[TL;DR]
- DAOs reduce agency problems and increase transparency, but decentralization also comes with costs like lack of expertise and coordination overhead, so the “optimal level” of decentralization must be found context by context.
- The current average DAO voter turnout of 6.5% is not only due to free-rider problems, but also to technical barriers to entry such as private key management, gas fees, and complex transactions.
- WaaS (Wallet-as-a-Service) provides a Web2-level user experience and lowers the barrier to DAO participation, making theoretically egalitarian governance work as a practical, functioning system.
1. What Is a DAO?
1.1 Definition and Background of DAOs
Public companies in the U.S. generate more than half of total GDP. Yet most of these companies share a structural feature: the separation of ownership and management. Shareholders invest their own money, but actual management decisions are delegated to the board of directors and the CEO. This structure improves efficiency, but it also creates serious problems.
The most representative one is the agency problem. Because the incentives of management are not perfectly aligned with those of shareholders, decisions regarding M&A, CEO compensation, and capital investment are repeatedly made in ways that deviate from shareholder interests. In finance, this is known as the principal–agent problem. In addition, stakeholders such as shareholders, customers, and employees are often excluded from the decision-making process, making it hard for them to feel a sense of belonging to the organization. Yet identity and attachment to the company are key factors in organizational success, and centralized structures weaken them.
The emergence of cryptocurrency and blockchain technology has opened up a different way to approach these issues. A Decentralized Autonomous Organization (DAO) is an organization that records member-agreed rules on a blockchain and executes them automatically through smart contracts. Unlike traditional corporations or partnerships that delegate decision-making exclusively to a board or representatives, DAOs are collectively governed by their members.
The autonomy of a DAO comes from its smart contracts. When predefined conditions are met, the blockchain automatically executes the agreed-upon decision. Since this is a “trustless” system that works without a central authority, a DAO is as transparent and publicly verifiable as its smart contracts, and it does not depend on any single locus of power. For these reasons, many see DAOs as core building blocks of the Web3 economy and society. They promise to reduce hierarchy, increase transparency, and build more cohesive communities.
1.2 Types and Current Status of DAOs
As of July 2022, there were 4,835 DAOs, 217 of which had issued tradable governance tokens. Growth over the past two years has been particularly striking. In early 2020, there were only a few dozen DAOs with tradable tokens, but by 2022 that number had surpassed 200. However, these DAOs are far from homogeneous. They differ significantly in use cases and in how their internal governance is designed.
Protocol DAOs use tokens as voting power to decide on protocol changes. They typically provide DeFi services to users, and MakerDAO is the most representative example. As the first protocol DAO and the first DeFi service to achieve mainstream success, MakerDAO issues and manages the DAI stablecoin through a DAO structure. Decentralized exchanges like SushiSwap and Uniswap reward liquidity providers with governance tokens, and decentralized lending protocols operate in a similar way.
One step further are Investment DAOs. They issue tokens to raise capital, and token holders collectively decide how that capital is deployed. They provide Web3 projects with an efficient capital-raising channel while creating crypto-native investment vehicles. BitDAO, which holds more than USD 2.5 billion in assets, is one of the largest investment DAOs, investing widely across DeFi projects. Collector DAOs such as Flamingo and PleasrDAO pool capital to purchase NFTs. Grant DAOs, on the other hand, allocate capital philanthropically without expecting returns; GitcoinDAO and MolochDAO, which fund open-source infrastructure, are representative examples.
Service DAOs and Social DAOs take a somewhat different approach. They function like talent agencies for the crypto ecosystem, bringing together people from around the world to build digitally native products and services. When a DAO posts a bounty in areas like development, legal, creative, or asset management, individual contributors complete tasks and earn rewards. The DAO takes a fee and distributes governance tokens. Raid Guild and DxDAO are major examples of service DAOs. On the social side, Friends with Benefits is infamous for its selective membership. Applicants must submit a form and acquire 75 FWB tokens, but once admitted they gain access to a community full of crypto builders, artists, and creators, along with exclusive events.
