DAOs Are The Next Big Thing
Disclaimer: This article is made for educational purposes. Hopefully, people find these updates helpful in keeping up with the breakneck pace of progress happening in crypto these days.
This is not financial advice; always do you own due diligence on coins :)
Crypto moves at a lightening fast pace, and with it comes a slew of acronyms and shorthand lingo that even confuse a longtime vet — let alone a crypto newcomer.
DeFi, CEX, DEX, AMM, TradFi, CeFi, CeDeFi, NFTs, ERC20, PoW, PoS. And that’s not getting into abstract technical terms like nonce, gas limit, SHA-256…
NFTs (non-fungible tokens), the most recent acronym to gain mainstream attention, has absolutely exploded — with over $1.1 billion in cumulative sales volume.
I’m here to teach you another three-letter acronym to keep your eye out for: DAOs.
The Way of the DAO
So what are DAOs?
A DAO is a decentralized autonomous organization. A simple, layperson-friendly analogy is that DAOs are essentially companies where its bylaws are written in code, instead of written on a piece of paper that lives in the file cabinets of some municipality.
Like how DeFi is programmable money and how NFTs are programmable media, DAOs are programmable organizations of people.
With its governance and operations written in smart contracts, DAOs ensure that its objectives and mission are immutable — decided by a community of DAO members.
They’re not as opaque as a traditional company governance, nor can Board procedures be tossed in the wind — like in the infamous Board scene in the HBO show Succession (spoilers for the show in the video linked below).
Instead, DAO governance structures are fully transparent and auditable to anyone with an internet-connection, and its procedure are absolute law — until the DAO votes to amend them.
The History of DAOism
DAOs started in infamy — with the first DAO, name “the DAO”, created in order to venture fund up-and-coming crypto projects in a decentralized manner.
Unfortunately, the DAO was hacked on June 2016 — resulting in the loss of 3.6 million ETH (nearly $9 billion USD in today’s prices).
This event forced the Ethereum community to decide to hard fork the blockchain in order to refund the DAO community members — leading to the split between the current Ethereum blockchain where the refund was honored and the Ethereum Classic ($ETC) blockchain which still holds the record of the DAO hack.
After that moment, DAOs laid low for a while, until Maker came into the scene.
MakerDAO is an open source community that manages Dai, the most popular crypto-collateralized stablecoin and lending protocol in DeFi — with nearly $10 billion locked in the protocol.
They re-popularized the DAO structure to pass executive votes and align on the protocol’s roadmap. These votes span the gamut from adjusting the DSR interest rate to changing the Stability Fee of the protocol.
Now, DAOs have emerged as a legitimate form of governance of open source projects and protocols, and are quickly becoming the preferred way of coordinating between community members of a crypto project.
PieDAO is focused on creating index products that bundle multiple coins in risk-mitigated ETFs of sorts.
Aragon is a DAO that builds tools for other DAOs to organize and collaborate across members.
Why DAOs are Important
DAOs are powerful because they create incentives and a sound framework for thousands of people to organize without the need for formal roles or hierarchy.
As a result, open source projects like cryptocurrencies are able to scale their operations much more quickly than a traditionally governed organization like a foundation/non-profit or a company.
For example, Uniswap is able to process nearly the same transaction volume as Coinbase — despite the fact that it has an order of magnitude less employees than that of Coinbase.
This is possible because Uniswap is operated by a DAO — where the core development team and any $UNI holder can collectively decide on how they want to advance the protocol.
Since UNI holders have a financial stake in the future of Uniswap, they are better incentivized to participate in the governance of the project as well.
This alignment allows UNI holders to simultaneously be an investor, operator, and user of the protocol.
Outside of human capital efficiency, DAOs are inherently the internet-native way to manage projects — built from the ground up on Web3 principles like open, permissionless, and decentralized.
As a result, DAOs are more democratic than a traditional private company because anyone can get a say in the roadmap of a protocol — versus just the Board having that power in a private company.
DAOs allow holders to simultaneously be an investor, operator, and user of the protocol.
For the first time ever, absolute strangers can coordinate hundred of millions of dollars and build a product that serves millions of users without ever meeting in-person, signing a legal document, or honestly even knowing each other’s names (many DAO members have pseudonyms like their Twitter handle or just their ETH address).
And the DAO prevents any bad actors. There’s no way for a member to run away with the DAO’s money — at least not the extent that we’ve seen in traditional startup structures.
Because the code is law.
Crypto DAOs are getting a lot of attention lately because of the large balance sheets (called treasuries) that they command — derived from holding a portion of the projects’ native tokens.
Some of these DAOs have billions of dollars of idle capital, waiting to be deployed in order to generate optimal yield.
The beauty of DAOs is that the community members — not just the core dev team — have the power to deploy its capital in any way that they wish.
DAOs are use the treasury to hire more developers and build out more products, deploy in a robust liquidity mining program to acquire more users, or hedge by swapping the tokens into stablecoins or other protocol tokens.
It’s all up to the community.
And while DAOs are predominantly used to govern crypto projects, they — in theory — can be used in any organization of people that want to incentive and leverage participation from a community.
An interesting DAO use case that is popping up again is using it to deploy venture funding (yes, we’ve come full circle from The Dao days).
The LAO has deployed nearly $40 million USD worth of ETH into improving the Ethereum ecosystem.
MolochDAO awards grants to Ethereum developers who apply for funding — similar to a government grant system.
MetaCartel is a DAO that focuses on accelerating dApp development, especially around projects created in hackathons.
Again, unlike traditional venture, a community of DAO members democratically decide on which projects they want to fund.
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