What is a DAO, and Why Do DeFi Projects Need It?

Published in

DeHive

4 min readApr 4, 2022

The concept of decentralized autonomous organizations (DAOs) emerged a long time ago but has dramatically evolved ever since.

Indeed, DAOs in 2022 are completely different from the ones in 2015 in terms of ideas, purpose, and performance. This is probably one of the reasons why many traders and crypto enthusiasts miss out on this opportunity.

Today, we’ll do our best to address this issue and tell you how to benefit from DAOs in 2022.

What is a DAO?

A DAO, or decentralized autonomous organization, is a community-driven protocol based on the principles of equality and full decentralization.

The main idea of any DAO is distributed responsibility and decision-making process. Users create proposals for future project development, vote for developers’ ideas, and sometimes make amendments and even full patches to the protocol. This way, the protocol is created by means of thousands of people worldwide, the whole community, which makes it decentralized in all aspects.

Traditional Management Structure & Decentralized Autonomous Organization

Unfortunately, there are still a lot of projects that are afraid to integrate community-driven management. What they do is create a lite version of a DAO, allowing users to add proposals and vote for them with the native token.

More advanced community-driven protocols give more discretion to their users. For instance, members of Yearn DAO and Compound DAO can influence the protocol fee, while the latter can also make some updates to the protocol. Other examples of such progressive DAOs are Aragon and QiDao.

DAO benefits

So what are the main benefits of DAO protocols? Here’s a brief list.

Community-based. Collective work, distributed responsibility, and collaborative decision-making make DAOs pretty good, if not perfect.
Automated and fast. All decisions are made collectively by means of voting and later are enforced automatically, thanks to the underlying smart contract. This eliminates the human factor and speeds up project development and improvement.
Trustless and transparent. As with any decentralized protocol, DAOs retain the main benefits of blockchain technology.
More secure. Since there is no single point of failure and no human factor involved, DAOs are much more secure than other DeFi projects, let alone traditional industries.

Every single user of the DAO protocol is involved in the project development, which means they perform certain actions and benefit as well:

bring value to the protocol by proposing new ideas and voting;
hold protocol tokens and benefit from their growth;
influence the development of the protocol;
get monetary rewards, such as grants and community fund payouts.

As you might understand, joining a DAO can be a pretty beneficial idea if you choose the right project. So what are the most promising ones?

Top DAO projects

Here’s a list of the top 10 DAO tokens by market capitalization as of April 1, 2022.

We believe that you’ve heard about most of them since these projects are quite popular now among crypto traders and DeFi enthusiasts. But have you considered joining their DAOs instead of simply buying coins? Sometimes, it might be much more profitable in the long run compared to your usual investments.

So think about such a possibility! But don’t forget to do your research and double-check if the protocol gives its users enough justice.

Metagovernance of DeFi 2.0 protocols with DAO

We are sure that DAOs can be integrated into almost any governance system and effectively substitute traditional management.

For instance, you can unite the concept of DAO with DeFi 2.0. In this case, users of a particular protocol will be able to use tokens to get profit according to their strategy and vote in the DAO. Besides, since users take care of the governance, they decide how to use the tokens for voting.

Let us explain this idea with an example. Let’s say we use the DeFi protocol X that has a particular strategy and earns on the tokens of protocol Y. As the members of protocol X’s DAO, we can vote on how the platform acquires Y tokens and uses them in protocol Y’s DAO. Thus, we gain metagovernance within two protocols.

DAO future

What’s the future of DAO, you might think? The answer is simple — DAO IS the future. We are sure that the future of blockchain must be community-driven since it is the only way to enable true decentralization.

DAO is a perfect way for a protocol to work in tandem with its users and for the users to express their ideas and bring them to life. At DeHive, we are also thinking about creating a DAO to develop better, even more useful DeFi tools for our community. How do you feel about that? Let us know in the comments!

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