What are Crypto DAOs & How Blockchain Governance Will Rule Them All

To DAO or not to DAO? For recent blockchains, the answer is clear. DAO it.

Most projects now signal their DAO properties as loud as they can, caught in the upswell of excitement about this new idea of corporate and social governance that could fracture and then recreate the body politic. Micro-communities, beholden only to themselves, are leveraging their collective warchests to deploy under the auspices of the blockchain.

For many, including Buterin, blockchain communities were always DAOs, the decentralised transaction nature leading to the formation of blockchain stewards. Yet now, with new technology, new tooling, and new conceptions of how to use blockchain’s incredible ability to organise trust and execute a shared aim between communities who don’t know each other, it’s no wonder the recent Messari Report signalled 2022 as ‘The Year of the DAO’. This new species of governance will change the way we work and collectivise forever.

Heady stuff, then, but fraught with risks. To solve the civilisational headache of assigning power effectively is no easy task. What are the legal issues? Why is privacy so important? And how do DAOs actually work and why will they change the world?

What is a DAO?

DAOs are organisations that are run by code, not people. If well programmed, smart contracts can auto-execute most of the organisational elements of a DAO, such as payroll, hiring, treasury disbursement and much more. This is why DAOs are autonomous structures, and why no single person is needed to sustain their existence.

The entity is code-driven, and all users agreed to abide by it. With open source code, anyone is free to review, audit, or contribute to the DAO’s mechanics.

Any user, at any time, can buy into a DAO and become part of its operations, or work for a DAO in exchange for payment in its own token or treasury assets. Any user, at any time, can leave a DAO — withdraw funds — and move on to somewhere new.

This essential lack of friction between organisations and outsiders looking in leads to vibrant communities whose members, workers, and contributors are all there because they want to be. The smart contracts that run the DAO can, too, be voted on and changed.

The door to new talent, from any background, country, or profession, is wide open — allowing DAOs to efficiently source workforces from professionals who are extremely motivated. They can also work for multiple DAOs briefly, earning rewards and a stronger voice in DAO decisions, until finding one they have perfect synergy with.

It is this fluid, amorphous, collective structure that causes so much excitement and the way it could lead to new ways of organisation vastly more effective than existing ones. Talent can directly apply for grants or take up employment by submitting proposals to the DAO.

Due to smart contracts, the laws of the DAO and its deployment and use of capital can be governed autonomously, with users only needing to worry about the common goal — creating proposals, voting on ideas, and making decisions to the betterment of the DAO’s purpose and treasury. The increase in the value of the DAOs token as a result of its activities also serves to the betterment of every user involved, not just the biggest players.

Uses and Benefits of a DAO

The DAO quest has begun in earnest, with amazing communities like MetaCartel, who act like a decentralised VC firm, Flamingo, who collect NFTs, and Yield Guild Games, who have operations in many play-to-earn landscapes, popping up and becoming extremely successful.

In February 2022, the DAO market cap consisting of governance tokens was estimated at $21.6B, with some of the most unique DAOs including BitDAO, Ribbon, Curve, Olympus DAO, Decentraland, Ethereum Name Service, PleasrDAO, Badger DAO, and others.

The way of the DAO has begun. The trick is ensuring the governance structures and basic tooling are in place to ensure each DAO runs effectively. This too, has already begun, with DAO operating systems like Aragon helping to service communities and work for their users.

These structures have already seen diverse implementations. We’ve mentioned collector, investment and play-to-earn DAOs, yet this is the tip of a large and ever-growing iceberg. Once the principles of representative fairness, treasury allocation, and blockchain-processes are set, the possibilities are endless.

Current ambitious projects include learn-to-earn (like Rabbithole), onboarding new crypto users into the DAO while also supplementing the knowledge of the wider crypto ecosystem, judge-to-earn, where subjective appraisals of events could be put to trusted DAO communities who can serve as Oracles for ‘soft’ information, and media DAOs that could lead to the creation of a decentralised, associated press.

