Everything you want to know about DAOs. Exclusive interview of XDAO CEO & CTO. Part 1

Nov 28, 2021 · 15 min read
Original interview

Table of contents:

Nikita: Hello dear friends! Nikita online here and this is Cryptus channel. For a very long time we wanted to reveal the DAO topic for our community, because it seems to us very interesting and promising, and the existing DAOs are now developing very quickly. But we decided to make an unusual video. We invited experts for this. These guys who work directly with DAO are Vlad Shavlidze CEO and founder of XDAO. And also Egor Gavrilov, CTO and co-founder at XDAO. They will also talk about XDAO during the dialogue. Your word. How are you doing?

Egor: Hello, thank you for the invitation. Everything is good. Now we are comprehending new expanses of new markets with our new product. We will also talk about this today. Thank you very much.

Vlad: Yes, we launched on 4 blockchains. On Wednesday we will have an official release of our product in New York at a conference hosted by Huobi. In judges with Stanford, Facebook and other giants.

Nikita: Tell us in a nutshell about DAOs.

Egor: DAO stands for Decentralized Autonomous Organization. In simple words, this is a way to collectively manage anything, any process on the blockchain. We know who legal entities are. For example, in Russia, these legal entities represent a collective management body. There are directors of this legal organization and they can jointly make decisions by voting. There is money in the blockchain, in cryptocurrencies, so why not collectively manage it too. Because together you can go further. So DAO is a big concept that reflects a collective way of managing something, not just money, but any process.

Nikita: Can you, please, tell us, are there many ways and schemes of management in DAO? What they exist in principle. Or is there only one most popular management scheme now, which everyone uses?

Egor: First of all, the management model depends on the case. Because we need to first consider what we will manage. Everything is built from this. If we just want to vote for an insignificant decision, and the result of this decision will be a simple written agreement, you can take the simplest model — this is to create a chat in a telegram and vote, or you can do it on the blockchain. This is called off-chain voting. When decisions are made by those who hold the tokens, the so-called shares in the organization. This is such a model and it enables a large number of people to vote for free and make small decisions. That is, if this vote does not pass, nothing terrible will happen. Will vote next time. There are more complex voting models in which risks are already important when it comes to money, for example. This is the so-called on-chain model. Here, all votes are already recorded into the blockchain. They cannot be faked, and everything can be double-checked. In general, the reconciliation of all opinions, all decisions takes place in the blockchain. So now there are two main models: one cheaper, but more risky, unreliable, where everything happens outside the blockchain, and another one is super reliable, where EVERY intent is fixed with money in your transaction.

Nikita: What, in your opinion, are the main advantages of on-chain voting over traditional governance models and what are the main disadvantages of DAOs?

Vlad: Regarding the advantages, I have one thing to add. Here, the main advantage is security and we solve the issue of trust, because DAO is primarily a tool for managing money, just like in traditional finance, where people create companies in order to conduct joint activities and manage capital, in DAO people manage such the same capital, but which is in the blockchain space. The only peculiarity that finance is represented by tokens, cryptocurrency, NTF, any other digital objects that can correspond to any standard and can be purchased. And the issue of trust is resolved, since in real life if someone forged someone else’s signature or acted illegally, breaking the organization’s chart, other members go to court to prove their case. Everything in blockchain, in opposite, works on smart contracts and all these cases are simply prevented. Because certain voting rules are established in advance, the rules for managing this mutual treasury, and only according to these rules an organization can work. I think Egor will add about the disadvantages of the DAO.

Egor: The main drawback of DAO is as follows. Let’s say members cannot initially agree on how they will operate in the DAO. And suddenly, they wanted to abruptly change their decision to the opposite or even cancel it altogether. But if a transaction flew into a block, you can’t take it back. It stays there forever. Therefore, in a sense, DAO limits flexibility a little. Because if the decision is made by the quorum, then there is nothing to prevent it from being activated. But here it already depends on what kind of architecture the DAO has, because there are different ways to implement it, there is no specific way to make the DAO. Moreover, depending on the case, you need to do different DAOs. Therefore, flexibility, in general, still depends on the case.

