DAO is an organization innovated by like-inclined members, who also decoded a set of rules governing the association into a transparent computer program (smart contract). The source law of the smart contract is controlled by the members and no other centralized government can impact it. Therefore, no managers and bureaucracy are demanded to operate the DAO.

The 1st completely functional DAO, and arguably most successful to date, is bitcoin. It functions autonomously with no central authority. It has programmed rules that can only be accommodated through a strict consensus protocol. It applied bitcoin as a “ source of funding” and “ medium of exchange”. Giving it an unparalleled degree of independence that no traditional associations can match.

Interest in DAO has skyrocketed, driven substantially by the explosion of Decentralized Finance (DeFi). In DeFi, crypto communities can transact the digital assets, without the involvement of ordinary financial institutions like banks, via entities called automated market makers (AMM). The AMMs operate as DAO, with community members deciding all aspects of its operation similar as what digital assets to give, how important figure for every transaction, indeed what chance of the figure must be given back to the community (like dividend). To spur the economic impulses, DAO generally creates tokens and distributed them originally among its member. The token can also be traded in the secondary market to gain fiat currency or other tokens.

The token actually plays a more salient part than just as an profitable incitement. Token holders have voting rights that can be used to propose and impact the DAO’s operating rules, nearly like to holding stocks of a company. The further popular the DAO is, the further people want to hold its token and the advanced the price appreciation of the respective coin. That’s why the world’s leading AMM similar as Uniswap and Sushiwap can command multibillion- dollar market valuation, based on the value of their outstanding tokens in rotation.

The maturity of DAO that are presently completely functional are operating in the financial sector, easing the trade of digital assets worth billions of dollars. Despite operating in a sector that’s traditionally largely regulated, no regulatory framework exists or is indeed able to regulate DAO as of now, simply because maximum policymakers still trying to grasp the conception of this innovative phenomenon.

The crypto communities can argue that being free from regulation might advantage the really essential purpose of decentralization to be free from any intervention of governments or authorities. Still, for the AMM to be suitable to onboard billions of users in the coming decades, some kind of regulations will still be mandatory to secure the consumers.

Creating a usable framework to regulate DAO operating in the financial industry isn’t an smooth task and brilliant minds each around the world still trying to make a workable result. This article isn’t aiming to develop a final framework but rather to point out significant fields that at the really least must be regulated despite the DAO’s “ unregulated” nature.

As mentioned before, DAO comprises 3 important essentials to be completely functional. First, there should be several like-inclined people who sit together to found the DAO. Second, these like-minded people must formulate a set of rules and code it in the form of smart contracts, these rules will also be used to govern the DAO autonomously. Incipiently, to invite participation and detector society interest, economic boosts in the form of crypto/ tokens must be created and distributed.

While it might be hard to control the alike-minded people since in the popular community anyone can gather to contribute ideas and workshop, it’s surely possible to regulate or at least regularize the smart contracts in which the DAO rules are programmed. Smart contracts are principally an IT programming product which in its veritably introductory form consists of a bunch of ifs/when. Then statement written in the blockchain. It’s the most vulnerable element of DAO because weak smart contracts mean that hackers can fluently exploit them.
There has been some news where the community lost their digital assets due to smart contract exploitation by irresponsible parties. Completely audited and battle- tested smart contracts based on standardized templates or rules are thus mandatory.

While maximum of the DAOs in operation have their smart contracts checked already, the check is generally done by fragmented crypto audit companies with no unifying standard. This is where presumably governments authorities could step in to, at least, give standard inspection processes.

The 2nd area that could be regulated is the operation of token distribution. Make no mistake, token holders are really significant individuals in the realm of decentralized independent associations. Concentrated tokens in the hands of veritably many individuals will break the fundamental intention of decentralization and endanger the communities. Again, authorities can try to set some threshold to secure no parties held too much token that can threaten the objectivity of the DAO.

The arguments developed above are still in their immaturity and we might be still years down to be suitable to formulate a strong DAO regulatory framework that benefits everyone. however, some significant areas for regulation have been aimed that could be a good starting point to dig more. One thing for sure, if we trust that blockchain has a major part to play in our future, also DAO regulation is imminent and we better start to suppose of it present.