DAO Beginner's Guide: What are the potential use cases and tools? What problems still exist?

This article is sourced from ChainNews, authored by Linda Xie, Managing Director of Scalar Capital Management, LLC, and translated by Lu Jiangfei.

What is a DAO?

A Decentralized Autonomous Organization (DAO) is a group organized around a task that is coordinated through a set of shared rules implemented on a blockchain.

One of the biggest advantages of a DAO over traditional corporate projects is its higher transparency, as anyone can see all actions and funds within the DAO, significantly reducing the risk of corruption and censorship. Public companies must provide independently audited financial statements, but shareholders cannot access the company's financial status at any time.

In contrast, since the balance sheet of a DAO exists on a public blockchain, you can see what happens with each transaction at any time, as the DAO maintains complete transparency.

Compared to traditional companies, DAOs are more accessible globally and have a lower barrier to entry. Given the higher transparency and lower entry barriers, even if there are DAO members who disagree with the rules and actions, the switching costs may still be relatively low.

DAOs with similar tasks may need to compete for members, who need to be incentivized under conditions that ensure as much transparency as possible, while not extracting too much "rent" from the organization so that it can attract top members. On the other hand, DAOs may also need to grow quickly to meet the needs of their members.

Comparison of DAOs and traditional companies. Source: Aragon

The main purpose of this article is not to provide a detailed introduction to every crypto DAO, but to give a high-level overview of what a DAO is, why DAOs are so interesting, and to showcase some potential use cases of DAOs.

DAO Examples

The most notorious DAO to date may be The DAO, launched in April 2016 as a decentralized venture capital fund, where many members contributed ETH to the organization and received DAO tokens in return, which could be used to vote on which projects to allocate funds to.

The DAO raised a total of $150 million worth of ETH, but $60 million was stolen by hackers. Interestingly, even though The DAO, this decentralized autonomous organization, has since failed, people can still see all the transactions that occurred, as they are recorded on the public blockchain and will never disappear.

Unfortunately, the hacking incident has left many with negative impressions and doubts about decentralized autonomous organizations, or the term "DAO." In fact, DAOs are an extremely powerful form of organization, and it is expected that DAOs will become active again in the crypto industry soon.

In fact, crypto projects themselves can be considered a form of DAO if these projects rely on decentralized governance for management, meaning that token holders can vote on the project's direction or various parameter settings, rather than having a centralized team make decisions alone—crypto projects with these characteristics can be seen as DAOs.

For example, token holders of MakerDAO, which mints decentralized stablecoins, can vote to govern the system and set system parameters such as fees.

An example of a MakerDAO proposal execution

Another example is Curve DAO, which established an automated market maker (AMM) that generates fees and shares profits with token holders who lock their tokens.

The longer Curve tokens (CRV) are locked, the more voting power and rewards DAO members receive. Unlike traditional companies that distribute profits based on equity, the setup of Curve DAO allows for voting power and income shares to be weighted based on the duration of token holders' investments.

Curve DAO

Token stakers can directly control DAO assets through their tokens, and they can be anonymous and reside anywhere in the world. These anonymous token stakers can gather online to vote on the allocation of DAO assets for anything, including hiring employees—this is what is happening today.

DAOs can consist of many identified and anonymous members, who can become legitimate employees based on community reputation. For example, the Empty Set Dollar (ESD) DAO recently paid its community manager Lewi a salary of $180,000, which Lewi stated is the highest-paying position of his entire career. Other blockchains, such as Tezos and Decred, also have similar systems to reward contributors for their work.

We have also seen some decentralized autonomous organizations created to fund investments or grants. Let’s look at a few examples:

Moloch DAO is a DAO that promotes the development of the Ethereum ecosystem through incentive funds, allowing people to "withdraw" funds without compensation if the final overall decision of the DAO is not agreed upon. The MolochDAO contract has been forked multiple times to create other DAOs.
MetaCartel Ventures is a for-profit fund that primarily invests in decentralized applications (dapps) and is an early investor in many well-known crypto projects, including Zapper and Rai. The fund's members are experienced builders in the crypto community.
Similarly, The LAO is another decentralized autonomous organization composed of Ethereum enthusiasts that primarily invests early in some crypto projects, such as Boardroom and Aavegotchi.

MetaCartel Ventures and The LAO are typical examples of decentralized autonomous organizations, both having strong access to the crypto ecosystem's "deal flow," often performing better than many venture capital funds because the founders of these projects want to collaborate with DAO members, who embody the spirit of crypto.

Additionally, we also see some decentralized autonomous organizations that focus on more specific investment opportunities, such as NFT art and virtual gaming projects. For example, Yield Guild Games is a DAO based on a "play-to-earn" business model, where investors can purchase NFTs in games like Axie Infinity, League of Kingdoms, and The Sandbox.

FlamingoDAO is a profit-oriented DAO focused on NFTs, actively investing in NFTs, and recently spent 605 ETH (approximately $7.62 million) to acquire a rare CryptoPunk NFT, which attracted industry attention.

