Aug 24, 2021
An Overall Observation of DAOs’ Development and Governance Mechanism
Part 1: Definition, history and classification methods
Summary：
A Distributed Autonomous Organization (DAO) is a form of organization that may be built on blockchain. DAO make decisions in a decentralized environment under shared rules, where tasks are accomplished automatically. The concept originated by Daniel Larimer and was refined by Vitalik Buterin. DAO has experienced a tortuous development through the past 8 years, including the Introducing Period, Chaos Period, Reconstruction Period, and the current period of Exploration.
Mainstream classification of DAOs includes sorting them by general and specific, by blockchain layered structure, by application scenarios, etc. In order to adopt comparative analysis, we also classify DAOs by the governance frameworks: 1) by coordinating mechanisms, such as off-chain proposals, entry eligibility, proposal prediction market; 2) by voting mechanism, such as the widely adopted token-based quorum voting, execution voting, permissioned relative majority voting, etc.
For the next part, we will discuss the pros & cons of several DAO representatives under certain governance framworks.
Authors：
【Huobi Research Institute】 Chen Han, Yuan Yuming
Contact the Authors:
Huobi Research Institute: huochain_research@huochain.com.cn
I. What is a DAO
A Decentralized Autonomous Organization (DAO) is a form of organization that makes some decisions and automates tasks through code and procedures in a decentralized and autonomous manner under shared rules. In simple terms, it means that people gathered under a “big goal” make collective decisions about different “small goals” and have the actions corresponding to the decisions executed automatically on the chain. In the blockchain world, DAOs are implemented through tokens and smart contracts and are often used for project governance or resource allocation.
1.1 Definition and Evolution of DAO
By definition, based on the content of the DAO acronym, the current mainstream definition needs to meet at least three points：
- Distributed
In the context of DAO, distributed mainly refers to the decentralization of decision-making rights, and does not give key figures/institutions special rights in the mechanism, which is completely different from the decision-making/ management system of traditional hierarchical organizations.
- Autonomous
It mainly refers to whether the rule/decision flow is constrained by code and automatically executed after the decision is completed; This process mainly relies on smart contracts.
- Organization
The organization is composed of people, who will be responsible for the input of core parameters (such as proposals) in DAO and start the distributed autonomous process of “small goals”. The organizational form of DAO includes two points: 1) the final individual for proposal and decision-making (expressed as “edge” according to the paper by Vitalik Buterin) is human, not purely automated individuals such as AI and robot; 2) Having a certain number of participants can fully reflect the process of individual decision-making based on personal interests. The difference between organizations under DAO semantics and ordinary groups is whether there is a mechanism to ensure the realization of “distributed”: fixed small groups are easy to form consensus outside the chain, and even democratic voting can not guarantee the decentralization of rights.
The definition of DAO originated from the distributed autonomous company (DAC) proposed by Daniel Larimer (BM), the founder of Bitshares and EOS in 2013. In 2014, Vitalik Buterin, the founder of Ethereum, refined the definition and distinction of DAO in a blog post, which became the more accepted version of the standard definition.
According to Vitalik, a DAO is “an entity that lives on the Internet, exists autonomously, but also relies on hiring individuals to accomplish certain tasks that autonomous mechanisms cannot accomplish on their own. Vitalik gives the following quadrantal diagram to distinguish DAOs from other distributed organizations, while only those with internal capital, autonomous at their core, and human behavior at their edges are DAOs.
According to Vitalik’s quadrantal diagram, DAO can be differentiated from distributed application (DA) by the existence of transferable value system. It can also be differentiated from distributed organization (DO) by the ability of automatically executing decisions. Further, DACs were classified as a subset of DAOs.
1.2 The capability and boundaries of DAO
With the continuous emergence of blockchain projects around the world, new organizational paradigms matching the blockchain world are gradually needed. The need comes from different business models and organizational forms required by the on-chain world.
In terms of business model, DAOs allow users to exit a project by selling tokens. They make the network effect less costly comparing with traditional organizations. Users may easily exit and choose alternative network. This implies that blockchain projects will pay more attention to the governance needs of their ecosystem, by giving more rights to participants to co-create in order to retain users and contributors and reduce the risk of replication.
In terms of organizational forms, the difference includes: 1) globalized and distributed from the initiating stage; 2) projects could have no enterprise entity, hence bottom-up governance rather than enforced by laws; 3) decision execution could be rapid, especially in the scenario of codes updating. These characteristics require the organization’s governance to be more fair, transparent, efficient and relatively stable, which is also unbalanced in the hierarchical structure.
The emergence of DAO aims to provide a new organizational paradigm and governance form of group decision-making for the blockchain world. On the premise of eliminating hierarchy, this new paradigm provides fairness between participants’ contributions and rights of the organization, improves governance efficiency, and reduces governance costs on this premise (let’s not expand whether it has fully realized its original intention here).
