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An Example DAO Structure

Let’s talk about DAOs. A DAO, by definition, is both “decentralized” and “autonomous”. In my view, this means that the DAO itself does not a top-down structure (i.e., it does not have a CEO) and it is not a registered legal entity under the jurisdiction of any state.

So how can such an entity interact in the real world? Can it own property? Can it provide limited liability for the people who work on it? In my view, the answer is yes, and this post reflects my current understanding of how. One key principle is to differentiate between elements that live/interact on the blockchain and elements that live/interact in the “real world”.

Specifically, I am going to talk about three different structures that can be part of the DAO/World interface: multi-sigs, trusts, and coops. There are other ways to achieve the same goals, but this is just meant as an example.

Multi-Sig

First, let’s talk about multi-sigs. Multi-sig is just shorthand for a Multi-signature wallet. All it really means is that certain transactions require multiple signatures to authorize. The reason a DAO might want to incorporate multi-sigs into its structure is two-fold:

  1. Allowing decisions to be made by a single individual is dangerous (what if that person get’s hit by a bus?) and may not be consistent with the principles of decentralization.
  2. Requiring every decision to be made by the whole DAO can be cumbersome and inefficient

So, basically, a multi-sig is a way for DAO to delegate power (e.g., budget) to a smaller, more nimble sub-organization.

A multi-sig lives on the blockchain. Therefore, in my view it should have limited interactions with the real world. In the example above, there are two multi-sigs: product and treasury. The product multi-sig pretty much just sends money to a development organization (in this case, a coop), and the treasury multi-sig interacts with a trust that can hold real world assets. The amount of money controlled by each multi-sig is the kind of thing that can be voted on by the greater community of governance token holders.

Coop

In principle, a coop is an organization that is run by its members, where distributions (and sometimes voting power) is determined by something called “patronage”, which represents how much each person has contributed to the coop (usually within a particular period).

In this example, the coop is an entity that is organized and registered under the jurisdiction of a US state. It is made up of developers who cooperate in the development of new code (both for the UI and for new smart contracts that live on the blockchain). The coop provides its members with limited liability, as well as health insurance options and other nice things for workers to have.

The coop is funded by the multi-sig, and the relationship between the multi-sig and the coop forms the blockchain-real world interface.

Trust

A trust is an arrangement between three parties: the trustor, the trustee, and the beneficiaries. Like the coop, the trust is a legally recognized entity that exists for the purpose of performing certain actions, specifically, holding real estate or other real world assets. The trustor is the multi-sig, and the beneficiaries are the holders of the governance tokens.

The trustee is a qualified professional who takes the funds provided by the multi-sig and invests them in a way that benefits the token holders. Periodically the Trustee can distribute funds back to the token holders or take other actions that increase the value of their tokens.

There are a few important differences between a trust and a coop that made this DAO decide to rely on a coop for development and a trust for holding assets. A trustee is legally obligated to act on behalf of the beneficiaries, which can create problems if the trustee starts doing anything creative. Therefore, a trust is a better vehicle for situations where the actions of the trustee are very limited.

On the other hand, a coop is a better vehicle for allowing multiple people to work together, to onboard new members, and to distribute benefits to each other (as opposed to third party beneficiaries).

So there you have it. A DAO can be decentralized and autonomous while retaining the ability to make nimble decisions (via the multi-sigs) and interact with the real world (via related entities such as a coop or a trust).

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Icewater builds blockchain technology for the future. Our primary product is H2O, a stable coin that focuses on long-term stability

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Redbeard

Redbeard

Patent Attorney, Crypto Enthusiast, Father of two daughters

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