Nikita: Let me then describe if I understood the DAO concept correctly. It turns out that the DAO is a kind of mechanism, it has various voting and management schemes and is used by the DAO for collective decision-making. That is, we store smart contracts in the blockchain, they contain possible options for the outcome of events or possible criteria by which decisions will be made. People, depending on the number of tokens they have on their balance, make their own contribution and the majority decides to make this or that decision. But in a nutshell, tell us about the technical process, how exactly the on-chain DAO works.

Egor: Technically, it looks like this: first you need to designate the participants in this DAO. Let’s denote it through a share. And the easiest way to express a share is a token, because the concept of ERC-20 token is as close as possible to a regular currency. In this way, we can secure the ownership of shares in the organization. You just need to place these tokens in the participant’s wallet, making sure that only this participant owns a stake in this organization. But, as we know, if you have a public wallet, you have a private key from it. It confirms the sole ownership and participation in the DAO. And then everything is simple. A person using a private key expresses his intention, namely, to sign a certain message, to perform a certain transaction. Thus, we know if a transaction has occurred from his wallet, then it is definitely him. Because only he has the key. And if he expressed his intention, then his voice passed, just as the voices of other participants pass. And if the quorum is reached, then a DAO can do some kind of action.

Nikita: Is there a difference when choosing a blockchain for a DAO?

Egor: The issue of the transaction cost is decisive in this case, because some transaction chains become simply unprofitable on the expensive Ethereum network and become simply brilliantly suitable for the Binance Smart Chain. Therefore, a lot depends on the blockchain. But we have to look separately at the blockchain and its technical component. The market is also important to us: to what extent people are now accustomed to using this or that network. And we can recall Vitalik Buterin’s trilemma about how difficult it is to make an ideal blockchain. In a nutshell, it sounds like this: it is very difficult, even almost impossible, to make the blockchain decentralized, cheap and fast at the same time. You have to sacrifice something. And, in principle, if we consider each blockchain, then we will reveal that there is no cheapness in Ethereum, there is no decentralization in the Binance Smart Chain. Where does this lead? Large funds with large finances can spend a large amount on transactions in favor of greater decentralization. Therefore, now we are seeing the presence of the largest DAOs on Ethereum. On the other hand, currently the most popular blockchain is BSC, and the main DEX on it is the most popular product in the world — Pancakeswap. It is a great product just for retail, for small groups of investors. Because the concept of DAO is broad and many groups of people can manage it. So, all blockchains are good for different cases.

Vlad: Yes, but there are also economic factors, for example, DAO cannot exist in a vacuum. Most often, DAOs interact with some other structural projects in the blockchain. If it is an NFT fund, they buy NFT. If this is an investment fund, they are interested in a launchpad or a specific exchange. It is very important here to understand what kind of infrastructure the organization needs. And we, as a tool, give the widest opportunities in the choice of these benefits.

Nikita: Let’s talk about XDAO. What do you do?

Vlad: Our global goal is to bring DAO to the masses. The concept of DAO remains quite complex nowadays. I know many founders of large crypto projects who do not know what a DAO is, how to use it, or know about it very superficially. We want to make it easy to understand and use. And make it massively used, because we see many cases where DAO can be applicable. We want to simplify the technology and make the process of DAO maintaining as natural as managing your bank account in a mobile bank application.

Nikita: Great! But what is the benefit to you? What do you work day and night for? Do you have a monetization scheme, how will you earn money by providing DAO in a few clicks?

Vlad: Yes, we have an interesting monetization system. It is non-standard, two-tier: at first, our task was to make a cool free product that people can already use. Once our ecosystem is sufficiently replenished, we will sell additional modules for our DAOs. And these modules will work in three types: like subscription or a one-time purchase for simple modules. We will take it in our tokens. For complex financial modules we will take a percentage of the profit. And besides this, we plan to develop additional projects that will contribute to monetization, because DAO is the foundation, our task is to form a business here. And once we form it, we will find options for where to turn. Perhaps in the direction of launchpads, when each DAO has its own launchpad. Or maybe will go towards the metaverse, where the DAO will have their own virtual offices and so on. That is, in fact, there are a lot of development paths, monetization methods that lie a little further beyond the surface of the main product. And we will be flexible to look at and respond to market inquiries, of course.

