DAOs: FTX Demise Is Win For Decentralization 

DAOs have the potential to shape more than just organizational structures


Blockworks exclusive art by axel rangel


FTX failed, in part, because it was too centralized, according to DeFi adherents — with decentralized advocates now saying the debacle has unexpectedly given DAOs an opening.  

There was little to no transparency of where the crypto exchange custodied customer cryptocurrencies, industry participants told Blockworks. A purported lack of transparency in crypto — ironically, long considered the first open, traceable financial system — is nothing new, from Mount Gox onward. 

Decentralized autonomous organizations (DAOs), on the other hand, have mostly managed to stay out of trouble. And they argue an inherent openness to where their funds are kept and how they move is a key reason as to why. 

While decentralized protocols are still nascent — with infrastructure models and tokenomics setups still in their relative infancy — supporters argue there are lessons to be learned from DAOs in an effort to head off future digital asset blowups on the centralized side. 

DAOs have held their own in the latest market downturn. The stalwart performance, coupled with structural maturations, ought to lead to a “large exit out of centralized institutions into decentralized ones,” according to Nick Almond of FactoryDao, who goes by drnick on Twitter.

“Then, it begins to influence centralized governance,” Almond told Blockworks. 

Technology at the center

The rise of DAO governance functions — with parallels to activism in equities markets — have especially bolstered the legitimacy of such collectives, according to a DAO governance consultant who goes by the pseudonym mel.eth.

The outcome, so far: DAOs have made it possible to legitimize how decisions are made in a public, trackable manner via on-chain governance tokens, mel.eth told Blockworks. 

“DAO technology at the middle, people at the fringes — [this] is a good mental model for how a DAO is different to a company which tends to be more like a republic than a true person to person democracy,” mel.eth said.

The purpose of DAOs is to diffuse power among geographically distant people, but there is no cookie-cutter solution. Centralized exchanges, meanwhile, likewise diffuse trading and transaction power around the world. But key decisions are not in the hands of customers or other stakeholders. 

“In my mind, the best way to build a DAO is — the good, the bad, the ugly — you bake it into the process and you learn from it and you hopefully grow the technology,” he said. “If you think of atoms, very simple bacteria cells, mitochondria — it’s all just code. We are massively complex mechanisms, and DAOs are almost an extension of our desire to multiply and propagate and take our initiatives out of our bodies.”

Blockchain technology is now limited to enabling general financial transactions, according to mel.eth. The majority of powerhouse DAOS use the blockchain to enable token-swapping, lending and aggregating — similar to centralized exchanges. But what’s next for DAOs ought to become a real differentiator, he said. 

How do DAOs scale?

MakerDAO and dYdX recently proposed to switch up to governance by moving into a subDAO structure.

Unlike hierarchical organizations that require management structures and require coordination costs, the model shift totally eliminates the need for layers of management to function. 

“If you allow anyone to create a substructure about anything and integrate a funding mechanism in it, then anyone could build anything — that becomes a fractal organization structure,” Almond said. 

So, what’s stopped DAOS from implementing fractal systems, so far? A lack of clarity around how to track what everyone is working on, according to Almond. His proposition solution: impose a meta governance structure on top of individual subDAOs, tracking the organization’s progress as a whole via a consensus-driven sum of its disparate parts. 

“At the moment, DAOs are stuck in an 100% direct democracy which is entirely plutocratic…but by creating different structures, it allows you to find out the bits that people are actually good at and can contribute to — the game is about decentralizing that power down the long tails of participants,” Almond said.

Don’t miss the next big story – join our free daily newsletter.


Upcoming Events

Hilton Metropole | 225 Edgware Rd, London

MON - WED, MARCH 18 - 20, 2024

Crypto’s premier institutional conference returns to London in March 2024. The DAS: London Experience:  Attend expert-led panel discussions and fireside chats  Hear the latest developments regarding the crypto and digital asset regulatory environment directly from policymakers and experts   Grow your network […]

Salt Lake City, UT

WED - FRI, OCTOBER 9 - 11, 2024

Pack your bags, anon — we’re heading west! Join us in the beautiful Salt Lake City for the third installment of Permissionless. Come for the alpha, stay for the fresh air. Permissionless III promises unforgettable panels, killer networking opportunities, and mountains […]

recent research

Frax report cover.jpg


Frax saw continued development in its frxETH liquid staking derivative and Fraxlend money market throughout 2023. Frax V3 introduces an RWA strategy to drive utility to the protocol's cornerstone product, the FRAX stablecoin.


MicroStrategy discloses the purchase of 16,000 bitcoin throughout November


Digital asset firms face potential new regulatory landscape under Treasury’s proposed authority expansion


Uniswap Labs will be providing trading APIs to Talos investors through Fireblocks


DYDX supply will climb by up to 80% after the Friday unlock, but a couple factors make a massive sell-off appear unlikely


Switzerland-based Pando Asset, which has crypto products trading on the SIX Swiss Exchange, now looks to the US


Binance does not hold the required licenses to advertise and serve customers in the Philippines, the country’s securities regulator said