or face the consequences. 

In other words, before another FTX happens, the community would stop it short. 

Is that too much to hope for?

I don’t think so. 

This is the future we’re all moving toward, one in which exchanges answer to their users, all the time. Isn’t it time for skin-in-the-game to rule? 

Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.