As we explained in our in-depth guide, decentralized IDs (DIDs) are digital identifiers associated with users’ attributes which can be used to prove a person’s rights to access data or services without disclosing unnecessary information about them. They bring back ownership of user data to the users themselves and establish grounds for a privacy-preserving way of exchanging data.

In this article, we explore what Decentralized Autonomous Organizations (DAOs) are, what challenges they face, and how decentralized identities can add a layer of security to the current version of the DAO ecosystem.

What is a DAO?

Decentralized Autonomous Organizations (DAOs) are community-led entities created to facilitate cooperation among individuals without a central authority that controls the process.

There are several types of DAOs, including:

• Investment or venture DAOs that pool tokens to invest in projects and startups. Examples include AngelDao and MetaCartel Ventures.
• Protocol DAOs created to govern decentralized protocols such as a borrow/lending transactions, decentralized exchange, etc,. Examples include MakerDAO and Uniswap.
• Grant DAOs created to facilitate funding and donations to different projects. Examples include Aave Grants DAO and OceanDAO Grants.
• Collector DAOs that pool together tokens to purchase and co-own valuable assets. Examples include PleasrDAO and Flamingo DAO.

Other types of DAOs include media DAOs, education DAOs, service DAOs, etc.

DAOs are created to bring back the decision-making powers from the hands of centralized authorities and place it into the hands of an automated system (smart contracts) and a crowdsourced process.

In other words, a DAO is a group of pseudonymous community members who have agreed upon certain rules and regulations for their collaboration, and their collective decisions affect the future of the entire organization.

Challenges of the current version of DAOs

According to DeepDAO, as of May 2022, there are ±4800 DAOs around the world with ±$9.8B of total treasury, and more than 665K active voters and proposal makers. As they are deployed on the blockchain, DAOs are censorship-resistant, and their users are pseudonymous. This means that users can organize an investment DAO to pseudonymously fund an illicit activity, or they can easily create additional pseudonyms to vote multiple times for the same project in a grants DAO, disrupting the fairness of the model and breaching the one-person-one-vote principle.

This, in turn, creates a fog of distrust over DAOs, and triggers regulators’ worries about adopting DAOs as legal corporations in society.

Benefits of a decentralized identity layer in DAOs

Decentralized identifiers have a great potential to make DAOs safer and more trustworthy than the current model.

Depending on the purpose of DAOs and their creators, the platform can request from the users specific verifiable credentials to allow them to participate in certain events in a data-preserving manner.

For example, protocol DAOs can request from its users verifiable credentials (VC) ensuring that they have had AML checks.

Collector DAOs and venture DAOs, on the other hand, can request uniqueness VCs to ensure their users are unique individuals in order to protect its users from unfair arbitrage or enable a true one-person-one-vote model.

Integrating DIDs into DAO platforms adds a layer of security to safeguard users from identity theft and scams, protect the platform and its users from illicit activities, and establish grounds for DAO mass adoption.

Exploring Fractal ID for DAOs

Fractal ID is an identity verification platform, ranging from human uniqueness for sybil-resistance to KYC/AML for regulatory compliance.

DAOs which integrate Fractal ID into their platforms will benefit from privacy preserving compliance. When users are onboarded to DAOs by Fractal ID, Fractal ID will issue verifiable credentials for the users which they can store on their Fractal ID Wallet on their devices and use them to clarify their rights to participate in different projects on DAOs.

For example, for a user that wants to participate in an IDO, Fractal ID will verify the user’s documents and issue a credential verifying that this user lives in a specific region without disclosing unnecessary information.

Moreover, these credentials are reusable on all platforms that are integrated with Fractal ID. For example, users who have completed KYC via Fractal ID and obtained KYC credentials, can reuse these KYC VCs to prove their status without needing to go through the process all over again, and thus can be ready to jump to new opportunities on DAOs as soon as they present themselves.