Why do we need DAO?
DAO is a decentralized autonomous organization that is managed using smart contracts. Would you like to know why people create the DAO? Let’s find out!
Smart contracts are responsible for the functions of voting, financial management and organization of work flows.
More and more cryptocurrency communities are interested in such structures. New DAOs appear almost every day. To join them, people quit well-paid jobs and invest millions of dollars in the sector.
The origin of decentralized governance
The DAO concept was created about 9 years ago when the EOS blockchain founder Dan Larimer introduced the term ‘decentralized autonomous corporation’. He described it as a structure with a charter ‘determined by the source code’.
Vitalik Buterin developed this idea by suggesting that the code base can determine the operational activities of an organization, its mission and ways to achieve it.
In the original Ethereum white paper, he wrote:
“The general concept of a “decentralized 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. This essentially replicates the legal trappings of a traditional company or nonprofit but using only cryptographic blockchain technology for enforcement.”
Some years later, the first DAO appeared — The DAO. It was a decentralized analogue of a crowdfunding platform, an autonomous venture fund that was managed collectively by all investors. A German startup was behind the development of the project Slock.it .
The DAO has predetermined the key features of modern DAOs. It had four important features:
- Impartial selection of participants. Anyone could join the management of the general funds. The only condition is ownership of the DAO token;
- Flexible structure. The voting system made it possible to support proposals of any nature — from targeted investments and charity to the creation of products useful for the organization;
- Available way to make a profit. The organization could profit from its initiatives. It was directed to the development of the project or simply converted into a DAO and distributed among the participants;
- Fair management model. DAO token holders had the right to vote in the course of making important decisions related to the management of the organization or internal projects.
The DAO raised 11.5 million UTH (~$150 million at the exchange rate at that time), which was approximately 14% of the total Ethereum supply. Its story failed — due to an error in the code, the project lost more than $ 50 million. However, this DAO provided the basis for the further development of the concept.
So many DAOs
The total amount of funds under the management of 1076 decentralized organizations tracked by DeepDAO is $10 billion, and the total number of their participants exceeds 1.7 million
Followers of the DAO model believe that self-organized communities can provide a new level of social coordination without centralized leadership.
People are grouped in DAO to create, distribute and receive resources within the framework of a common mission. The mission may include a wide range of goals: from more efficient management of the DeFi protocol to collecting NFT.
All decentralized organizations are nominally divided into two large categories: technically oriented and socially oriented.
The first ones are focused on building digital infrastructure, protocol management and the development of industry services. They tend to use blockchain to coordinate the actions of participants.
The main goal of the second ones is to unite people and search for new ways of interaction between them. Such organizations can also be managed outside a decentralized network.
According to the zones of interests, DAO can be divided into eight groups:
- Infrastructure;
- Protocol;
- Service;
- Social;
- Investment;
- Grant funds;
- Collector communities;
- Media
Infrastructure DAO
These organizations allow people to create their own DAO. They offer templates, frameworks, ready-made smart contracts and APIs that simplify the operational process in the blockchain.
In other words, thanks to such projects, even users with limited technical skills can organize a decentralized community.
There are over 20 infrastructure DAOs on the market offering various solutions for organizing communities in different networks. Among the brightest representatives of the segment:
- Aragon is an open source project offering a line of solutions for creating and managing DAO based on Ethereum, Polygon, Metis Andromeda or Harmony;
- Colony is a blockchain platform operating exclusively on the Ethereum network. The set of smart contracts proposed by the project is designed for a team — it ensures compliance with certain rules, without providing for a hierarchical structure;
- DAOhaus is a kind of browser for decentralized organizations that allows you to join existing communities and create your own based on the Moloch framework. The project works in various networks — from Polygon to Ethereum and the corresponding L2 solutions.
Protocol DAO
The major goal of the protocol DAO is to transfer project management into the hands of the community. Organizations issue digital tokens and their holders can propose, vote and make changes to the mechanics of the protocol.
Such structures usually introduce various models of liquidity mining and profitable farming in order to attract new users and increase decentralization.
The protocol DAO also includes:
- Uniswap is the largest decentralized exchange based on the automated market maker mechanism. The vector of the project development is set by the holders of the UNI management token.
- MakerDAO is a DeFi platform based on the Ethereum blockchain, which allows issuing DAI stablecoin secured by digital assets. The management token is MKR, which also participates in the DAI sustainability mechanism.
- Compound is a decentralized landing protocol in which interest rates are formed algorithmically based on supply and demand. It is also based on the Ethereum network.
Service DAO
As mentioned above, decentralized organizations manage assets with a total value of $10 billion and represent a significant sector of the cryptocurrency industry. Service DAO is a B2B market segment. They provide services to other distributed communities within their competencies.
