Decentralized approach and XDAO

Decentralized autonomous organizations (DAOs) need a clear product management process to provide trust. One of the sensitive points for this type of startup is capital management. Every DAO needs a trust account in which to store its assets.

However, current decentralization of governance for crypto and IT includes geographic decentralization, where company management and token holders live in different countries — including the CEO and developers. And many so-called DAOs have a risk of manipulation, including theft, by attackers or their own management (rug pull). At the beginning of 2022, the management of Fortress DAO experienced an exit scam, proving that trust and understanding inside a DAO team may not be enough to prevent risks of fraud.

The Fortress DAO case

Fortress DAO is one of several crypto projects that tried to repeat the success of Olympus DAO. For the time being, Olympus and its ponzinomics created great results in OHM token price growth reaching $1,500, but then it plummeted to under $100. Even some experts still think that OHM has strong potential, but that opinion doesn’t apply to many other projects that use similar mechanics. So the problem with such types of DAO is that they use aggressive DeFi mechanics that are similar to pyramid schemes and their decentralization is more a slogan than reality.

Fortress DAO is an Olympus DAO fork on the Avalanche blockchain. Formally, It had $14 million in its treasury. But in reality it didn’t, since the DAO and its members had no real governance. The control over funds and project code remained in the hands of its team. These funds were used by Fortress CTO Avraham Eisenberg to launch his own project — and no one could stop him.

The situation with Fortress proves that DAO is not a slogan and that decentralization and community governance must be real. However, if you organize a project in advance as a true DAO, all participants know that the agreements will be respected. Members need to understand that they are joining a real DAO that is decentralized, transparent and controlled by the community. To achieve this, it is important that the community has control and information about the activities of the project developers and their ability to control the DAO. At the very least, if a protocol has a proxy or can be controlled and changed by developers without community permission, it should not be subordinate to a single developer.

What is DeFi Project Management?

Talking about the DAO and DeFi, we should understand that they both use blockchain and have decentralized infrastructure. The creation and management of this infrastructure is a complicated thing as it needs integration of existing blockchain solutions and/or the creation of proprietary DAO tools. Project management of DAO and DeFi is about asset storage and management and the creation of a proper decentralized infrastructure for this purpose.

In the DAO case, this mainly consists of community treasury governance and smart contract governance. After creation of the DAO and collection of funds, the community treasury should be fully transferred to DAO ownership, with multisig wallet governance by the DAO. Also, smart contract governance should be transferred to DAO control and governance tokens (GT) distributed to DAO members. We can distinguish the following steps in the creation of a DAO.

First stage

In the first stage of DAO development, GT tokens can only be held by the founders. At this point, there is a minting of GT tokens to the entire team responsible for the project, in equal shares for the head and in smaller shares for the rank-and-file employees of the project.

Then the whole project treasury is poured into the DAO (i.e. the transfer of all project tokens and also additional funds raised from investors to the address of the organization).

Finally, the project’s smart contracts are transferred to the DAO. From now on, all votes on protocol changes and the use of funds pass from the hands of individuals, developers and CEOs to the whole team. This ensures that the interests of all parties will be respected.

Let’s take an example. An important parameter in DAO management is the quorum value, which indicates what percentage of DAO tokens must take part in a vote for a decision to be made. Let’s say the quorum is 81%. 100 votes are distributed in our example DAO as follows:

CEO — 20 GT
CTO — 20 GT
CBDO — 20 GT
COO — 20 GT
Lead analyst — 4 GT
Business developer — 4 GT
Senior Developer — 4 GT
Developer — 4 GT
Community manager — 4 GT

This means that if all members with 20 GT and one of the five smaller GTs vote, the proposal will pass. But if at least one of the managers with 20 GT does not agree with the decision, or all five junior employees do not agree with it, the vote will not reach a quorum and cannot be executed. In the latter case, participants propose a different solution. And any of the team can initiate a vote, which makes the process transparent and allows any of the participants to put forward a proposal. Each of the participants in the project is to some extent responsible for the decision of the issue put to the vote.

Note that the large size of the required quorum guarantees the rights of investors, but complicates the decision-making process. And yet, especially when it comes to managing large sums of money and large communities, a high quorum threshold is a great way to maintain control.

Community Stage

In the second stage of DAO development, the whole community should be involved into the project management.

There are 2 types of community voting: Off-Chain and On-Chain.

Off-Chain voting doesn’t have a result fixed in code and smart contracts. It is similar to any recommendation mechanism. For example, which project contract update should be released next. In this case, the team should listen to the opinion of the community and begin to develop the update that users voted for.

On-Chain voting results are recorded on the blockchain. For example, a decision to send a 1,000 USDT airdrop to a competition participant. In this case, community voting will be followed by the execution of a smart contract to send funds to the user who won the contest.

In the case of Off-Chain voting, the DAO creates a cell on the Snapshot and sets up a vote with a project token. These can be completely off-chain votes. In this case, the community with project tokens votes on the Snapshot platform and the result of these votes will be visible to the team and executed by the team in the future.

In the case of On-Chain voting, XDAO should be connected to Snapshot to manage decisions on behalf of the community through the XDAO Snap solution (technically the same as Gnosis). This solution will be implemented in the near future and will give the community more power over the project.

However, we do not recommend to allow community make decisions about the treasury and protocol directly. If you still want to connect the community directly to the treasury, limit yourself to electors from the most active members of the community (no more than 5) who will be able to put forward decisions, but whose GT tokens will not be enough to execute decisions on their own.

Conclusion

Projects need tools for secure money management as it is more difficult to control the activities of an organization and ensure the safety of the protocol for all participants in today’s decentralized world. However, implementing these solutions without third-party expertise and auditing can greatly diminish the community’s trust. That’s why professional support is so important when creating a DAO. XDAO is the tool that can help solve these issues and set up the protocol's project management in the best way.

We are happy to support teams and help them set up a DAO over the protocol in the most decentralized way. If you need any help, you are welcome to join our community!