What Is A Decentralized Autonomous Organization?
Decentralized finance (DeFi) and blockchain technology have sparked the creation of cutting-edge governance models that can enable decentralization. Since, a number of blockchain projects have started including decentralized autonomous organizations (DAOs) into their protocols to support good governance. These governance arrangements create decentralized voting rights, built on diverse grounding infrastructures.
Read ahead to learn more about governance-token DAOs, share-based DAOs, and examples of DAOs.
What Is a DAO?
A Decentralized Autonomous Organization (DAO) is a business that operates entirely on its own volition and in accordance with smart contract-encoded regulations on a blockchain system. DAOs are frequently referred to as “trustless” systems since they do not require human oversight or centralized coordination. Frameworks for trustless decision-making in a DAO are typically designed to make governance more available to everyone, as opposed to just a small group of people. In other words, DAO governing bodies control the distribution of protocol resources and guarantee the endurance of the initiatives they fund.
Even if not all blockchain projects use DAOs, the development of decentralized finance (DeFi) protocols has boosted awareness of blockchain governance and encouraged more investment. As of August 2021, according to DeepDAO, DAOs were in charge of managing over $9.3 billion USD in digital assets.
While some DAOs work as independent protocols, most share the following traits:
- Tokenization: To reflect voting rights, several DAOs use blockchain-based tokens. Therefore, only token owners are permitted to take part in network governance.
- Self-enforcement: To automate organizational norms, DAOs use smart contracts. The use of middlemen that can jeopardize decentralized decision-making can be significantly reduced or perhaps completely eliminated via these smart contracts.
- Autonomous automatization: Only simple transactions can be handled by a single smart contract. A comprehensive collection of smart contracts must be defined by DAO frameworks in order to support multi-party interactions without the need for human intervention.
- Decentralized infrastructure: Decentralized infrastructure is necessary for the underlying network to function, even though DAOs use decentralized governance. Without sufficient decentralization, people with access to sufficient computational power could abuse the governing system.
- Transparent data: The immutability of the blockchain enables DAOs to work effectively as decentralized governance mechanisms. Immutability enables protocols to transparently communicate about organizational operations and data.
- Trust mechanism: DAOs incorporate a certain amount of trust through smart contract conditions and other protocol features. Various agreements between network stakeholders can therefore be made without the involvement of other parties.
Governance tokens are permissionless, mintable tokens that holders can trade on decentralized exchanges. They are used by several DAOs (DEXs). Other protocols, like as Proof-of-Work (PoW) consensus techniques, issue governance tokens in exchange for user contributions to network security or market liquidity. No matter how governance tokens are introduced to the market, their owners often have voting privileges. The decentralized governance of protocols or even the governance of the tokens themselves may often be accessed by holders of these tokens.
A DAO framework called MakerDAO is used by the Maker platform to pass executive votes that direct protocol development. For instance, executive votes may direct modifications to protocol fees or even initiate a shutdown in an emergency. Since there are many decentralized exchanges that accept the MKR currency, anyone can buy voting power. It’s vital to remember that voting power is weighted, which means that people with the greatest MKR tend to be the most powerful.
Aragon serves both a DAO itself as well as a toolset protocol for DAOs on other platforms. As a result, the voting procedure is open to all ANT token owners. The Aragon framework is used by a number of well-known projects, including Aave, Curve, and Pillar, to organize activities. The Aragon architecture is also used by other collaborative asset management initiatives, including the decentralized asset manager PieDAO, the dHedge DeFi hedge fund, and the BarnBridge derivatives protocol.
Although less so than DAOs using governance tokens, share-based DAOs nevertheless have a fair amount of accessibility. A proposal to join the DAO and a deposit of value in the form of tokens, such as ether (ETH) or DAI, are requirements for applicants. Share-based DAOs, as opposed to governance-token DAOs, issue a single token signifying direct voting power and ownership of the capital reserve. Despite the fact that tokens are issued by share-based DAOs, these tokens are often redeemable for underlying capital at any moment. On decentralized exchanges, users of governance token protocols like MakerDAO can swap MKR for ETH, however these platforms typically lack a capital reserve that MKR holders can trade against.
The MolochDAO protocol, which focuses on funding Ethereum-based projects, is used by the majority of share-based DAOs. In accordance with this DAO structure, applicants for membership must submit a proposal demonstrating that they have the knowledge and resources required to participate in decision-making. On the MolochDAO platform, the group must also have faith in these people’s assessments of Ethereum project grantees.
One of the most well-known projects under the MolochDAO framework is MetaCartel, a fork of Moloch. MetaCartel invests money in projects leveraging the Ethereum application layer rather than concentrating on Ethereum development. Since its founding, MetaCartel has made investments in well-known initiatives like Rarible, xDai, and Opium.
Examples of DAOs
Over the past few years, decentralized autonomous organizations have gained popularity and are now completely integrated into many blockchain initiatives. DAOs are used in the decentralized finance (DeFi) field to enable applications to become completely decentralized, for instance.
Some claim that the Bitcoin (BTC) network is the oldest existing example of a DAO. Despite the fact that the majority of network participants have never met, the network grows through community consensus. Additionally, it lacks a formalized governance system; instead, miners and nodes must communicate support.
However, by modern day standards, Bitcoin is not regarded as a DAO. According to current standards, Dash would be the first real DAO because it features a governance structure that enables stakeholders to decide how to use the project’s money.
Stablecoins backed by cryptocurrencies are introduced by other, more sophisticated DAOs, such as decentralized networks constructed on top of the Ethereum blockchain. In some instances, the companies who first started these DAOs gradually relinquish control of the undertaking in order to one day become irrelevant. The hiring of new contributors, the addition of new tokens as collateral for existing tokens, and changes to other parameters can all be voted on by token holders.
2020 saw the launch of a DeFi lending system that distributed its own governance token via a liquidity mining mechanism. In essence, tokens would be awarded to everybody who engaged with the protocol. Since then, the model has been imitated and modified by other projects.
The list of DAOs is quite lengthy. It has evolved into a distinct idea that is gaining support over time. Even while some projects are currently working to implement the DAO model and achieve total decentralization, it’s important to note that they are still relatively new and have not yet met all of their intended purposes.
DAOs have the ability to fundamentally alter corporate governance because they were built on the internet. More and more companies may use a DAO model to help oversee aspects of their operations as the technology evolves and the legal ambiguity they function in is clarified.