API3
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API3

Fiona Watson, A Parliament of Rooks

Significance of the DAO and staking

API3: The DAO & Staking, Part I

A short update: We are currently going through the auditing process of the authoritative DAO and staking. We have cleared the first audit and are waiting for the rest to be finalized. The current state of the market has driven up the demand for audits significantly, which is causing some uncertainty in audit schedules across the board. Since the blockers are mainly external and expected to resolve in an uncertain —yet presumably short — time frame, expect the DAO & staking launch announcement without further notice, closely followed by the launch itself.

As the launch of the authoritative DAO and its staking pool is drawing closer, we will publish a series of posts that discusses how they were formulated in the whitepaper, what we have learned during the interim period of DAOv1 governance, and how exactly the final version is implemented.

Why do we need a DAO?

Most blockchain projects are either centrally governed, or have decentralized governance mechanics that are inconsequential — “let’s give the community some knobs to play with while we continue running the show.” However, for a project to reach true decentralized governance, its assets need to be kept on a sufficiently decentralized blockchain and governed over in a permissionless and decentralized way. Budgetary control grants sovereignty, and decentralized governance lacking this is merely theater.

This is especially critical for oracle solutions because it’s unavoidable for them to have off-chain components (as they integrate the off-chain to the on-chain). These off-chain components make them prone to complete budget intransparency, corruption and fraudulent business practices. Therefore, an oracle solution should be deliberately designed in a way that its off-chain (centrally governed) components submit to its on-chain (decentrally governed) components, and not the other way around. The on-chain, decentralized governance holding the keys to the treasury is the ultimate way of achieving this.

Having a mint() method in a token contract used to be strictly forbidden. This was because such functionality would have needed to be governed over by the founding team for the lack of a decentralized alternative. It’s easy to see that if we have a decentralized governing structure that can be trusted with the budget, we can also trust it with the monetary policy of the project. This adds one more tool to the toolbox of the project, and allows it to get itself out of corners it painted itself into.

Here, a potential argument is “API3 did rather well without the authoritative DAO, keep doing what you’re doing.” The issue with this is that API3 (under DAOv1 governance) did well with its current scale, which doesn’t predict success at the scale that we envision it to reach (all APIs, all chains, all use-cases, public, permissioned, enterprise, etc.) We prioritize decentralized and permissionless governance expecting the kind of growth that will make a transition impossible later on due to solidified power structures. That being said, DAOv1 accrued ample amounts of legitimacy through exercising benevolent governance, which is a significant resource that API3 should utilize even after the migration to the authoritative DAO.

DAOv1 and the authoritative DAO

The project is currently governed over by DAOv1, which is a conventional Aragon-based DAO where voting power is hardcoded for founding members. This implements a decent approximation of token-based governance, as the tokens of the voting power holders are time-locked and they have a strong vested interest in upholding the project’s long-term success as a result. In addition to this, the authoritative DAO will provide a significant improvement to representation through permissionlessness.

The name “authoritative DAO” is in reference to the following:

  • It’s a more complete version that will succeed DAOv1. However, we refrained from calling it final/definitive/etc., as it’s planned to be extended in a hierarchical way.
  • DAOv1 and the authoritative DAO will coexist during the gradual migration. Here, “authoritative” refers to the fact that DAOv1 will act as a subordinate of the new DAO in terms of policy. The process of migration from DAOv1 to the authoritative DAO will be expanded on in a future post.

Why do we need staking?

Just as a lot of projects have tokens with no utility, they also implement staking mechanics that are not really needed (or do not provide the claimed benefits). Such aimless monetary expansion will only cause inflation. Therefore, staking rewards should be well-justified.

In the context of API3, staking rewards is primarily the price the project pays to achieve decentralized governance (which is not negotiable, as described above). A token holder stakes at the DAO pool to participate in governance (directly or by delegation), which comes at an opportunity cost because they could have staked their tokens at another platform or utilize their capital in any other way. Then, the project needs to compensate the stakers in return with rewards. By making these rewards withdrawable after 1 year, the stakers are incentivized to fulfill their governance responsibilities to the best of their abilities. The reward amount will self-regulate to stay at the market rate, which will be discussed further in another post.

Of course, another utility of staking is to form a pool of collateral for the insurance services that will secure API3 services in a quantifiable way. People often only consider this utility of staking, and forget about enforcing adequate representation in decentralized governance. In fact, an amount comparable to the total token supply should be staked at the DAO pool at all times to ensure that the governance is sufficiently decentralized, which will be a significant driver for the staking target and the rewards paid to achieve that.

Conclusion

In this post, we briefly introduced what the DAO and the staking mechanism means to API3 at a very high-level and why they are vital. We will publish a frequent series of posts in the following days, diving deeper into the details.

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