Nikita: So, with your help, large companies can build their own DAO. There will be a certain payment for them. And let’s say four friends have gathered, there will be a slightly different tariff for them.

Vlad: Yes, we recently signed an advisor agreement. The President of Liberland has agreed to become our advisor. I think many in the crypto industry have heard of Liberland. And we are now negotiating that an entire economy of a free state will be built on the basis of XDAO. Therefore, there can be many cases.

Nikita: Super! Now for the tricky question: Do you have direct access to the contracts you create and launch?

Egor: We have a page “Create DAO” on our website, clicking on it creates a DAO. At this moment, a person leaves us and owns his completely independent smart contract. Therefore, we have no influence on the DAO. The only thing is that we can remove the organization’s avatar from our ecosystem or instead put another one on our website, but the DAO smart contract is completely separated from us and independent.

Nikita: How complex are your smart contracts? Do your contracts have only basic functionality, or is it possible to make a DAO using XDAO of any complexity?

Egor: Let’s start with the simple ones. Two friends get together and want to manage money together. For example, when they create a DAO for two people, each has half of a company shares and they manage treasury manually. You need to make a decision — you go to vote — you make decision. And then the difficulties begin to grow. To create a large corporation, you need to add more people. Ok, there is no limitation on the number of participants. Do you need to automate something? Ok, in XDAO there are modules for this, for example, you can add a module that will automatically perform some transactions for you, collect profits, or use limit orders to buy tokens. Do you need to participate in allocations with a large sums? Ok, DAO allows you to connect on behalf of a DAO as if it is a user wallet. Need to interact with any DeFi project? Ok, we named this technology XDAO WalletConnect. This allows the DAO to connect to any DeFi project. Need to make difficult decisions? OK, we have a flexible quorum system. In the starting DAO configuration, there is initially only one quorum in which the DAO will wait until the threshold will be reached. Modules can be used to complicate this voting model. For example, make the minimum quorum and instant one. Minimal — the decision is made and activated later, and the instant decision is activated immediately. In general, the modules of our DAOs allow us to make a project of any complexity acceptable in the blockchain. The Solidity language used to write smart contracts is Turing complete. This means that any task you can think of can most likely be implemented. Therefore, everything depends on customer requests and on the case. We try to consider the maximum number of cases, but sometimes we are surprised at what we are offered in the chat. When partners or clients write. They ask, is it possible this way or this way and the answer is “yes”. You just have to think about how to do it. And in general, the difficulty varies.

Nikita: Looks like a constructor. From small to large.

Vlad: Yes, like LEGO.

Nikita: Let’s talk about the safety of the various components, like Wallet Connect or modules. What security solutions do you have here?

Egor: The main components that are worth considering: firstly, this is the main DAO contract and the contracts adjacent to it, such as contracts to raise investments. Their security is related to two factors, the security of our contracts and the stability of the blockchains. We are working in fairly stable blockchains and our contracts have been audited by respectful audit companies. These reports and code are public. Anyone can watch them. Our code is, in principle, quite compact, so any technician can understand that everything is safe. So everything is based on these two factors.

Nikita: Ok, good. Is there anything, any technical innovation you also want to highlight?

Egor: Technological innovations are a great question because there are answers to it. In general, the super novelties were not related to how to come up with something from scratch, but rather in order to solve the problem of existing DAOs. Because we ourselves used DAO from our competitors. Even before we created our project, we already used DAO on third-party sites and we saw what we specifically lacked. Fortunately, it turned out that we were not the only ones who noticed these shortcomings. So much of our technological innovation has to do with solving the problems of our competitors. The first and most important thing was that we needed a convenient connection to DeFi projects, because we all wanted to use the DAO for investing, buying tokens, lending, etc. Therefore, in XDAO we have implemented the following model. You do not need to install any additional software and the whole connection works through the Wallet Connect. We need to go to Uni Swap, press Wallet Connect, select XDAO and that’s it! You are connected on behalf of a DAO. Then, when you press “Swap”, a vote will be created. The DAO members vote and after voting in the Swap function is activated. This kind of connection model on behalf of the DAO has actually been implemented before. For example, there is a Frame project from Aragon. It has some problems and disadvantages. First, Frame is not compatible with mobile devices. And our analytics showed that a lot of people use the phone. Secondly, Frame is presented as additional software. In fact, it is an extension that we need to download on our computer to run. Thirdly, Frame requires the installation of an additional browser. So you have to download some kind of browser like Brave and connect through it using a Frame. We have solved these three shortcomings with XDAO.