Media DAOs decentralize the content ecosystem. Unlike traditional media, which rely on advertising revenue, they use token incentives to reward both producers and consumers. BanklessDAO is a representative case: an Ethereum-centric media platform aiming to promote the spread of a decentralized monetary system. Looking across these four categories, an interesting pattern emerges: service/social DAOs account for 38.2% of DAOs with tradable tokens, but by asset size, protocol DAOs dominate with 69.5% of total DAO assets. In terms of count, DAOs skew toward services; in terms of capital, they are highly concentrated in protocols.
2. The Double-Edged Sword of Decentralization
2.1 Problems Decentralization Solves
To fully understand the decentralized decision-making that defines DAOs, we first need to see what problems it solves. In traditional corporate structures, shareholders delegate most decisions to the board and management. This delegation structure is efficient, but it also creates principal–agent relationships. And the incentives of agents almost never perfectly align with those of principals.
Consider hiring a financial advisor. We want the advisor to maximize our wealth. But the advisor may push us toward products with higher fees because those generate more income for them, even if returns are lower. In public companies, this agency problem is far more complex and pervasive. Labor negotiations, CEO compensation, mergers and acquisitions, capital investments—almost every major decision is influenced by management’s own interests. If all owners could participate directly in decision-making, as they can in a DAO, these problems could be significantly reduced.
A second benefit of decentralization is participation and belonging. In many cases, a company’s shareholders are also the consumers of its products and services. With direct experience of quality, strengths, and weaknesses, they can provide highly valuable feedback for the organization’s success. Moreover, when consumers are also owners, they develop a sense of belonging and identity with the organization. This increases loyalty, facilitates coordination among members, and aligns incentives.
Credit unions and cooperatives have these characteristics, and DAOs do as well. Conversely, in highly centralized organizations, users feel they have no real control over the company. Feeling powerless to influence decisions, they lose motivation to spread information or engage in optimal governance. Ultimately, decentralized structures have the potential to address two core issues at once: reducing agency costs and increasing member participation.
2.2 New Problems Created by Decentralization
But decentralized decision-making also has important downsides. First comes the problem of insufficient expertise. Decision-making is costly: you must learn about all available options and carefully weigh their pros and cons, which takes time and effort. Decentralized decision-making forces each member to bear these costs individually, which is highly inefficient.
This is why companies centralize their decision-making processes. They hire experienced managers to work full-time on finding and executing the best decisions for all owners. Compared with a CEO and a team of experts, decisions made by decentralized owners or members are more likely to be under-informed and less well-understood in terms of outcomes. Merit Circle DAO illustrates this well. In May 2022, its members proposed “refunding” a major investor, Yield Guild Games (YGG), on the grounds that YGG had not added sufficient value as an investor.
The problem was that there was no legal mechanism in the DAO agreement to return the invested capital. Even so, members voted to end their relationship with YGG and buy out the USD 175,000 investment for USD 1.75 million in stablecoins. This was a naïve decision that failed to grasp the legal and reputational consequences. It could inflict lasting reputational damage on all DAOs and, in the long run, make it harder for DAOs to raise capital effectively.
The second issue is difficulty maintaining confidentiality. Many corporate decisions must not be known to current or future competitors. To maintain competitive advantage, companies expend significant effort to keep data and strategic plans secret. In decentralized decision-making, all members need access to information to make decisions, so it is much harder to keep things confidential than in hierarchical or centralized organizations.
The third problem is coordination costs. Making informed decisions takes time and effort. When many people are involved in decision-making and everyone benefits equally from the outcome, each individual has little incentive to acquire information. They assume others will do the work of discovering the right answer. This is the free-rider problem. In equilibrium, effort is undersupplied and second-best decisions are made.
Finally, there is the difficulty of acting quickly. Organizations sometimes need to act in a timely manner. Decentralized organizations must put proposals to a vote and allow time for all governance token holders to learn about the options and vote. Centralized organizations, where only a few people participate in the process, are generally better positioned to make rapid decisions.
