With the recent publishment of Vitalik Buterin’s article about decentralized management, we wanted to further expand upon the Decentralized Autonomous Organizations (DAO) topic which is gaining huge popularity on the now well-established DeFi market.
It has been a while since the first smart contracts have been deployed on the Ethereum blockchain, however, the mistakes that were made during the creation of the first DAOs will never be forgotten. But the crypto community has learned from those mistakes. We now have more than 700,000 people involved in DAO operations with more than $8B in total assets under management.
What does it mean? It means that managing DeFi and supporting a blockchain (whether it is Ethereum, Binance Smart Chain, Polygon, or other) becomes a more challenging task for developers and investors to support this rapidly growing demand.
Well, the majority of DeFi users have one main goal – personal wealth growth. People mostly do not realize that someone needs to support and develop this ecosystem. Thankfully, we see more and more enthusiasts willing to get involved in the development and management of these blockchain protocols.
DAO is a successful attempt of thousands of people to join their efforts and finances to contribute to blockchain development and increase universal wealth.
Technically speaking, DAO is just a series of smart contracts which define two main functions:
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What is being managed;
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How it is being managed.
These two functions can be applied to any company, fund, community or nonprofit organization. DAO is the digitalization of our day-to-day life.
The same way we moved:
from newspapers to → the internet;
from fiat currency to → cryptocurrency;
and now we are witnessing companies converting from centralized to → decentralized management.
Management of DAO is becoming more sophisticated. The DAO pioneers overlooked such important issues as conflicts of interest, excessive influence of large players (“whales”) on decision-making, and bribery of voters. These issues are becoming more relevant as DAOs become more open to the general public. Moreover, the access to creating DAOs is now open to everyone.
Coordination, responsiveness and alignment are the major triggers of growth and DAO operations.
There are many examples of how small projects with joint governance have become the largest DAOs. It was the right and logical decision for Uniswap and Compound to set their governance in the form of a DAO and thus contribute to DeFi ecosystem growth.
It was a risky step, but now it facilitates the protocol growth and the prosperity of all participants. With growing popularity of NFTs, we even saw the appearance of such protocols as PartyBid, which allows people to jointly purchase NFT assets and profit from it as a group. Nearly 400 people teamed up to buy the super cool Crypto Punk. Thus, a DAO became the owner of the NFT and its value was distributed among users in the form of special ERC-20 tokens. And this is also a DAO, even though it is completely different from serious protocol funds.
What tools are needed to manage a DAO?
We expect to see a large-scale growth of projects that facilitate DAO operations. The first of these famous projects was MakerDAO in 2014. Before the advent of DAO builders and different management tools, DAOs were written and supported using internal resources. Now, DAO founders can fully focus on working out the concept, the rules: what is managed and how it is managed, while the building platforms will wrap these rules in the smart contracts, safely and effortlessly. We now have apps that enable votes and allow DAO participants to make joint decisions. Among them are Boardroom and Snapshot, just to name a few.
There are protocols allowing for multisig (the requirement for a transaction that implies that more than a single key is needed before a transaction can be accepted), such as Gnosis Safe.
DAO treasure management tools like Lama or Parcel.
There are also dashboards to track DAO balances, like dFox (mobile app), DeBank, and Zerion. Finally, there are powerful constructors that provide everything you need for a DAO, combining all listed above tools in one place. Among such are xDAO and Aragon.
What DAOs need and what needs to be sacrificed?
We understand DAO as a fully transparent and public organization. Due to the fact that any action on the blockchain network and any data recording is accompanied by a gas fee, complete on-chain transparency becomes an expensive privilege for the DAO.
Vitalik Buterin in his last post also spoke about his support for off-chain governance. Off-chain voting could become an issue if there is an urgent need to make a hard-fork of the current state of the protocol. If it happens, all off-chain data will be lost.
This wouldn’t be a problem for most DAOs, since only the voting process is stored off-chain, and the subsequent execution is transferred on-chain. Yes, off-chain voting loses the absolute transparency of the DAO. Anyway, there are several reasons why we SHOULD keep some of the data off-chain.
The first and most important argument is built on security guarantees against the influence of external factors on decisions made, pressure from a third party during the voting process, the result will nevertheless be saved on the blockchain forever.
Secondly, the off-chain votes are a lot cheaper and faster. Let’s say we have a DAO with two members. An average, non-urgent transaction on Ethereum takes about 3 minutes. Thus, we need 3 minutes to create a vote + 3 minutes to record a signature of a first member + 3 minutes to record a signature of a second member + 3 minutes to record a final decision on the blockchain.
In total, this vote will take 12-15 minutes. Now let’s imagine that we have not 2 but 200 members. We will have to spend about 10 hours assuming that all participants would vote instantly! And if we wanted to speed up this vote by increasing the gas allowance, the vote would become very expensive.
Off-chain method would speed up a vote to 3 minutes in total (0 minutes to create a vote, 0 minutes to record a signature of a first member, 0 minutes to record a signature of a second member and 3 minutes to record a final decision on-chain).
In the case of 200 members, it will also only be 3 minutes, if all voters will vote immediately.
Participation in the DAO is much more beneficial for an individual than managing their assets themselves. It is true that DAO management is a complex process and there are still many unresolved issues related to it.
However, we must move up the technological ladder, taking into account the positive and negative experiences and changing the situation for the better, trying new solutions and methods of voting regulation.
P.S. We highly recommend taking a closer look at existing DAOs, at least to understand their role in DeFi. To start with we highly recommend to visit DeepDAO that provides a comprehensive list of all major DAOs with their main characteristics.