Specifically, DAO tries to solve the following problems：
- Fairness — ensure fair decentralization, so that everyone’s opinions can be reflected in governance, and the adopted proposals can be accurately implemented.
- Transparency — ensure that governance rules are transparent and cannot be tampered with, and that governance and resource information is visible and timely.
- Efficient collaboration under multi-party cooperation game — provide an efficient collaboration basis of de-trust and no regional restrictions for participants with different interest demands.
Meanwhile, DAOs are not Savior to everything, it has the following boundaries:
- Profit maximization — maximize governance but not profits, depending on the intelligence and orders of the group of people.
- Quick decision — applicable to complex and multi-party governance scenarios but not rapid decision-making (i.e., decision within 1 hour).
- Overall economical improvement — still far from various applicable scenarios, faster decision making, better functionality and less governance costs.
Based on the capability and boundaries, some trends have emerged: 1) achieve minimum availability, such as simple voting governance; 2) exploration of application boundary, DAOs in subdivided fields such as investment and financing, special governance and NFT have emerged, and some widely used models have emerged in different application directions.
1.3 The development stages of DAO
From the perspective of the time dimension, the evolution of DAO has roughly experienced three periods: the Introducing Period; the Chaos Period; and the Reconstruction Period. Since the second half of 2019, it has entered an Exploration Period. DAOs with different functions and forms of existence are moving towards a more stable development stage.
- Introducing Period (2011–2014): Concept forming and spread.
- Chaos Period (2015–2016): Appearance of Dash DAO signaled DAOs moved from concept to implementation; the flash across of The DAO stroke down the expectation of DAO in some extent. Impact of The DAO caused: 1) cooldown in heat of the community; 2) shake the confidence due to the exposure of technical risks under complex scenarios; 3) potential legal risks indicated by the SEC.
- Reconstruction Period (2017–2019): Continuous development of DAO platforms including Aragon and DAO Stack, and specific representatives including MakerDAO and Moloch.
- Exploration Period (Current): Paradigm given by Moloch v2 adopted widely, as well as the DeFi boom triggered by Compound and its governance token.
In summary, DAO enters the current exploration period — exploring the utility and boundaries of DAO within different purposes, application scenarios, and ecologies.
II. Classification Methods of DAO
DAO itself means an organizational behavior model and a business model, and the organizational purposes of many blockchain projects may be different from the business model; The concept and theory of DAO itself are still evolving and not fixed, so there are various definitions of “DAO classification”.
2.1 General v.s. Specific
The core difference of this dimension is whether the token can be directly used for governance.
✓ General DAO — — bitcoin, ethereum, etc;
✓Specific DAOs — — DashDA, MakerDAO, and many other current DAOs.
2.2 By blockchain layered structure
This dimension is distinguished by the hierarchy served by DAO governance and decision-making. The consensus layer almost serves a chain itself; The contract and application layers serve specific protocols, projects, or application scenarios; In addition, there are some middleware projects for upper layer contracts/applications to create DAO. This middleware provide some governance paradigms and standard solutions for DAOs, and some also have native DAOs created based on their own governance paradigms, so they are also included in the classification here.
✓ Consensus layer DAO — — Bitcoin, Ethereum, Boca, Bezos, etc.;
✓ Protocol/application layer DAO — — Most projects such as MakerDAO, MolochDAO, and AaveDAO;
✓ Middleware DAO — — Aragon, DAOStack, Colony, DAOHaus, Snapshot, etc.
2.3 By application scenario
At present, many DAOs are clustered in the contract/application layer, and the application scenarios and objectives are different. Therefore, it is necessary to classify different scenarios under this branch. Here we refer to the classification method on a DAO information platform Boardroom.
✓ Investment and Financing DAO — — Moloch, MetaCartel, DAOSquare, DuckDAO, etc.
✓ Protocol DAO — — MakerDAO, Compound, Uniswap, AaveDAO, etc., mainly used by token holders to participate in protocol governance.
✓ Project DAO — — Badger DAO, YAM DAO, etc., mainly for project promotion services, decision-making, product planning, etc.
✓ NFT DAO — — Flamingo, Metafactory, JennyDAO, B20, etc., spawned by the emerging NFT wave, which includes both investment and financing DAOs.
✓ Other scenarios — — As emerging concepts continue to spawn, there are also guilds such as DAOs that specialize in serving communities and serving the freelance talent market, which will not be expanded here.
2.4 By governance framework
The above lists some of the conventional ways to classify current DAOs, but in order to explore the similarities and differences between different DAOs, it is necessary to classify them according to some similar governance frameworks behind some of the current mainstream projects. A governance framework is a large concept that encapsulates purpose, capability in governance, coordination mechanisms, decision-making methods, implementation, etc.
