Expert Insight

DAOs prove decentralised economy is not completely lacking intermediaries

Since its inception, one of the key highlights of blockchain technology and, by extension, the decentralised economy at large, is the ability to nullify centralisation in its entire operation. 

The aforementioned – in addition to security, immutability, transparency, traceability, and trust – is what makes the decentralised economy unique, considering that the bulk of these attributes is missing in the previously existing centralised system.

However, while the decentralised economy has been lauded for its ability to eliminate centralised authority, and third-party interference, it appears to still maintain an intermediary governance system in the form of decentralised autonomous organisations (DAOs). 

Understanding the concept of DAOs

Decentralised autonomous organisations or DAOs, as the name implies, refer to decision-making communities. However, one without centralised leadership. According to Wikipedia, DAOs are represented by rules encoded as a transparent computer program, controlled by the organisation members, and not influenced by a central government. 

In other words, this type of community is governed and managed by the entire member, and not a single leadership entity or centralised leadership. 

This further implies that, unlike in a traditional system, decision-making processes in DAOs are a collective effort of all the members within the community. As a result, the rules and governance of these communities or organisations are encoded on a blockchain, thereby enabling transparent and collective decision making among all stakeholders. So why are DAOs considered intermediaries themselves?

The decentralised economy is not lacking intermediaries

The unconventional truth about the decentralised economy is that it cannot function effectively without an intermediary system. Notably, DAOs are a necessary component of any blockchain initiatives as they are in place to automatically enforce policy, as well as regulate the project so it is not manipulated by a selected few.

However, to ensure that a DAO functions effectively, a smart contract is in place to automate the entire process from policy-making to voting, and implementation. 

While the DAOs, powered by smart contracts, are automated to execute certain instructions once a pre-set agreement is met, it stands in-between the end-user and other components of the project such as other end-user, escrow systems, P2P payment, liquidity pool and even the network’s governance.

Merely looking at the above explanation, one can easily see the existence of a centralized system, however, it’s one whose decision-making process is decentralised, transparent, and automated, unlike the existing system.

That said, this might also mean that the decentralised economy simply devised an alternative to replace human-governed centralisation with smart contract-governed centralisation through DAOs, which, in themselves, act as intermediaries. Now, does this mean the decentralised economy is still vulnerable to the flaws present in the centralised economy?

Is the decentralised economy subject to manipulation?

Despite the fact that the system is designed to be free of human intervention, decentralised projects are not completely free of interference – particularly from the development team. Notably, this set of people has ultimate control over the codes that make up the smart contracts and, as a result, determines what is and is not implemented to the smart contracts.

In a real sense of things, the smart contract developers act as the board of directors in a traditional corporate institution. This further implies that the fewer smart contract developers’ teams a blockchain project has, the easier it becomes to manipulate the system.

In other cases, the smart contract could be the primary target of a cyberattack, considering that it is the most vulnerable part of a decentralised project, especially when not designed for strong resistance.

For instance, towards the end of 2021, Blockchain start-up, MonoX announced that a hacker exploited a bug in its software which essentially enabled attackers to draft smart contracts. Hackers carted away with at least $31 million in stolen funds.

By nature, smart contracts are designed to manipulate are keys to the system that hold funds in a decentralised project. Hence, they are primary attract targets for criminals who may want to exploit the otherwise fortified system.

Where a smart contract is compromised, then the otherwise decentralised network becomes highly vulnerable, thereby making for a major flaw of the decentralised economy. 

Ultimately, the decentralised economy is still largely centralised. However, with more control delegated to computers rather than humans.

Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.

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