Non-profit organizations have, over the years, played a critical role in the social well-being and community development of individuals in vulnerable environments. However, despite the goal to achieve a noble cause, nonprofits face several challenges, most notably fund mismanagement due to a lack of transparency and efficient accountability systems.
A recent charity fraud report by BDO revealed that 36% of charity organizations experienced a surge in fraudulent instances in 2023 compared to the previous year. What’s even more worrying is that half of the detected frauds were linked to trustees, members, staff, or the volunteers.
This begs the question: could the novel Decentralized Autonomous Organization (DAO) concept, pioneered by crypto innovators, bring more transparency if adopted by charity organizations and the larger nonprofit community?
Web3 DAOs; The Future to Transparent Funding
By now, you’ve probably heard of Bitcoin; the first decentralized digital asset to launch. Satoshi’s main motivation for creating BTC was to introduce a currency that would not be controlled by any central government but rather a decentralized community.
While Bitcoin set the stage for decentralization, Ethereum ushered in the era of decentralized governance with the inaugural launch of The DAO. This was the first DAO ever to launch, although a $60 million exploit later forced the project to wind down, alongside causing the infamous Ethereum hard fork to try to recover some of the funds.
Surprisingly, that was not the end of the road for DAOs; in fact, it was just the beginning. Today, most of the successful DApp projects, including the likes of Uniswap, Compound, and upcoming DeFi innovations such as Prom, a modular ZkEVM Layer 2 ecosystem, are all governed through a DAO model.
So, what is the exact value proposition of DAOs in governance, and could this form of organization be effective in the charity space and corporate governance?
DAOs Explained
As mentioned in the introduction, DAOs are designed to operate as decentralized entities. Instead of having the C-suite level making all the decisions in closed door meetings, DAOs empower users or a community with a direct say on matters development.
For example, in the context of traditional banks, strategic decisions are either made by the board or top management. In contrast, a DeFi lending protocol like MakerDAO is governed by the Maker Governance community through a native token dubbed MKR. What this provides for is a more decentralized governance approach such that even a user who holds a minimal amount of the MKR token can have a say in the protocol’s governance.
It is also worth noting that most of the DAOs in existence are built on public blockchains networks. This means that all the proposals raised by DAO members can be viewed and audited by anyone. More importantly, it is much more seamless to track and audit the use of treasury funds that a DAO may be obligated to run. This is the main reason why DAOs could be the perfect poster boy for charity organizations and corporations.
Not Yet There
Like any nascent innovation, DAOs are not devoid of fault. There have been multiple instances besides The DAO hack where these organizations have fallen short in their so-called democratic infrastructure.
To provide some more context, external actors can seize control of a DAO by acquiring a majority of the governance tokens and vote for bad proposals in their favor. This was the case following the Hector Network hack, after which the compromised DAO voted to wound up its $16 million treasury by distributing the funds.
In another instance, Parrot Finance, a DeFi project that had raised $80 million initiated a proposal to buy out its governance token holders at significant loss compared to their entry price. Although unpopular with the community, this proposal was eventually passed, thanks to the fact that inside actors had unlocked a huge amount of vested tokens and therefore had a majority of the voting power.
Looking Into the Horizon
While DAOs are yet to fully morph into the organizations they are intended to, it would be naive to ignore the role they could play in charity organizations. For starters, crypto is already paving the way, with over 56% of the top 100 charities now accepting digital asset donations. Going by these trends, it is inevitable that charity organizations will start embracing DAOs as a way to introduce transparency and incentivize the community to act in good faith.
Take for example the Prom nonprofit foundation which is in-charge of its ZkEVM Layer ecosystem; this decentralized organization is sustained through the revenue it collects from transaction fees. However, what really distinguishes Prom, is the nonprofit’s approach of sharing some of the revenue with active DAO members who in turn contribute to product development through a community-driven governance model.
Similarly, centralized nonprofit organizations could borrow a leaf from DeFi DAOs by leveraging blockchain infrastructure to implement better checks and accountability. This will likely reduce the fraudulent cases associated with personnel, not to mention that DAOs also have the potential to build more vibrant and trustworthy funding vehicles.
Given the underlying value proposition, it is only a matter of time before DAOs are embraced by nonprofit organizations and corporations as a futuristic form of governance.