Since the number of DAOs varies, the cross-sectional comparability is mainly in “how to coordinate” and “how to make decisions”, so we have streamlined the focus of the governance framework to these two parts and categorized them as follows.
✓ Coordination mechanisms — — i.e., the balance between guiding active governance of participants and the influence of each proposal, there are several differences in coordination mechanisms: 1) off-chain proposal governance v.s. on-chain proposal governance (off-chain such as BIP, EIP, MakerDAO Phase 1 forum proposals); 2) DAO with or without access threshold (with access threshold such as Moloch’s funding/contribution threshold, invitation system, etc.); 3) whether there is a proposal attention allocation mechanism (e.g. DAO Stack’s proposal prediction, Compound’s delegated proxy). The difference between these three mechanisms is that in addition to cost and benefit considerations, they essentially set rules for participant attention and proposal influence, because DAOs that perform more complex coverable matters or involve more interests require higher expertise in proposal content, and place different importance on participant attention allocation.
✓ Decision-making mechanism — — i.e., rules that allow participants to reach agreement, currently mainstream programs are realized through voting, with two distinctions: 1) rights mapping methods (such as BIP and other arithmetic voting, the current mainstream governance token system); 2) voting rules (such as threshold-based quorum voting adopted by most projects, relative majority voting along the Moloch framework, etc.)
References
[1] https://blog.ethereum.org/2014/05/06/DAOs-dacs-das-and-more-an-incomplete-terminology-guide/
[2] https://blog.aragon.org/thoughts-on-governance-and-network-effects-f40fda3e3f98/
[4] https://vitalik.ca/general/2017/12/17/voting.html
[5] https://www.theblockresearch.com/defi-governance-games-makerDAO-87759
[6] https://deepDAO.io/#/deepDAO/dashboard
[7] https://www.boardroom.info/
[8] https://makerDAO.com/zh-CN/whitepaper/
[9] https://DAO.molochDAO.com/
[11] https://github.com/MolochVentures/Whitepaper/blob/master/Whitepaper.pdf
[12] https://ethfans.org/posts/aragon-network-whitepaper
[13] https://aragon.org/
[14] https://DAOstack.io/
[15] https://DAOstack.io/wp/DAOstack-White-Paper-zh.pdf
[16] https://forum.DAOsquare.io/
[17] https://medium.com/api3/api3-DAO/home
[18] https://consensys.net/diligence/audits/2020/08/aave-governance-DAO/
[19] https://dxDAO.medium.com/
About Huobi Blockchain Research Institute
Huobi Blockchain Application Research Institute (referred to as “Huobi Research Institute”) was established in April 2016. Since March 2018, it has been committed to comprehensively expanding the research and exploration of various fields of blockchain. As the research object, the research goal is to accelerate the research and development of blockchain technology, promote the application of blockchain industry, and promote the ecological optimization of the blockchain industry. The main research content includes industry trends, technology paths, application innovations in the blockchain field, Model exploration, etc. Based on the principles of public welfare, rigor and innovation, Huobi Research Institute will carry out extensive and in-depth cooperation with governments, enterprises, universities and other institutions through various forms to build a research platform covering the complete industrial chain of the blockchain. Industry professionals provide a solid theoretical basis and trend judgments to promote the healthy and sustainable development of the entire blockchain industry.
Contact us:
Consulting email:
research@huobi.com.
Official website:
https://research.huochaintech.com/
WeChat Subscribe:
HuobiCN
Sina Weibo:
Huobi Blockchain Research Institute
https://www.weibo.com/u/6690456123
Twitter:
@Huobi_Research
https://twitter.com/Huobi_Research
Medium:
Huobi Research
Welcome to join the research exchange group of the Institute
Disclaimer
1. The author of this report and his organization do not have any relationship that affects the objectivity, independence, and fairness of the report with other third parties involved in this report.
2. The information and data cited in this report are from compliance channels. The sources of the information and data are considered reliable by the author, and necessary verifications have been made for their authenticity, accuracy and completeness, but the author makes no guarantee for their authenticity , accuracy or completeness.
3. The content of the report is for reference only, and the facts and opinions in the report do not constitute business, investment and other related recommendations. The author does not assume any responsibility for the losses caused by the use of the contents of this report, unless clearly stipulated by laws and regulations. Readers should not only make business and investment decisions based on this report, nor should they lose their ability to make independent judgments based on this report.
4. The information, opinions and inferences contained in this report only reflect the judgments of the researchers on the date of finalizing this report. In the future, based on industry changes and data and information updates, there is the possibility of updates of opinions and judgments.
5. The copyright of this report is only owned by Huobi Blockchain Research Institute. If you need to quote the content of this report, please indicate the source. If you need a large amount of reference, please inform in advance (see “About Huobi Blockchain Research Institute” for contact information), and use it within the allowed scope. Under no circumstances shall this report be quoted, deleted or modified contrary to the original intent.
