Decentralized Autonomous Organization as a way to manage DeFi projects
In 2016, a new form of decentralized infrastructure management appeared — DAO or Decentralized Autonomous Organization. The first project was The DAO, created on the Ethereum blockchain that raised a record amount of funds through ICO: about $150 million. The point of this process was that investors who own tokens manage the company by voting, and the process is organized independently. However, the project failed due to a coding error, which resulted in the theft of more than $50 million in cryptocurrency.
Later, more reliable platforms appeared, such as MakerDAO, Aave, Decentraland, and others. But the Aragon platform, which some crypto enthusiasts call the “mother of all DAOs”, stands out especially from them.
Other decentralized networks offer hybrid protocols that combine cryptocurrency and traditional assets. One of such protocols is MakerDAO, which uses a set of algorithms to ensure that the DAI stablecoin is pegged to the dollar exchange rate. But MakerDAO in September was added to the list of infamous projects: the growing demand of investors for DeFi products and crypto-farming (yield farming) threatened the stability of the DAI token. As a result, the platform was unable to maintain volatility, and the DAI rate jumped by 10% from the dollar price. In a matter of hours, the capitalization fell by more than 99%, despite the fact that the project ranked second in the DeFi market with a capitalization of $1.26 billion.
Methods for managing DeFi applications
Over the past two years, many new protocols have been created to solve various problems: Aave, Synthetix, Curve DAO, YFI, Compound, and others. And at the center of the entire ecosystem is ChainLink, whose oracles use the aforementioned platform. Oracles form a solid foundation of DeFi, since the operation of applications directly depends on the reliability and accuracy of external data. Moreover, the more blockchain providers provide data, the less likely it is that the protocol will incorrectly calculate data that may affect, for example, the actual cost of loans issued.
A striking example of this deviation is the bZx Protocol (BZRX) for tokenized trading and landing. When calculating the price, the platform used data from a single Oracle supplied by the Kyber Network. As a result, when the price of the KNC cryptocurrency collapsed, positions on BZRX were liquidated. With data distribution, this situation would be unlikely.
Depending on the management method, there are several main categories of DeFi projects:
1. Pegging to exchange rates (stablecoins)
Ensuring the stability of exchange rates is a key factor for lending and hedging risks. New stablecoins are generated when an equivalent amount in currency is deposited to the Issuer’s account, and burned when the holder repays the amount and withdraws the currency from the account. But in the case of decentralized platforms, you don’t need to wait for confirmation and otherwise depend on a specific operator for an exchange or transfer.
2. Crypto loans and collateral
We mentioned one of these projects in the first part — Maker DAO. The model works in such a way that when making a deposit, usually in Ethereum, new stablecoins are created in a certain ratio. In the case of Maker DAO the ration is 2:1. This was the case until September 2020. A similar model is used by Curve DAO, whose tokens are also generated by making a deposit. However, the generated coins are distributed among the liquidity providers of the Curve Finance exchange, and farmers use the token to make a profit.
Other popular examples of such projects are Aave and Compound. Aave tokens showed record growth — in just 4 months, the price of the LEND cryptocurrency increased almost 40 times from $0.021 to $0.8, which made it one of the fastest-growing coins.
However, in August 2020, a DeFi project appeared that bypassed all previous platforms in this category, providing a new management system. This is Yearn.Finance — the YFI token gained more than 125,000% and rose above $40,000 in under a month, surpassing the cost of Bitcoin by several times. Yearn.Finance serves as a liquidity aggregator for crypto-credit platforms such as Aave, Compound, Fulcrum, and others. The main task of YFI is to select the best loan product for borrowers based on the analysis of offers.
3. Decentralized crypto trading
In terms of the trading mechanics, decentralized crypto exchanges (DEX) are not much different from centralized ones (CEX). The differences lie in the mechanism of operation: DEX platforms do not have a single point of failure, and users are not forced to provide their assets to the exchange, which eliminates the trust factor. All transactions are made on the blockchain, and cryptocurrencies are stored in users’ wallets.
For example, Synthetix has developed a liquidity protocol for trading cryptocurrencies and tokenized traditional assets such as stocks, currencies, precious metals, and others. Synthetix also interacts with the CurveDAO protocol to provide a pool of liquidity for stablecoins.
New DeFi projects run on the Ethereum blockchain and generate offers based on the number of tokens and available liquidity. Such crypto exchanges are called automatic market makers or AMM — they use algorithms to provide liquidity, which allows holders to earn income by providing cryptocurrencies. One example of such a DEX exchange is Uniswap. But their main drawback is their dependence on ERC20 tokens. These crypto exchanges cannot provide as much liquidity as centralized platforms.
These are only the main, but not all of the existing ways to manage Dapps. There are platforms that provide a risk management system, such as Nexus Mutual and Augur, and crypto exchanges with atomic swaps are being developed. Hedging projects focus on eliminating the risks associated with the volatility of crypto assets and the operation of smart contracts. However, the current problems cannot be completely eliminated yet. Perhaps in the future, developers will find solutions using interest rate swaps that reduce risks when the collateral value of assets falls.
5 leading DAO platforms
Now we will take a closer look at the largest DAO projects on the blockchain and briefly talk about each of them.