2.3 What the Data Tells Us
Given these pros and cons, there is a spectrum between decentralization and delegation. Even in the most hierarchical organizations, such as public companies, shareholders can still influence strategic decisions by voting on mergers and acquisitions, executive pay, board nominations, and other proposals. Conversely, highly decentralized organizations like DAOs still contain important centralized elements, such as large token holders and influential core developers.
DAO community members themselves recognize these trade-offs. In October 2022, a series of proposals passed with majority support in MakerDAO (the protocol that issues and maintains DAI, the largest decentralized stablecoin). These proposals appeared to fundamentally change how MakerDAO operates. The key proposal, MIP83, created sub-units within MakerDAO to manage different aspects of operations.
Instead of every MakerDAO token holder voting on every proposal, separate “MetaDAOs” specialize in certain decisions. Each MetaDAO has its own token, and only that MetaDAO’s token holders vote on issues within its jurisdiction. Some argued that this would improve the productivity of individuals and core units within MakerDAO—essentially advocating for more centralized (and more expert) decision-making. Multiple governance-related proposals were passed, and the entire process drew a great deal of commentary, both positive and negative.
The lesson is clear: the costs and benefits of decentralization are highly context-dependent and can evolve over time. While decentralization reduces agency problems and empowers participants, it also introduces drawbacks in expertise, confidentiality, coordination, and speed. DAOs must carefully calibrate this balance. Even in the most hierarchical organizations, where the separation of ownership and control is greatest, shareholders still influence strategic choices; and in highly decentralized DAOs, large token holders and core developers remain significant centralized actors. Full decentralization and full centralization do not exist in practice—and there is no reason they should.
3. How Technology Shifts the Balance
3.1 Positive Contributions of Blockchain Technology
Once we understand the costs and benefits of decentralization, we can ask how DAOs might shift that balance. Does the technology that underpins DAOs enable organizational structures that were previously impossible? Does it reduce the costs of decentralized governance enough to tilt the balance toward a less hierarchical, more inclusive economy?
DAOs are inherently tied to cryptocurrencies because their smart contracts run on blockchains such as Ethereum and Polkadot. Many of the advantages of cryptocurrencies therefore apply naturally to DAOs. Compared to traditional organizational structures, DAOs can enhance trust and transparency, enable smoother on-chain value flows, and build potentially more cohesive communities through information sharing. Beyond that, the underlying technology may even change the cost–benefit structure of decentralization itself.
First, DAOs can further reduce agency costs by limiting the scope of agents’ discretion. More actions can be automated, reducing the need for agents to exercise discretionary authority. Greater transparency allows for better monitoring of behavior, which in theory reduces the likelihood that core contributors or majority token holders will engage in fraudulent conduct. DAOs can also provide simpler ways to block problematic behavior.
For example, a DAO can encode limits on what core contributors or large token holders are allowed to do, preventing them from exploiting other token holders. In this way, the boundaries of agency relationships within a DAO can be built directly into the DAO’s code, preventing violations from happening in the first place. Of course, corporations can similarly write such limits into their charters or bylaws, but enforcing them requires going to court or waging proxy battles. In a DAO, smart contracts implement the limits, making enforcement much easier.
Second, a DAO’s smart contracts can enhance regulatory compliance. By embedding regulatory requirements directly into code, the DAO’s structure itself can become an advantage—making it easier to comply with normative regulatory demands by design.
Third, technology can improve speed of execution. While decentralized decision-making increases the need for coordination and thus slows the process of reaching a decision, once a decision is made smart contracts can enable much faster execution. ConstitutionDAO is a good example. To bid on an early copy of the U.S. Constitution, it raised and deployed nearly USD 47 million in only five days. A similar grassroots effort might have taken months to organize. Here, the technology underlying DAOs inverted one of decentralization’s traditional drawbacks—slowness—turning it into faster execution.
3.2 Technological Limits
Despite these important technological advantages, DAOs also face substantial limitations that must be considered and, ideally, addressed. The first is the problem of incomplete contracts. No contract—smart or traditional—can anticipate and specify responses to every possible future contingency. Sometimes it is optimal to renegotiate after the fact. In traditional finance, renegotiation happens every day. In decentralized finance, however, ex-post renegotiation is generally not allowed, which raises difficult questions.
