Around 2016, there was a time when some people in the tech world really thought they had solved one of the oldest problems in human history: how to run a business without dishonest leaders, over-sized boardrooms, or executives who only care about themselves. They said the answer was easy: write down the rules, let the people vote, and let democracy work its magic. A Decentralized Autonomous Organization is what they called it. After only a few months, it had lost about $60 million to hackers, and the dream was already falling apart.
It wasn’t just a technical glitch that caused the DAO to fail. It was time to make up. And to be honest, the cracks could be seen before the whole thing fell apart.
The idea behind a DAO is very appealing because it is so simple. Smart contracts let you write governance rules directly into a blockchain, so shareholders don’t have to trust a CEO who trusts a board who trusts a committee. Token holders can vote on ideas. Decisions are carried out automatically. Not a middleman. No deals in the back. It was easy to see why it would appeal, especially to people who had seen how traditional corporate governance led to greed, fraud, and shockingly bad management.
But this is where things got tricky. Decentralized Autonomous Organization governance was based on the idea that big groups of people, who were often anonymous, spread out across dozens of countries, and driven by speculation rather than mission, could make clear, well-informed choices about difficult technical and financial issues. That assumption needed to be looked at more closely than it was.
A very low number of people have voted in most major DAOs. Researchers who looked into these groups always found that a small group of large token holders, who were sometimes called “whales,” controlled the way the organization was run, even if it seemed democratic on paper. It turns out that when resources are spread out unevenly, decentralization can quietly put back in place the hierarchies it was meant to get rid of. Things look different. The way power works, not so much.
The technical difficulty made things even worse. To participate in DAO governance in a meaningful way, you had to understand how smart contracts work, how tokens work, protocol risks, and proposal documents that were getting more and more complicated. Most people who owned tokens didn’t know enough about what they were voting on to understand it. Some people voted based on what people on Discord servers said. Others followed whales without fully grasping what it meant. There’s something almost touching about that: a system designed to be completely open but making decisions that most people couldn’t really question.
Uncertainty about the rules made the whole situation less stable. DAOs worked in a legal gray area that most places hadn’t figured out how to handle. When things went badly—and they went horribly badly in a number of high-profile cases—there wasn’t a clear way to hold people accountable. Who was responsible when a DAO’s funds were taken away? Who took responsibility for a failed plan that cost millions of dollars? Not having traditional organizational frameworks wasn’t just a pain. It was risky.
More than anything else, the DAO experiment showed that running a government is harder than it seems. Even though they have flaws, traditional business structures have been around for hundreds of years to solve real coordination problems. They’re not perfect. At times, very corrupt. But they have features like fiduciary duties, liability frameworks, and professional management that distributed token voting just couldn’t copy overnight. It’s still not clear if any version of DAO governance can fully replace those systems or if the goal should be something less ambitious, like adding to the ones that are already in place instead of completely replacing them.
To be honest, the original idea behind DAOs was based on a positive view of how people would act, which wasn’t quite supported by reality. A lot of people are busy. People only care about themselves. People don’t read 40-page plans for government before they vote. That’s not cynicism; it’s just a fact. And any system of government that doesn’t take into account how people actually act will have a hard time.
Now, a group of researchers, developers, and practitioners are working to find what’s useful in the wreckage and make something that will last longer. The idea of government run by the people is still alive. But the version that came out in 2016 was full of ideals and hadn’t been tested much. It needed a much tougher conversation before it was given $32 billion in collective assets to manage.