1. MakerDAO (MKR, DAI) — $456 million, rank #7
MakerDAO is the undisputed leader and perhaps the most famous of the DAO projects in the DeFi market. This is an Ethereum-based crypto lending platform created back in 2015. Users can make a deposit in ETH tokens, receiving in return DAI tokens — the world’s first stablecoin.
A month ago, MakerDAO led the entire DeFi sector and was in first place in terms of the number of Ethereum tokens blocked in the smart contract. But the platform failed to cope with the load that arose due to a large flow of users, as a result of which the DAI stablecoin rate deviated by 10%, and users began to withdraw their assets en masse.
MakerDAO is governed by voting using a different token, MKR. MKR owners vote for platform updates, and the weight of the vote is proportional to the number of tokens held.
2. KyberDAO (KNC) — $180 million, rank #14
KyberDAO was created as a voting platform for the Kyber Network. Users have the opportunity to participate in the staking of native KNC tokens and receive rewards in ETH by participating in the popular vote. This became available after a major update and launch of the Katalyst network. In the updated platform, developers are not tied to default rates and can set fees at their discretion.
The platform supports project management not only inside the blockchain, but also outside it. The developers of KyberDAO have made a great contribution to decentralizing the Kyber ecosystem and added many options for delegating votes. The platform’s business model also involves burning KNC tokens to counteract inflation.
3. Aragon (ANT) — $106 million, rank #88
Aragon (ANT) is a blockchain project that provides solutions for creating your own DAO protocols. In other words, Aragon is to the DAO concept what Ethereum is to decentralized applications (dApps) as a whole. Such well-known DeFi protocols as Decentraland (MANA) and Aave (LEND) have been developed on this platform. At the time of writing, the latter is in fourth place by market capitalization among DeFi platforms and has about 10% of the entire decentralized finance sector.
The Aragon project was founded in 2016, and the company managed to reach a soft cap of $25 million at the ICO stage in a little more than half an hour from the launch of the public token sale. The universal framework provides templates for smart contracts and DAO protocols for creating your own decentralized platform. The developers have designed a special “Aragon Manifesto” that defines distributed DAO governance and competitive leadership as the highest goal of structural interaction. This structure is followed by all DAOs that are part of the Aragon infrastructure. Dispute resolution is conducted by smart contracts in accordance with the “Aragon Manifesto”, which acts here as the Constitution.
Unlike Kyber, the Aragon project was designed as a DAO from the get go. The platform is fully governed by users who own ANT tokens and use them to vote for important platform updates.
Aragon is a transparent and secure DAO Protocol that is very popular among creators and users of various blockchain projects, because it allows users to fully control the funds. To date, more than 1,500 decentralized organizations have already been created using the Aragon framework and in mid-2020, more than $350 million in cryptocurrency was involved. However, by September, the project’s capitalization decreased threefold, as the focus of investors shifted to the so-called Yield Farming.
4. MANTRA DAO (OM) — $7 million, rank #95
MANTRA DAO can be called an almost universal DeFi platform, since it focuses on staking, lending, and decentralized management for building Web 3.0. The Protocol is based on a highly secure and scalable Rio Chain network that interacts with the Polkadot (DOT) blockchain.
Rio Chain is compatible with multiple blockchains and uses a hybrid blockchain model to provide throughput of up to 3,000 transactions per second. MANTRA DAO uses the KARMA reputation mechanism, which works like a credit rating and is aimed at rewarding users for their contribution to the development of the ecosystem.
5. DAOStack (GEN) — $7 million, rank #540
DAOStack is a decentralized, open-source platform designed to build a globally collaborative network that connects companies for transparent protocol governance. The platform has developed a holographic consensus that aims to balance the performance (scalability) of the platform and the amount of decision-making. The DAOStack tokenomics is based on GEN. Unlike most other platforms, the GEN token does not grant voting rights, but its holders bet on candidates who will participate in the voting.
Among the partners who integrated DAOStack solutions, we can mention such major projects as Polkadot (DOT), Portis, The Graph (GRT), Gnosis (GNO), as well as Kyber Network (KNC), which added to the list of the most promising DAO projects.
Conclusion
The principle laid down in the DAO concept allows us to take a different look at how to manage companies. Centralized companies are tightly tied to a small group of managers who may not take into account the real and actual needs of the market, which, however, often leads to financial troubles. DAO is managed by a decentralized community that is interested in the development of the project, and the allocation of resources is optimal.
Solutions based on the principle of a Decentralized Autonomous Organization can be applied almost anywhere: in insurance, fund management, and even government initiatives. Smart contracts ensure the autonomy of all transactions conducted on the platform. The DAO ecosystem is still in its infancy, but there are already enough hints that this approach to structural management will be used everywhere in the future.
Decentralized management itself allows to speed up and optimize the business processes of any organization, whether it is a bank or a high school. In classic companies, decisions are made along the chain from the top level to the staff, passing through a complex bureaucratic machine. For example, if you need to finance some projects, then after the expert opinion, many more steps will be required before the allocated funds will be credited to the project account. The DAO allows you to avoid this, and the smart contract will distribute funds between projects as soon as the experts issue their conclusion. In addition, nothing can interfere with the process if the decision has already been made. Decentralized systems cultivate collective management, and this approach can change the way we think about the distribution of resources, whether they are digital or real.
