Uneeb Agha Follow Apr 28
· 14 min read
That’s a mouthful.What does it even mean? The term was coined by none other than Vitalik Buterin who is known for his cheeky style.However, the necessity of a DAO comes from Bitcoin.One of the early challenges that Bitcoin faced was, due to its decentralized nature, it was quite difficult to agree on particular decisions.
The classic example is the block size debate , whereby miners had the incentive to support bigger blocks whereas the developer community felt that a better solution to go with SegWit .There was no good way to settle the debate.This sparked a need for some sort of governing body.Vitalik in his article for the Bitcoin Magazine wrote a piece titled: Bootstrapping a Decentralized Autonomous Corporation where he attempted to address the question: do we really need the people? He then went on to introduce Decentralized Autonomous Organizations in the Ethereum White Paper .
The general concept of a “decentralized autonomous organization” is that of a virtual entity that has a certain set of members or shareholders which, perhaps with a 67% majority, have the right to spend the entity’s funds and modify its code.
The members would collectively decide on how the organization should allocate its funds.Methods for allocating a DAO’s funds could range from bounties, salaries to even more exotic mechanisms such as an internal currency to reward work.
Today, the DAOs have evolved quite a bit.We have DApps such as Compound Finance running on ETH chain leveraging DAOs for making governance decisions.Governance tokens are distributed among early adopters and investors to allow for decision making.More on that later.
Vitalik’s definition of DAO is a little dated though now.In her post, A beginner’s guide to DAOs , Linda Xie gives a broader, more abstract definition of a DAO:
A decentralized autonomous organization (DAO) is a group organized around a mission that coordinates through a shared set of rules enforced on a blockchain.
Perhaps that’s a bit too vague though.Packy McCormick of Not Boring breaks it down a bit more concretely .
More simply, DAOs are a new way to finance projects, govern communities, and share value.Instead of a top-down hierarchical structure, they use Web3 technology and rapidly evolving governance and incentive systems to distribute decision-making authority and financial rewards.
Typically, they do that by issuing tokens based on participation, contribution, and investment.Token holders then have the ability to submit proposals, vote, and share in the upside.
One could argue that DAOs are simply a step function improvement over the traditional companies Let’s take a trip through history.And see how this concept has evolved over time.
Decred: Humble beginnings There are models of governance that pre-dates Ethereum.For instance, the origin of Decred can be traced back to 2013 when an anonymous Bitcointalk user named ‘tacotime’ started a thread highlighting the problem with Bitcoin stating that PoW miners have amassed too much power and proposed a new chain “Decred” that gives power to the people who hold the currency via a Proof of Stake model.It wasn’t the first chain to introduce Proof of Stake.Decred is still relevant to this day, with a marketcap just shy of $1B making it the #86 in the top cryptocurrencies by marketcap.However, it hasn’t been as powerful as Ethereum.
Enter “The DAO” Ethereum whitepaper introduced the concept of DAO, but Christoph Jentzsch took the bold step to author it.It launched in April 2016 as a decentralized venture capital fund.
Members contributed ETH and received DAO tokens in return that could be used for voting on which projects the funds should be allocated to.11,000 people invested 11.5 million ETH, 14% of the total supply at the time, worth roughly $150 million, which they planned to collectively invest in crypto projects.It was one of the largest crowdfunding campaigns in history.But soon turned out to the most controversial of the projects too.
Two months into the project, hackers were able to steal 3.6 million ETH by exploiting a bug in the code.Luckily, the funds were put on a 28-day hold based on the terms of the smart contract, which gave the community some time to think.
Eventually, after a contentious debate, the Ethereum core team released a hard fork of the Ethereum blockchain since it was a substantial amount.History was rewritten on the blockchain and in the new chain, there was no hack.Bitcoin maximalist immediately pointed fingers at Ethereum saying that the hard fork by small group of people demonstrated that the chain was not decentralized enough and a small group of people were able to critical decisions about Ethereum.