Some DAOs are organized around work, such as Raid Guild, which is a decentralized collective of builders and designers focused on developing cryptocurrency products; MetaFactory is a decentralized autonomous organization centered around fashion and culture, primarily selling creative products.

DAO Tools

There are many tools available in the market for creating and coordinating DAOs, such as Aragon, DAOStack, DAOhaus, and MyCo, so members do not have to build everything from scratch.

The above shows an example of creating a DAO in DAOhaus

There are also tools like Snapshot, which are primarily used to manage voting proposals from token holders, making it easier for organization members to view proposal details and voting status.

The above shows a voting page for a Yearn.finance proposal on Snapshot

In some decentralized autonomous organization projects, you can even buy and sell governance votes, such as Automata. However, this concept may be controversial, as it can lead to those with substantial capital controlling the votes, but I believe that creating such lending systems is inevitable and will only lead to a more stable governance structure for the projects.

In terms of metrics, there are also decentralized autonomous organizations that track the DAO ecosystem, such as Deep DAO. Although the data provided by this organization may not be comprehensive, it at least allows you to view several key metrics, such as member count, proposals, and voter participation.

The above shows some key metrics of decentralized autonomous organizations on Deep DAO

Future Use Cases

DAOs have many interesting use cases, and we are just beginning to design them. With DAOs, we can quickly experiment with governance systems to understand which governance methods work and which do not. For example, in the future, there may be a DAO that makes decisions about the organization's future, allowing members to bet in prediction markets and then use the results of those markets to make action decisions.

When DAOs themselves serve many different protocols and receive governance tokens as rewards, we will also see "meta-governance," where a decentralized autonomous organization can not only vote itself but also accept delegation to vote on behalf of other decentralized autonomous organizations.

Let’s consider a potential use case for an anonymous DAO: all members within this decentralized autonomous organization can be anonymous, and by building a reputation within the DAO, they do not have to disclose their identities. This means that each member can work in a fairer competitive environment and makes it easier for the DAO to reward individual contributors rather than catering to those with a large "fan base" or more well-known organizational members.

Another interesting use case for DAOs is "shared" NFT art, where each member of the organization can vote on different attributes of a piece of art and change the overall artwork based on those attributes.

Potential Issues

While DAOs are a powerful form of organization, they may also have potential issues, as they are not an ideal system for everything.

While DAOs can replace various aspects of legal contracts with code and save significant operational costs, in some cases, decentralized organizations and their members may not have the necessary legal protections beyond the DAO rules outlined in smart contracts. Additionally, although some DAOs may form legal entities behind them, problems may arise if control of the DAO becomes centralized or is vaguely defined.

It is worth mentioning that on March 10, the Wyoming State Senate in the U.S. passed the first committee hearing and approved Bill No. 38, proposed in January 2021, which aims to recognize the legal status of decentralized autonomous organizations and grant them limited liability company (LLC) capabilities.

Depending on how they are set up, decentralized autonomous organizations may find it more challenging to coordinate and act quickly compared to centralized leadership models (for example, a company CEO can make quick decisions when necessary).

However, DAOs can actually address these issues, such as setting a quorum for decision-making to reduce the time taken to make decisions and establishing response requirements for DAO member decisions, etc. This means that when many decisions need to be made at the beginning of the organization's establishment, some members may have more centralized power, but the DAO will gradually decentralize over time, which is known as "progressive decentralization."

On the other hand, there are also potential issues with DAO "voters," such as: not all members want to vote (this is often referred to as "voter apathy"), or some voting members may not meet the qualifications or standards.

In such cases, there may be "voters" who delegate their voting power to those organization members who are more knowledgeable and actively participate in voting, and who align with the "voter's" wishes. These voting delegates are sometimes referred to as "protocol politicians," as they often seek to obtain delegated votes from DAO members, similar to politicians in the real world. Therefore, we may see some lobbying groups emerge that will influence the decisions of "protocol politicians."

Moreover, in the future, we may even see decentralized organizations directly engage in lobbying and become major political institutions in society.

Lastly, there is a concern that if the membership of decentralized autonomous organizations is too open, it may lead to a decline in quality within the organization and an increase in "noise." However, this issue can be addressed through organizational screening or setting minimum token holding requirements to ensure that each DAO participant shares the risks, ultimately incentivizing the organization towards success.

Resource Sharing

If you want to learn more about DAOs, you can read the article by Vitalik Buterin, co-founder of Ethereum:
"DAOs, DACs, DAs and More: An Incomplete Terminology Guide," or you can share your thoughts or project information about DAOs on Twitter @ljxie.

Thanks to Will Warren, Jordan Clifford, and Brian Flynn for reviewing this article.

Disclaimer: Linda Xie is the Managing Director of Scalar Capital Management, LLC, which is a crypto asset investment company focused on ETH and Ethereum tokens. This article is not investment advice.

Source link: linda.mirror.xyz