Multisignature encrypted wallets are the safest choice for DAOs

You can't hang the fate of a decentralized autonomous organization on a single point of failure if you want it to be successful.

Key points:

• Multi-signature wallets are a necessary step for users and contributors who see DAOs as a secure alternative to centralized enterprise structures.
• The benefits of multi-signature wallets are twofold: they protect the DAO from malicious actors and hackers.

Decentralized autonomous organizations pave the way for community governance of any type of business. We're seeing new creative use cases for DAOs, such as B. GameFi comics, laying the groundwork for the development of trading card games, backed by major players like Ethereum co-founder Vitalik Buterin - who claim to share its value in eliminating collusion.

But on the flip side, some DAOs are disbanding or running out of ether to repay lenders, and there is also declining optimism. The number of critics is growing, as are their concerns about the many attack vectors affecting the project. To end this narrative, DAOs must explore new structures to maintain integrity. To that end, multi-signature wallets are a necessary step for users and contributors who see DAOs as a secure alternative to centralized enterprise structures, and an important part of driving this egalitarian approach to decision-making.

Not fully, but almost safe

Concerns about accessing DAO funding cast the biggest shadow over its egalitarian structure. Any resource investment in the DAO is stored in its vault, and the proper governance structure is non-negotiable. The first thing to be clear is that all Web3 projects and DAOs wishing to ensure the continued operation and future growth of their protocol must have funds on hand.

Better spending and investment decisions should start with financial management — especially when a DeFi platform like bZx faces a hack, and all members of the DAO governance team are held accountable for the negligence of the protocol. There is no such thing as a 100% secure crypto wallet, but a multi-signature wallet protects against external hacking threats because hackers need access to multiple keys to do so.

Not your keys, not your crypto

Large sums of money can attract anyone, so DAOs looking to reduce the risk of unauthorized transactions or blanket shipping benefit from having each transaction approved by multiple signers. Like any traditional business, crypto businesses are vulnerable to many risks. The benefits of multi-signature wallets are twofold: they protect the DAO from malicious actors and hackers.

Probably the most notorious example of such a risk remains QuadrigaCX, whose cryptocurrency founder Gerald Cotten’s death — who was the sole owner of the exchange’s wallet encryption keys — left $198,435,000 worth of funds unrecoverable.  Multi-signature arrangements act as backups and provide protection against the risk of private key loss by allowing multiple keys to be stored in different locations.

Multi-signature wallets add extra security and transparency to transactions. One of the biggest misconceptions is that every transaction must be signed unanimously. But for a key transaction to succeed, a threshold or number of signers — say, three-fifths of the owners — must be reached to ensure a majority and prevent one person from taking full control. The DAO team can also set spending limits for wallet owners so that small purchases don’t have to be signed by every wallet owner. This speeds up the operation.

Don't give keys to strangers

For people who use the wallet for their own money, there is no need for a second person to sign off on their transactions. But it is essential for those who hold funds from organizations that other people have invested in, or when people rely on the money for their livelihoods (such as salaries). Pinning the fate of an organization on a single point of failure is not only reckless but also immoral.

Some see it as a matter of launching a DAO or using a multi-signature wallet — as if the two were on opposite ends of the spectrum. But using multi-signature wallets actually reduces the risk of weakening group goals. Nor does it mean that Web3 projects and DAOs trade decentralization for the ability to process transactions with higher enforceability. This is as decentralized as possible. Someone has to sign, so it's best to have several people sign the transaction. However, you also can't get everyone to sign because nothing is done.

Setting up a wallet is the easy part — the challenge is devising how to best coordinate signers without resorting to a system where the rich buy power and hold the keys. Hold an annual recurring roundtable with three to five DAO members serving as signatories for a designated time period. The DAO can even nominate new people every year, so each time the contributors are different.

Too many players on the table 

Of course, the more people involved, the greater the risk that coordination becomes a challenge. You need more people to log out and everyone can see everything. Some DAOs prefer the convenience and accept the risks that come with it. Others are unwilling to compromise and are willing to jump over additional hurdles to protect their money. We've even seen DAOs use a "pod" or SubDAO architecture where they create multiple multi-signature wallets for small teams to give them more flexibility and speed up the process. At the end of the day, what makes a DAO a more viable option: agile, centralized wallet management, or improved fund security? we will see.