Aragon: power of composability Despite “The DAO” hack and the consequent Ethereum fork that made many question decentralization of Ethereum, DAOs were not done just yet.Developers were learning from their mistakes and they started writing code that could be composed.Aragon promised to provide the picks and the individual teams were to be responsible for implementing their own DAO.This is a common pattern in programming whereby the framework creator simply makes it easy for the developers to implement their code with less errors as they do the heavy lifting themselves.
Aragon was one of more successful ICOs that managed to raise $25 million in matter of 15 minutes.
Their vision was to make new company setup a plug-and-play experience.Any entrepreneur would have the ability to set up company ownership (via tokens), issue tokens, and raise funds for a project in a matter of minutes.You could set rules for the new company’s governance by creating tokens with various voting rights and tweaking percentages needed to pass a motion.You can also set rules for vesting schedules.
Hence, making the experience of setting up a company leveraging a DAO very painless.Aragon wasn’t just the only name out there that was building such capabilities.
There was also the DAOStack, District0x and others.
Today Aragon boasts to have created 1900+ DAOs with 60,000 members.But it hasn’t really been able to capture the market that well.
Possibly because they were too early.
MakerDAO: first real use-case of DAO Rune Christensen, co-Founder of MakerDAO, came up with a novel idea in a Reddit post to create a stablecoin (token whose value is pegged to the US dollar) by leveraging the power of three tokens: DAI (stable), ETH (collateralized) and MKR (govern).DAI was issued as a debt and required ETH as a collateral.More specifics on that some other time, but for now it is worth noting down that such a system as Maker required adjusting risk parameters and deciding on future iterations of the product.It needed guardianship and right incentives.
The consequence: a governing token (MKR) that gave users voting powers and incentives to make the right decision.MakerDAO is one of the earliest applications of Ethereum.
MakerDAO’s governance model has been adopted by many protocols.Similar to Maker, the Compound protocol wants community consensus on which new markets to add, what parameters to change, how to issue COMP governance tokens (as a reward to protocol participants so they can participate in the DAO as well), and what to do with their three billion dollar treasury! By owning COMP tokens, your ownership weight is your voting weight.
Another example is Curve DAO building an automated market maker (AMM) that generates fees and provides revenue sharing for token holders that lock their tokens.The longer the Curve token (CRV) is locked for, the greater the amount of voting power and rewards received for the DAO member.
Unlike traditional companies where profits are paid out pro rata, this DAO is setup such that voting power and revenue share is weighted according to the length of time a token holder has remained invested.
Moloch DAO and treasury management During the depths of bear market, Ameen Soleimani, founder of SpankChain, recognized a problem with the Ethereum ecosystem.The developers didn’t have incentives to work on the Ethereum and as a result, progress on ETH2 was being hampered.He decided to fix it by building a DAO.The design was kept purposefully minimal, and thus reducing risk.
Using MolochDAO, the members were able to propose projects and then acquire funding.One interesting feature of Moloch DAO was the ability to ragequit, i.e if a member don’t like a proposal, they can exit with their funds before the proposal goes through.MolochDAO’s contracts have been forked many times to create other DAOs.
Building on MolochDAO was MetaCartel.MetaCartel Ventures is a for-profit fund that invests in DApps and is an early investor in many prominent crypto projects including Zapper and Rai.
Members consist of experienced builders in the crypto community.Similarly, The LAO is another DAO made up of Ethereum enthusiasts that has invested early on in projects.MetaCartel Ventures and The LAO are both examples of DAOs that have strong access to deal flow in the crypto ecosystem.Today, you need a staggering amount of 375 ETH minimum to become a member of the LAO.
In addition to financial instruments, DAOs have also been used to manage funds that seek to invest in specific types of projects.Similarly, PleasrDAO is a group that leverages a DAO with the goal of buying art in the form of NFTs.
Most members of this group have never met, and some are still anonymous, but this hasn’t stopped them from buying an NFT of Edward Snowden for over $5M in April.At the time of writing, FlamingoDAO has a portfolio of $1B USD owning 215 CryptoPunks and 22 Bored Apes.
