Governance as a Service: a New Business Model for DAOs?

It’s halfway through 2020 and the DeFi industry has made some real strides under the spotlight. Several Layer 2 scaling solutions on Ethereum are live, Bitcoin is starting to transmute liquidity via multiple ERC-20 manifestations, and DAOs are a thing again.

Most of WBTC’s launch partners are confirmed members of its DAO

Speaking of DAOs, some of DeFi’s major players are making efforts to decentralize their infrastructure- or at the very least, look like they’re doing it. Here’s a list of just a few:

• WBTC DAO — a consortium of largest DeFi companies, exchanges, custodians governing transfers, custody, mint/burn logic, etc. of the WBTC token.
• DiversiFi launched necDAO as a governance community for their decentralized exchange.
• MakerDAO spread voting power to the MKR token holders, and incorporated on-chain polling within their community.

Say what you will, but decentralization could be more than just a trend here. As many DeFi products are regarded for upholding the values of permissionlessness with no centralized authorities, it would make sense for the companies governing the products to distribute their power and follow suit. Now we’re seeing businesses implementing dissolution into community governance as though it were a stage in their business cycle:

• Meta Governors (often liquidity providers) will be in charge of administering the parameters and execution in mStable’s ecosystem.
• DeFi Money Market’s DMG to serve as a governance token to adjust interest rates, collateralization, reserve %, etc. and collect dividends when this transitions entirely to a DAO.
• StakerDAO, a Tezos-built DAO, created a three-branched system where STKR token holders have voting power over the creation and design of their DeFi products.
• The Lao’s website mentions that mentors are available to funded projects and can help out as advisors.
• Gnosis granted custody of their exchange frontend Mesa to the DXdao.

At this rate, decentralization will go on to provide many community-run DeFi products that were formerly owned by legally incorporated businesses with executives, board members, etc. Ideally the governing communities will be incentivized by the revenue-generating mechanisms of said DeFi products, otherwise the ecosystem would collapse.

But why would any Founder just give away his/her product, aside from the off-chain idealism of decentralization? The biggest upside for companies bestowing responsibility of their products to communities, is the relief of legal liability in such an SEC-overwatched, regulatorily murky space. In addition, this can be done while preserving a substantial amount of stakeholdership among the original founding team. That is the new Promised Land for DeFi companies.

But what is the best method of incentivizing and empowering a community to govern? We have seen Gnosis transition their ownership of Mesa to the DXdao community, who host the domain in a decentralized fashion. However, there is nothing more than goodwill and graciousness to Gnosis for their immense support that keeps the DXdao community maintaining the DEX frontend. How long will that last without any form of remuneration? I’m all about staying loyal and dedicated to one’s allies- the only issue I have is that you can’t put it on-chain.

Art by Satoshi Kambayashi

It is the responsibility of the DAO to include their reward for governance into the business models they govern, as it will ensure that there is always incentive for new and old members to participate in this service. If a DAO could generate revenue from collective stakeholdership of a platform’s revenues in this manner, then could a DAO thrive solely from governing products, apart from building and investing in them?

I would venture to say that yes, governance will be the new frontier of business models for decentralized autonomous organizations, if given the proper incentives. I just don’t think these incentivization structures have been entirely figured out yet. Some ideas have been expressed:

• Governance tokens tied to a potential revenue-fueled dividend or token burn model (DMM).
• Stakeholder community of investors voting on PoS-fueled token burn rate (StakerDAO).
• Pure platform ownership, allowing the DAO to issue new business models of their own. The DXdao can facilitate Initial Dex Offerings on Mesa, with a percentage of tokens raised routed to their treasury.

What qualifies a DAO for governance? One potential answer and example we have seen already is the community of stakeholders, which is probably the best case scenario. Perhaps then, based on that stakeholder community’s success, they could explore other partner projects and be able to govern multiple DeFi products and protocols.

It would be interesting to see a DAO formulated from the ground up with the sole purpose of being a standalone, community-agnostic GaaS provider. Anonymity would have to be weighed with the necessity of proving the DAO members’ track records. Maybe DAOs can be the on-chain makeover of blockchain advisories, with retainers replaced by stakeholdership. This revitalization of DAO governance will hopefully make successful case studies of blockchain’s potential and utility, in and out of finance.

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Just FYI: this piece is entirely an expression of my own opinion and serves as my way of thinking “out loud.”