Learn about the potential risks of investing in Decentralized Autonomous Organizations (DAOs) and how to mitigate them.
As it is with everything in the Web 3.0 and blockchain technology industry, there are risks associated with DAOs. We shall be discussing the risks associated with DAOs. DAO can be risky in the sense that the blockchain they are been built upon and issued their governance token can get hacked. There have been stories on the news of such occurrences. This is because decentralization as a whole is still in its infancy, and there are a lot of security and technical works that need to be done on this system of financial operations.
Overview of DAO hacks, DAOs are vulnerable, and this means there can be a technical loop on smart contracts and such bad actors can seize the opportunity to place an attack on the user’s funds. According to a blog post which wrote and I quote. “The vulnerabilities of DAOs were exposed with the formation of the first DAO itself. If this was before your time, here’s a quick refresher on what happened: Simply called The DAO, it was formed in 2016. The idea was that investors would put money in, receive tokens, and vote on projects developed by the DAO. In a month, the DAO was able to raise $150M from 11k investors, unfortunately, before the token sale ended, a vulnerability in the smart contract wallet was found. The team began fixing the issue, but attackers were able to exploit another bug: they made a small contribution and then requested a withdrawal with a recursive function, stealing 3.6M ETH of the 15M ETH in the treasury. The stolen ETH was worth $60M at the time”.
The above quote explained the potential risk associated with DAOs, especially in their technical area and funds security since all these are built upon a smart contract.
The risks involved with DAOs such as hacks and other fraudulent activities have made investors not invest anymore in DAO projects. Nevertheless, this depends on the catalyst behind the DAO, if a DAO project has fulfilled all requirement for the development of its DAO and have the strong backing of a market mover then other investors might see it as important to also invest as well. DAOs are the new business model and it has been gaining momentum in real life and also gaining the attention of web 3.0 whales.
Mitigating risk in DAO is very vital, this will tell investors how important their investments are to the DAO projects. Money is something valuable that should be protected at all costs.
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I'm Carina, a passionate crypto trader, analyst, and enthusiast. With years of experience in the thrilling world of cryptocurrency, I have dedicated my time to understanding the complexities and trends of this ever-evolving industry.
Through my expertise, I strive to empower individuals with the knowledge and tools they need to navigate the exciting realm of digital assets. Whether you're a seasoned investor or a curious beginner, I'm here to share valuable insights, practical tips, and comprehensive analyses to help you make informed decisions in the crypto space.