ConsititutionDAO and the connection to traditional institutions In mid-November 2021, an internet collective called Constitution DAO crowdfunded close to $47 million in Ether.The goal was to use the funds to bid on a rare copy of the U.S.Constitution at a Sotheby’s auction on Nov.18.
This wouldn’t actually result in a tangible outcome that donors could use beneficially, but rather it exemplified that people could come together in novel ways to upend a traditionalist institution.Although, they lost the bid to Ken Griffin, CEO of Citadel, the move was significant enough to create waves in media and at one point, it was the favorite candidate to win the bid.It signified the power of DAOs and how quickly it could align people towards a single goal.It issued an admonition to traditional institutions: innovate or be displaced.
In late Feb 2022, Russia declared war on Ukraine that sparks protests across the globe.Around the same time, Shevchenko a Ukrainian based in UK, started a DAO for fund raising and donating to Ukraine.
By end of March, it has raised around $8 million from people donating across the globe.As a consequence, Ukrainian President Volodymyr Zelenskyy legalized cryptocurrency in the country to address the deluge of digital assets that people wanted to donate to support humanitarian aid and Ukraine’s defense.This demonstrated enormous potential for DAOs as use-case for humanitarian causes.
One big milestone in getting DAOs recognized as a legitimate entity was getting Bill 38 passed in Wyoming that clarifies the legal status of DAOs.DAO contracts can be viewed as an LLC.The legal aspect of DAO has really been capitalized by Open Law.
Open Law further makes it easier to create real world contracts using Ethereum.They essential wrap legal contracts within smart contracts.And makes it possible to sign and execute such contracts.Another product SyndicateDAO introduces the concept of web3 investment clubs.
It can attach legal entities, open bank accounts, and issue K-1s.
And allow a group of individuals to collectively invest in the web3 products such NFTs or tokens.Thus, we are ushering into this new era where DAOs will have legitimate place in the legal world.
The many faces of DAO DAOs have come a long way.It originally started as a mechanism for ensuring that miners don’t have all the power and influence to dictate changes over the blockchain protocol.The new mechanism transferred power to tokens that could be distributed systematically.This incited a spark to add more powerful controls.Aragon was born that attempted to disambiguate power and money by building a blueprint for governing structures.
It wasn’t super effective as the needs of the community were constantly changing.Birth of DeFi apps such as Compound, Uniswap and Curve required controls to be baked into the native protocol.Governance dashboards were built.Tools for monitoring and voting on proposals were created.Seeing success of governance tokens, DAOs were built that were essentially funding instrumentation for web3.
Being decentralized and easily accessible, they managed to amass quite a bit of funding.Seeing their success, there was a need to bridge the gap from a legal perspective.And legitimize DAOs.
Also, please follow me on Twitter 🙏 Coopahtroopa has a great article that sketches out the lay of the land and puts DAOs in different buckets .
Holy Trinity: Power, Capital, Community I spent some looking at the various DAOs that exist today and extracted common elements from them.Broadly speaking, all DAOs have some form of interjection of roles, capital and community.As an example, Grant DAOs are heavy on the capital side of things whereas a Protocol DAO requires stronger controls and access privileges.Similarly, Social DAOs has strong sense of community alignment.
Same for Media DAO.But an investment DAO might be more heavy on the capital and access controls.
Community One common mistake people make when valuing ideas is that they don’t put enough emphasis on community.
Products that built around DAO should gravitate where there is already community present.Today, most companies are dependent on some social chat product for internal communication.The are two big competitors are: Slack and Microsoft Teams.You can’t have coordination in a decentralized, distributed organization with such chat tool.
The crypto community isn’t using Slack or Teams.They are use Twitter for getting the latest news and updates; Discord for engaging in active discussions and Reddit for knowledge sharing.