Solend provides a good illustration. In June 2022, the Solana-based lending platform discovered that a single liquidity provider had borrowed a very large amount of stablecoins using SOL as collateral. Solend’s developers worried that a sharp drop in the value of the collateral and a sudden liquidation of such a large position could leave the pool undercollateralized and destroy value for all liquidity providers. After attempts to contact the investor failed, the developers proposed and passed a measure to close the position to limit risk.
Although their concerns were reasonable, the move drew widespread criticism in the crypto community as an attempt to rewrite the code. The proposal was later reversed. This incident underscores that while smart contracts bring efficiencies by automatically executing transactions, they are inflexible tools when unexpected events occur. As the sector matures and learns from past outcomes, smart contracts will likely become more comprehensive, reducing the need for renegotiation—but the limitation remains.
The second limitation is bugs and vulnerabilities in code. Smart contracts are immutable, but errors in code can be discovered and exploited. The most infamous example is The DAO hack. Launched in 2016 as a venture-style DAO, The DAO raised about USD 150 million worth of ETH in just three weeks. Shortly after fundraising, an attacker found a vulnerability and drained USD 60 million from The DAO. Although funds were ultimately recovered for investors, the case clearly showed that developers cannot guarantee a DAO’s security.
Third, there is legal uncertainty. DAOs operate in an extremely unclear legal environment. Fundamentally, a DAO is not recognized as a legal entity. Through incorporation, corporations and LLCs can limit the personal liability of their members; DAOs generally cannot provide such protections. Some jurisdictions allow DAOs to register as a special form of LLC, and some DAOs have registered under existing LLC statutes, but how these laws will actually be applied remains uncertain.
Because DAOs are not legal persons, it is also unclear how tax laws apply to DAOs and their members. This uncertainty can lead to significant tax burdens for participants. Moreover, DAOs that issue tokens may risk violating securities regulations if those rules are found to apply. While recent U.S. executive orders on digital assets may address some of these issues, the legal uncertainty surrounding DAOs may, in the meantime, hinder adoption, impede innovation, and limit effectiveness.
SushiSwap’s decision to restructure in late October 2022 seems to be a response to such concerns. Going forward, it plans to operate through three separate entities: one Cayman Islands-based corporation and two Panama-based corporations. This came soon after the Ooki DAO settlement with the CFTC, which appeared to highlight the liability risks faced by DAO members when a DAO is not organized as a legal entity. The benefits of technology are real, but these limitations are challenges that must be overcome before DAOs can fully realize their potential.
5. Infrastructure for DAO Mass Adoption: Wallet-as-a-Service
5.1 The Reality of Participation Barriers
The fact that average voter turnout in DAOs is only 6.5% cannot be fully explained by free-rider problems or lack of expertise. There is a more fundamental issue: technical barriers to entry. To participate in DAO governance today, users must navigate a series of complex steps. They must first create a crypto wallet and securely store their private keys. They need to acquire governance tokens, sign a transaction every time they vote, and pay gas fees.
This process is cumbersome even for crypto-savvy users, and for the average person it is almost impossible. If you lose your private key, you permanently lose access to your assets. Gas fees are volatile and hard to predict, and transaction signing flows are far from intuitive. Compared to public company shareholders who can vote online with a few clicks, participation in DAO governance requires a much higher level of technical literacy.
On top of that, many DAO participants belong to multiple DAOs at once. Each DAO may run on a different blockchain, using different wallet interfaces. A user voting in an Ethereum-based DAO who then wants to switch to a Solana-based DAO must use a completely different wallet and workflow. This fragmented experience wears down even motivated users. A significant portion of that 6.5% voter turnout can be attributed to these technical barriers.
For DAOs to become truly inclusive and democratic organizations, user experience is just as important as governance design. No matter how well-designed a voting mechanism is, if it is hard to participate only a small group of technically sophisticated users will wield power. That fundamentally undermines DAOs’ core values of decentralization and equal participation. Lowering technical barriers is not optional—it is essential.