I almost forgot to say, since you are not using Wallet Connect, you need to connect your personal wallet to the Frame. How can you bind it? We previously discussed private key usage. So, you delegate the security of your private key to the Frame. But you don’t in in XDAO, because Wallet Connect works without it. Your private key remains with you and you only use it for voting. These are the problems we solved. But that is not all. Our other competitors also have invented the way to connect to DeFi. For example, Gnosis Safe. But theirs extension suddenly disappeared from Wallet Connect. Something didn’t work out for them. Perhaps due to incompatibilities, one of which we managed to solve at XDAO. Wallet Connect did not know that someone would use it both as a wallet and as a DeFi project. Other services allow you to integrate the DeFi interface directly into your DAO on your website. But this is dangerous because DeFi projects most often make their own interface more beautiful, with different functionality, they change their IP pretty often.
Well, the second technological novelty is actually not new. The only question is in implementation. I’m talking about DAO modules, which are the ability to extend the functionality of your DAO. And this is a very simple concept. Let’s think a little how we come to it. If we want to make transactions on behalf of the DAO we need to vote. And what if we select such a whitelisted addresses, the users of which have the right to perform any action without voting. Let’s say we add a person and he, despite the opinion of others, will activate voting on behalf of the DAO. There is a danger that these people, having complete freedom of action in the DAO, will be able to get it rekt. But the same concept can be turned in a completely different direction! If we add some smart contract to this whitelist, which can only perform some actions within the framework of its algorithms, we will get a universal system of modules. And such modules can take your profit on behalf of the DAO, buy out limit orders, delegate votes to other participants for a while, and so on.

Vlad: We actually found out about this later. The request for upgradable DAOs was made by the market itself and I just talked with Egor when we came to one solution, which later, we found out, became our main killer feature. Since now the DAO can be infinitely updated and, as Egor said, the DAO at the beginning of its path can be completely transformed after some time thanks to the modules.

Nikita: I get it. You have fully automatic functionality, private keys are not stored anywhere. But I wonder if you already have some kind of token or some kind of payment system?

Vlad: It will be in December. Formally, it is deployed to the network, but it is not in circulation, since we are now in the stage of private round and fund rising. After the round is closed, we will place the token first on the launchpad, then on the IDO. Therefore, for now, we can say that he is not.

Nikita: Is the IDO public, that is, the guys from the community can also participate?

Vlad: Yes. We ask everyone to follow our social networks. There will definitely be all the information. We ourselves do not yet know when we will announce this. Those who follow us most closely will be among the first to enter.

Nikita: Okay. Let’s get down to the question, what is DAO being used for right now?

Vlad: Yes, observing the market and the users, we have identified several cases that fit DAO model the most. The first option is a venture fund or even a hedge fund that invests in DeFi protocols. That is, people under trust management attract money and invest in the ecosystem, making money on it. They need some kind of add-on so that they can conveniently distribute funds between depositors, accept money and withdraw assets. Also now the GameFi and NFT direction is actively developing. The DAO is also great for this case, since it can buy any art and also jointly sell it and share the profit among all members of the organization. This is really cool, as NTFs can be expensive for the individual user. DAO solves the problem of dividing the NTF since each member in the DAO has its own share, which means that the NTF stored on the DAO balance belongs in proportion to these shares. Further, you can also connect on behalf of the DAO to the game and play. This essentially makes it possible to create guilds, buy some kind of game object, for example. In-game items are also quite expensive, so it’s really better to purchase them by clubbing together. And on top of everything else, DAO is a convenient tool for managing company money. We see now that people are often not attached to countries, to cities. They negotiate remotely having a joint budget or attracting investments. It is safe to them to create a joint account and set up rules. Thus, they ensure the safety of their finances from unlawful decisions. That is, this again solves the issue of trust. And in fact, I am sure that after a while we will learn about the trends that now we do not even mean, because this is such a very wide tool and its application probably ends only with the imaginations of those people who will use it.


MultiChain DAO Ecosystem