Decentralized autonomous organizations pave the way for community governance for any type of business. We’re seeing creative new use cases for DAOs, such as GameFi comics laying the groundwork for trading card game development, and support from key players like Ethereum co-founder Vitalik Buterin – who has asserted that it was useful to make shared decisions to eliminate acts of collusion.
But at the other end of the spectrum, there are DAOs dissolving or running out of Ether (ETH) to repay lenders, and there is also waning optimism. Critics are growing and worry about the many attack vectors affecting projects. To end this narrative, the DAOs must explore new structures to remain incorruptible. To that end, multi-signature wallets are a necessary step for users and contributors to see DAOs as a secure alternative to centralized corporate structures and are a critical component in advancing this egalitarian approach to decision-making.
Not 100% sure, but close
Concern over safeguarding the DAO funds cast the greatest shadow over their egalitarian structure. Any investment of resources in the DAO will be stored in its treasury, and an appropriate governance structure is non-negotiable. The first thing to clarify is that all Web3 projects and DAOs that wish to ensure the ongoing operations and future growth of their protocol must maintain funds.
Making better spending and investing decisions should start with cash management – especially when DeFi platforms such as bZx face hacks, everyone involved in the DAO governance team being held responsible for negligence of protocol. There is no such thing as a perfectly 100% secure crypto wallet, but multisignature wallets protect against external hacking threats, as hackers would need to access more than one key to do so.
Not your keys, not your crypto
Large amounts of funds could tempt anyone, so DAOs who want to reduce the risk of unauthorized transactions or rug draws will benefit from approving multiple signatories for each transaction. Crypto businesses are also subject to key person risk, like any traditional business. The benefits of multisignature wallets are twofold: they protect DAOs from malicious actors and from hacking.
Related: DAOs must neutralize whales (and more) if they want better governance
Perhaps the most notorious example of this type of risk is still QuadrigaCX, where the death of its crypto founder, Gerald Cotten – who was the sole owner of the exchange wallet’s cryptographic keys – left funds of a value of $198,435,000 in unsalvageable condition. A multi-signature arrangement will act as a backup, providing a hedge against the risk of losing a private key by allowing multiple keys to be stored in different locations.
Multisignature wallets add that extra layer of security and transparency to transactions. One of the biggest misconceptions is that every transaction must be signed unanimously. But for a successful key transaction, a threshold or a certain number of signatories must be reached – for example, three out of five owners – to guarantee a majority vote and prevent one person from having full control. DAO teams can also create spending limits for wallet owners so that small purchases don’t require every wallet owner to sign off. This will speed up operations.
Do not give your keys to strangers
For people using a wallet for their own funds, there is no need for a second person to sign their transactions; but for those who are the custodians of an organization’s funds that others have put money into or where people depend on that money for their livelihood – for example, salaries – it is imperative. It would not only be reckless but also immoral to limit the fate of an organization to a single point of failure.
Related: Waves founder: DAOs will never work without fixing governance
Some people think it comes down to whether to form a DAO or use a multi-signature wallet – as if the two are on opposite ends of a spectrum. But using multisignature wallets actually reduces the risk of undermining the group’s purpose. Nor does it mean that Web3 projects and DAOs trade decentralization for the ability to process a transaction with higher runnability. It’s as decentralized as it gets. Someone has to sign, so it’s best to have a few people sign transactions. However, you can’t get everyone to sign either, because nothing will ever be done.
Setting up the wallet is the easy part – the challenge comes when considering how best to coordinate signatories without reverting to a system where the wealthy bought their way to power and now hold the keys. Have a rotating annual roundtable, where three to five DAO members take on a signatory role for a period of time. The DAOs could even appoint new people each year so that they are not the same contributors each time.
Too many hands in the pot
Of course, with more people involved, there is a greater risk that coordination becomes a challenge. You need more people to sign, and everyone can see everything. Some DAOs will prefer convenience and accept the risks that come with it. Others are unwilling to compromise and would gladly jump through the extra hoops to secure their funds. We even see DAOs using a “pod” or subDAO architecture where they create multiple multi-signature wallets for small teams so they can operate more flexibly and speed up the process. Ultimately, it comes down to what will make DAOs a more viable option: agile, centralized portfolio management or increased security for their funds? Time will tell us.
Tahem Verma is the co-founder and CEO of Mesha, an all-in-one smart management tool for Web3 startups and DAOs. He previously founded the English learning app Enguru. He earned his Bachelor of Arts from the University of Pennsylvania and an MBA from Cornell Tech.
This article is for general informational purposes and is not intended to be and should not be considered legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.