5.2 Problems WaaS Solves
Wallet-as-a-Service (WaaS) is the infrastructure that can remove these technical barriers. At its core, WaaS abstracts away complex wallet management and delivers a Web2-level user experience. Users can participate in a DAO instantly with nothing more than an email address or social login. Private key management is automated using technologies such as MPC (Multi-Party Computation) or account abstraction, so users do not need to understand complex cryptography.
Embedded wallets are the most powerful form of WaaS. Wallet functionality is built directly into the DAO’s website or app, so users can do everything from a single interface without installing or switching to separate wallet apps. The entire flow—from reading proposals, to joining discussions, to casting votes—is seamlessly connected. Everything happens inside an interface as familiar as KakaoTalk or Naver.
WaaS can also solve the gas fee issue. With gasless transactions, a DAO can pay gas on behalf of users or batch multiple transactions together to minimize costs. Users no longer have to worry about how much it will cost to vote. This is particularly impactful for small token holders. It eliminates situations where people give up voting because gas costs more than the value of their vote.
Cross-chain integration is another major advantage of WaaS. A single account can be used to participate in DAOs across multiple blockchains. Voting in an Ethereum-based protocol DAO, engaging in a Solana-based social DAO, and submitting opinions on proposals in a Polygon-based media DAO can all happen within one unified interface. Users do not need to care about the technical differences between blockchains; they simply choose which communities they want to join.
5.3 WaaS Application Scenarios
Let’s look at some concrete scenarios to see how WaaS changes things. Start with protocol DAOs. Today, to participate in Uniswap governance, a user has to install a wallet like MetaMask, hold UNI tokens, and then move to a voting platform such as Snapshot or Tally. With WaaS, users can vote directly inside the Uniswap app. While trading, they can see a proposal about a new fee structure and vote on it without leaving the app. Participation becomes a one-click experience.
Social DAOs may benefit even more from WaaS. Currently, to join Friends with Benefits, a user must acquire 75 FWB tokens and set up a wallet. This filters out many potential members at the onboarding stage. With WaaS, joining becomes as simple as signing up for KakaoTalk. Users sign up with email, submit an application, and once approved, tokens are automatically allocated to their embedded wallet. Even people with no prior crypto experience can join community events and vote in governance.
In investment DAOs, WaaS can drastically increase accessibility. Today, DAOs like BitDAO are effectively open only to users with crypto experience. With WaaS, retail investors without specialist knowledge can participate in collective investment. In-app, they can review investment proposals, read community discussions, and vote in a flow that feels as intuitive as using a mainstream fintech app. This means democratizing DAO investing: technical barriers no longer gate access to investment opportunities.
For media DAOs, WaaS enables a natural connection between content consumption and governance. A reader of a BanklessDAO article on a WaaS-powered platform can instantly become a governance participant. At the end of the article, they can see proposals about the editorial direction, receive tokens, and vote on the next content topics, all in one continuous flow. The transition from content consumer to governance participant happens without friction.
5.4 Potential Impact on Participation Rates
How much can WaaS realistically improve participation rates? While precise numbers are hard to predict, we can make some grounded assumptions. Given that retail shareholder turnout in public companies is around 32%, it is reasonable to expect that DAOs could reach similar levels once technical barriers are removed. Moving from today’s 6.5% to around 30% would represent almost a five-fold increase.
DAOs may actually have an advantage over public companies. DAO members are often direct users of the product or service, which can create stronger intrinsic motivation to participate in governance. When WaaS removes technical friction, this intrinsic motivation can better translate into actual participation. A mobile-first approach is critical as well. In an era when most people communicate via mobile, DAO governance must be optimized for mobile too. WaaS can be embedded in mobile apps so users can vote anytime, anywhere.
Integrated notifications and curation features can further boost participation. Many DAO members today simply do not know when a vote is taking place. WaaS-based platforms can send personalized alerts about proposals a user is likely to care about and provide simplified summaries of complex proposals. Instead of facing an overload of information, users receive timely, relevant updates. Busy participants can still join in on critical decisions.