In some jurisdictions, DAOs can obtain the status of a legal entity, in others they need an affiliated classical structure to interact with traditional companies and partners. This creates a demand for the services of specialists in the field of law.
In most cases, the DAO accepts proposals. In accordance with them these issues are resolved by legal advisers. However, in some cases, the legal aspect can be provided by smart contracts.
Distributed organizations like LexDAO offer tools that DAO can use instead of expensive and often inaccessible legal services.
In addition, there is a developing segment of ‘decentralized courts’. If there is a dispute between two DAOs, they can turn to a platform like Kleros, which is a kind of arbitration service. Conflicts within an organization can be resolved in a similar way.
There are many more varieties of service DAO: from outsourcing services (Vector DUO) to delegating project management (Governor DAO).
Social DAO
Social DAO can be considered as a product of the evolution of forums and group chats. First of all, such communities are focused on social interaction of people, and therefore can be created around their common hobby.
For example, the Bright Moments project is an NFT art gallery organized as a DAO. To join the community, the user needs to purchase a non-interchangeable token from the Crypto Citizens collection.
FiatLuxDAO is a community of graduates of the University of California at Berkeley. DAO is focused on financing scientific and technological innovations.
KrausHaus is an association of basketball fans who decided to create a DAO to raise funds, buy and manage an NBA league team.
Investment DAO
The first representative of this group was The DAO. Such organizations are focused on making a profit — their participants combine capital, knowledge and experience to form an investment portfolio in accordance with common goals.
Such DAOs can finance decentralized projects at early stages of development or invest in digital tokens.
CSP DAO is focused on development teams that use blockchain technology. The structure is managed through NEBO tokens, which are also responsible for the distribution of investment shares.
theLAO is the spiritual heir of The DAO. This is a venture fund focused on the Ethereum ecosystem. The organization launched in April 2020 has more than 30 projects in its portfolio.
All community members sign an operational agreement. Interaction with traditional institutions is provided by OpenLaw — it is responsible for preparing tax reports and performs various administrative functions. Like traditional funds, the LAO charges a management fee.
Some investment DAOs are focused on a specific segment of the industry. For example, Flamingo strategies are limited to the sector of non-interchangeable tokens, including fragmented NFTs.
Grant DAO
The participants of such organizations merge capital to achieve common goals, but do not have the aim to maximize the profit.
In most cases, these are “distributed” grant programs focused on maintaining the ecosystem of a particular protocol:
- Audius Grants provides funding for projects and initiatives of the Audi ecosystem;
- MolochDAO is a community whose members finance the development of EIP.
However, there are other examples — the Mint Fund grantees are digital artists interested in creating NFT. DAO subsidizes the cost of issuing tokens (gas commission), as well as provides consulting and other support.
The Collectors DAO
The rapid development of the NFT segment and the growth in the value of digital works of art has caused the emergence of decentralized organizations whose purpose is to collect non-interchangeable tokens. Participants of such DAOs usually own a share in the treasury of the community.
Some DAOs are focused on specific collections. For example, APE DAO supports the Bored Ape Yacht Club ecosystem. Others choose collectibles based on different principles — herstoryDAO acquires digital works by black women.
There are also organizations that buy NFTs for the purpose of sharding them and subsequent fractional ownership. An example of such structures is PartyDAO.
There are other DAOs , which are created to purchase physical items or finance any public initiatives. So, in February 2022, AssangeDAO raised more than $32 million to facilitate the release from prison of WikiLeaks founder Julian Assange.
Media DAO
The purpose of these decentralized organizations is to disseminate news and other information.
Some media DAOs resemble community-driven traditional media. For example, holders of BANK tokens of the Bankless organization have the right to put various proposals and initiatives to the vote, as well as to be content authors, provided that the relevant skills are confirmed.
Organizations like Mirror are community-owned blogging platforms. They allow authors to publish materials and monetize content.
Another representative of the group, Global Coin Research, is a hybrid community of authors and investors focused on the Web 3.0 industry. Holders of GCR management tokens get access to a joint investment platform and unique analytical content. Its creators earn tokens for writing materials.
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To sum up
The DAO organizations are changing and evolving. So, in the future we will see even more options for decentralized coordination of people. Socially oriented structures are more dynamic in this regard, since they rely on the social interaction of users.
In technically oriented DAOs, huge amounts of money are often at stake, so these organizations are extremely “unwieldy” — responsibility for capital requires on-chain management with a mandatory system for submitting and ratifying proposals.
The decentralized structure offers a different model of management and development, which, under certain conditions, can be much more effective than traditional mechanisms. However, due to legal and other problems, the creation of a DAO is not always justified — sometimes the classical management structure is more viable.
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