The most popular and most prominent type of DAO on the market, of course, are protocol DAOs. These include projects like Compound, Aave, Maker and Uniswap. Protocol DAOs allowed token holders to have a direct say on the underlying mechanics of a protocol by letting them be able to propose changes to it that then are voted on by the community at large. They provide important on-chain services, like stablecoins (Maker), credit markets (AAVE), and trading (Uniswap).

A DAO’s capability to rapidly source new talent, reduce hierarchical inefficiencies and friction, maintain world-class motivation among every member in its community, and rapidly relocate its capital budgets with near-zero wastage, means they are the business and community structure of the future. That’s not to say they are not without problems.

Obstacles to DAOs

Legal Recognition

For libertarians, governments cannot ‘shut down’ a DAO any more easily than they can ‘shut down’ Bitcoin. The decentralised community can not be targeted and, if the government wanted to intervene, they would have to buy tokens in the DAO like anyone else. The stripping away of the legal layer not only increases efficiency but guarantees freedoms.

Most advocates of DAOs do understand, though, that some legal recognition and ensconcing within the political system is essential for their long term scalability. For these, DAOs and smart contract organisation really is a better way to work, and the government needs to declare effectively their standing. a16z has already published a paper looking into how this could be done.

Problems with Voting Weight

One of the core concerns with DAOs, especially early ones, is the way that they can re-enshrine the importance of capital and its connection to political weight. To quote Adam Smith from the Wealth of Nations, ‘People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public.’

To outsiders of large DAOs where early investors scooped large token pools, the concentration of this power makes them wary about the stewardship of DAO treasuries. How DAOs husband, delegate, distribute and, of course, create decentralised authority going forward is a fundamental goal for long term sustainability and scalability.

The Maker foundation, responsible for the most feted crypto collateralized stablecoin, DAI, recently returned its dev pool of Maker to the protocol, with no strings attached (you would have to code something for there to be) and the DAO is free to use the funds as they wish to grow and orchestrate development of the protocol. As DAO treasuries grow, and the crypto market grows with them, having these vast warchests and integral pillars truly under decentralised governance will only augment the wider crypto-utopia. That vital foundations of the new Web 3.0 economy will be truly run by a distributed authority, with all the inherent promise that provides.

We’ve already seen working for DAOs as earning core voting rights, as well as the fluid entry and exit mechanisms meaning successful projects attract more hot finance.

DAO Vulnerabilities

It was a $50 million dollar hack from the treasury that brought down the first DAO, known as The DAO, and the fallout resulted in the hard fork from Ethereum Classic to the current Ethereum today. DAOs are vulnerable to exploits and hacks just like any other protocol. DAOs pay out regularly for bug discoveries and other code contributions from their communities.

Although hacks can affect any project, DAOs are particularly sensitive as individual DAO treasuries may quickly add up to significant figures. This is why it is equally important for DAOs to use audited tooling and engage in the best op-sec practices.

Onomy Protocol: Just DAO it!

DAOs are the governance structures of the future, with decentralised protocols actively distributing control to their communities. Such is also the case with Onomy, which will be fully structured as a DAO.

We believe that a DAO structure is essential to governing the mechanics behind FX markets, stablecoin deployments, cross-chain trading, bridge development, and treasury allocation.

Onomy Protocol’s $NOM token confers governance rights that allow users like validators, delegators, and holders to submit and vote on proposals that may impact current protocol mechanics, future products, and treasury allocation.

To be specific, NOM holders can submit proposals with a minimum deposit, which then enter a voting period during which holders — directly or by delegating — can express their intention.

DAOs as a concept still have a long way to go, from ensconcing themselves in the legal system to establishing the most effective governance and distribution of power. Make no mistake, though, the benefits are too much to ignore. In ten years, many of the world’s largest organisations will be DAOs and traditional employment structures will forever change.

The future is DAO. Don’t miss it.