Of course, WaaS alone will not solve every participation problem. Fundamental costs of decentralization—like free-riding and lack of expertise—will remain. But by eliminating unnecessary costs arising from technical friction, DAOs can focus on core governance design. We can clearly distinguish between problems faced by those who want to participate but cannot, and those who could participate but choose not to.
5.5 WaaS and the Decentralization Trade-off
While WaaS improves accessibility, it also introduces new trade-offs. The most important is the spectrum between custodial and non-custodial models. In a fully custodial WaaS setup, the service provider manages users’ private keys. This delivers the simplest user experience but deprives users of full control over their assets. In contrast, non-custodial WaaS uses MPC or account abstraction so users can retain control while still enjoying convenience.
This is fundamentally about balancing security and convenience. Pursuing absolute decentralization makes user experience more complex; pursuing absolute convenience introduces centralization risk. Successful WaaS implementations must find an appropriate point on this spectrum. Depending on their community and purpose, some DAOs may choose a more custodial approach, while others will prefer more strongly non-custodial models.
The notion of progressive decentralization is key here. Early on, it may be better to offer a more centralized, managed experience that makes it easy for new users to join; over time, as users become more comfortable, they can be given more control and autonomy. Newcomers might start with email login, then later choose to manage their own wallet directly as their experience grows. This approach lowers the barrier to entry without abandoning the ultimate goal of decentralization.
We also need to consider the decentralization of WaaS providers themselves. Relying on a single WaaS provider creates a new central point of failure. Ideally, multiple WaaS providers should compete, and users should be able to switch between them easily. Open-source WaaS protocols and interoperability standards can make this possible. DAOs adopting WaaS must be careful not to become locked in to any particular provider.
Ultimately, WaaS is the tool that bridges the gap between DAO ideals and DAO reality. It preserves the benefits of decentralization while lowering participation barriers, turning theoretically egalitarian governance into a system that actually works in practice. For DAOs to become truly inclusive and democratic organizations, infrastructure is just as important as governance design—and WaaS is a core piece of that infrastructure.
6. Conclusion: The Future of DAOs = “Right-Level Decentralization + Right Infrastructure”
DAOs reduce the agency problems inherent in traditional organizations, increase member participation, and strengthen transparency and trust. Built on blockchain and smart contract technology, they make more democratic and egalitarian organizational forms possible. At the same time, we cannot ignore the costs of decentralization: lack of expertise, coordination overhead, slower decision-making, and legal uncertainty.
What becomes clear from this discussion is that the goal of DAOs is not complete decentralization. Decentralization exists on a spectrum, and the optimal point varies by context. As MakerDAO’s shift toward MetaDAOs illustrates, hybrid structures—in which some decisions are made by groups and others are delegated to experts—can produce better outcomes.
Yet today’s average DAO voter turnout of 6.5% cannot be explained solely by the intrinsic costs of decentralization. Unnecessary technical barriers to entry prevent many people from participating. Private key management, gas fees, and complex transaction signing flows cause even motivated participants to give up. When retail shareholder turnout in public companies is 32%, it is reasonable to expect that well-infrastructured DAOs can achieve much higher participation as well.
Here, WaaS (Wallet-as-a-Service) plays a central role. Embedded wallets, gasless transactions, and cross-chain integration deliver a Web2-level user experience while preserving the benefits of blockchain. WaaS is the bridge that turns DAO ideals into reality.
DAO builders must invest in user experience as much as in governance design. Even a perfectly designed voting mechanism will concentrate power in the hands of a few if it is hard to use. For infrastructure providers, WaaS is not just a convenience feature; it is a foundation for the Web3 economy. They must find the right balance between security and convenience and support progressive decentralization. For participants, the key question is whether lower technical barriers will translate into a willingness to engage more often.
The future of DAOs will open up when context-appropriate decentralization meets infrastructure that ordinary people can actually use. Complete decentralization is not the goal; better decisions and stronger communities are. Decentralization is a means to that end, and WaaS is the tool that makes that means work in practice.
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