DAOs are becoming exclusive investment clubs that you can join if you can set aside certain amount of capital.NoiseDAO is one such example of a DAO that you can join by putting in minimum of 2 ETH.You pass in your discord username and it gives you access to a gated discord channel where participants of the channels are all members of the DAO.
This gives some sort of exclusivity to members.
What is even more interesting are tools such collabland that allow folks to verify that they are indeed true owners of a particular NFT or some tokens.This tool integrates with Discord.
Capital One interesting thing that catches the eye when looking at the list of highest funded crowdfunding projects is that majority of them are blockchain in nature.Crowdfunding, as a movement, had already been growing, but crypto tokens has put that on steroids.Platforms such as kick-starter allowed for crowdfunding and in return, the investor would be the first ones to see the product.
In world of blockchain, when you invest in a project, you aren’t just incentivized by getting first look at the product, but you are actually making money if you are an early investor.A lot of people have made quite a fortune from investing early in blockchain projects.And as an entrepreneur, blockchain has proven to be a great vehicle for raising money.
But raising capital is just one part of the story.You could be building decentralized internet, but it doesn’t necessarily qualify you as a DAO.
In order to be a DAO, the capital has to be locked up in treasury and only accessible by some people.Thanks to the open nature of the blockchain, people can know where the funds are being spent and if they have the right governance structures in place then it would be very hard of someone with access privileges to send funds for personal interests.This makes DAO an ideal candidate for not just raising funds but also managing them and allocating it to right projects that are beneficial for the org.
DeepDAO sorts DAOs with highest treasuries For additional safety, you have products that allow funds to move only there is sign-off from sufficient number of people.
Gnosis Safe with it’s multi-sig feature Balaji’s concept of a mirror table (inspired from cap table) is another example where blockchain solutions shine.The radical transparency of blockchains make it easier to understand the flow of funds.
Roles An organization can not function effectively if all members of that organization are experts on the same thing.We saw Industrial revolution bring about assembly lines that lead to higher productivity as role became more specialized roles.Similarly, we expect a DAO to have members with various responsibilities and unique expertise.
This is codified in the smart contract.There needs to be dynamicity so that these rules can evolve.As a result, we have upgradable contracts that grant/revoke accesses from members.However, for managing all of this complexity, we need UIs.
Tally and Snapshot are two such product that lets you visualize DAO’s members and activity We already saw how Aragon attempted to build a framework such that it could take advantage of composability of smart contracts and build a foundation upon which all futures DAOs could be built.In practice, however, it had some challenges taking off.That being said, some patterns are starting to emerge.
One such pattern is giving community tokens and letting them vote on proposals for a protocol.
Future potential DAOs aren’t a new concept.And have existed since the early days of blockchain.They have continuously been evolving from being just a great vehicle for fund-raising to managing treasury and distributing funds to areas that people decide need the most attention.As the crypto ecosystem continues to grow and draws more resourcing, it will create an even greater need for better management of capital.
There are many areas where tooling can improve.Raising funds in compliant manner with no rug pulls.That’s where legal tech is going to play a pivotal role.You require better community management so that it is easier to voice opinions.
And the community is adequately incentivized so that the ideas that are brought up are beneficial to the larger group.This could be mean some sort of payroll being incorporated.And having transparency in fund movements.All of these avenues for growth warrant their own exploration.
But we will get to that a later point in time.
References https://www.notboring.co/p/the-dao-of-daos?s=r https://linda.mirror.xyz/Vh8K4leCGEO06_qSGx-vS5lvgUqhqkCz9ut81WwCP2o https://banklessdao.substack.com/p/history-of-daos-state-of-the-dao?s=r https://underscore.vc/blog/the-future-is-dao-a-primer-on-daos-and-their-explosive-growth/ https://coopahtroopa.mirror.xyz/_EDyn4cs9tDoOxNGZLfKL7JjLo5rGkkEfRa_a-6VEWw https://1729.com/daos https://www.placeholder.vc/blog/2020/5/7/aragon-daos https://future.a16z.com/ dao-canon/.