Whales, Sybil attacks and low trust: Can DAOs avoid centralization pitfalls?

Imagine a future where organizations operate not under individuals’ control but by a community’s collective will. Decisions are made collaboratively in an environment where the power is distributed among members, not concentrated in a central authority. This concept, once confined to the realm of science fiction, is now taking shape in the form of decentralized autonomous organizations (DAOs).

DAOs are internet-based organizations fueled by blockchain technology. They function through smart contracts, self-executing code that automates decision-making based on established rules. Ownership and voting rights are often linked to crypto tokens, empowering members to actively shape the DAO’s trajectory. This structure upholds transparency as all transactions and decisions are permanently recorded on the blockchain, accessible for public scrutiny.

The challenges around DAOs

But as with any disruptive innovation, DAOs come with their own set of challenges, raising a critical question: can they truly revolutionize governance, or are they destined to remain a captivating experiment?

One of the most significant challenges facing DAOs is the potential for large tokenholders, known as whales, to influence voting outcomes in their favor. Due to their extensive holdings, whales can manipulate governance outcomes, undermining the collective decision-making process and jeopardizing the fairness and legitimacy of the DAO. According to a research paper, voting power in DAO governance systems is unfair and highly centralized, with fewer than 10 addresses having full control over most DAOs. The study shows that for crypto platforms Compound, Fei and Uniswap, the community delegate vote share is low at about 10% or less.

The centralization issue in the voting process is further exacerbated by Sybil attacks, where individuals impersonate multiple voters to skew outcomes using the ease of creating multiple accounts. These attacks can erode trust and hinder the legitimacy of a DAO’s governance.

While some participants in DAOs may be aligned with collective interests and long-term goals, investors will inevitably be driven solely by quick profits, disregarding a project’s sustainability and future. The intrinsic importance of tradeable governance tokens in DAO operations makes aligning financial incentives and community interests challenging, particularly in optimizing a project’s growth potential over time.

Recognition of diverse contributions

Secure identity verification measures and a transparent governance system can solve the problems within DAOs. AirDAO, a community-governed layer-1 blockchain, recognizes the solution and aims to make decentralized finance (DeFi) more accessible, fair and user-friendly for everyone.

Built on its own blockchain network -AMB-NET- AirDAO offers a product suite to simplify complex financial operations. The suite includes cross-chain bridging to Ethereum and BNB Smart Chain along with a staking platform, a multichain network explorer and FirepotSwap — a native decentralized exchange (DEX) developed in partnership with Firepot Finance.

Understanding the challenges of governance manipulation and multiple account creation, AirDAO implemented solutions to foster a fairer and more inclusive decision-making process:

• Facial verification: Through a partnership with Fractal ID, a provider of Web3 identity solutions, AirDAO links wallets to users using facial verification technology. The integration enables the creation of decentralized identifiers (DIDs) that verify identities without requiring the disclosure of personal information or compromising user anonymity. Facial verification reduces the ability to create multiple accounts, ensures each vote is from a unique participant and promotes transparency and accountability.
  The issuance of the AirDAO’s governance soulbound token (SBT), AMB, is also based on the user’s facial recognition biometric data verified by Fractal ID.
• Impact-based governance: AirDAO’s system rewards users with soulbound tokens (SBTs) based on their contributions to the platform, such as providing liquidity or participating in governance discussions. SBTs determine an individual’s voting power, giving a stronger voice to those who actively contribute to the project’s success.

AirDAO rewards the community for contributing to its ecosystem with impact-based SBTs. Source: AirDAO

AirDAO recognizes that its success relies on the contributions of a diverse community. Whether users validate transactions, contribute their skills or champion AirDAO as a Governor or Ambassador, their efforts will be crowned with governance SBTs that reflect users’ benefits to the ecosystem.

A vision for decentralization

AirDAO’s Governance Working Group (GWG), comprised of around 30 community members with expertise in various fields, underlines the platform’s commitment to community governance.

AirDAO’s vision is to complete decentralization and become a fully community-governed project that fosters collective decision-making within the DeFi space. If successful, AirDAO’s potential to address key challenges in DAO governance could pave the way for a more equitable and trustworthy future for DAOs and the wider DeFi ecosystem.

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