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DAO —— An organization with no central leadership

What is DAO?

An organizational structure based on the development of blockchain and other technologies.

The Definition

DAO is the abbreviation of Decentralized Autonomous Organization, which is an organizational structure based on the development of blockchain and other technologies.

Wikipedia's definition of DAO is: "An organization represented by rules coded as a transparent computer program. This organization is controlled and decided by members without being affected by a single center."

DAO is to gradually encode the organization's iterative management and operation rules (consensus) in the form of smart contracts on the blockchain, so that without third-party intervention, through intelligent management methods and token economic incentives, the organization Realize self-operation, self-governance, and self-evolution according to pre-set rules, and then realize the organizational form of maximum efficiency and value circulation of the organization.

How DAO Grew?

With the advent of cryptocurrency, in 2013, Daniel Larimer first proposed a concept similar to DAO—decentralized autonomous corporation (DAC). The difference between DAC and traditional enterprises lies in decentralization and distribution. In 2014, Daniel Larimer added the concept of DAC again. Subsequently, Vitalik elaborated on the understanding of DAC, and inspired by Daniel Suarez's Daemon book, proposed DAO in the context of blockchain.

The DAO concept was first formally proposed in a smart contract called DAO on the Ethereum blockchain in 2015. The DAO at this time is a smart contract, that is, a technical framework and a tool, which is often understood as a self-organization similar to a non-profit organization.

In 2016, slock.it, a startup company at the time, launched a project called "The DAO" to support their decentralized version of Airbnb, and innovatively proposed a set of DAO governance models. Which also helped the company to raise about 150 million U.S. dollars worth of Ethereum, which accounted for 14% of the total Ethereum supply at the time.

Many people consider "The DAO" to be DAO, but “The DAO” was attacked by hackers shortly after it was on the chain. Many people showed a critical attitude towards DAO. Despite this, the governance model of DAO has also been retained.

With the rise of the DeFi (Decentralized Finance) wave in 2020, everyone's attention to DAO has gradually increased. For example, Aave, Bancor, Uniswap, Compound, Curve, etc. have established their own DAO and governance guidelines.

How DAO Works?

A DAO is an organization where decisions get made from the bottom-up; a collective of members owns the organization. There are various ways to participate in a DAO, usually through the ownership of a token.

DAOs operate using smart contracts, which are essentially chunks of code that automatically execute whenever a set of criteria are met. Smart contracts are deployed on numerous blockchains nowadays, though Ethereum was the first to use them.

These smart contracts establish the DAO’s rules. Those with a stake in a DAO then get voting rights and may influence how the organization operates by deciding on or creating new governance proposals.

This model prevents DAOs from being spammed with proposals: A proposal will only pass once the majority of stakeholders approve it. How that majority is determined varies from DAO to DAO and is specified in the smart contracts.

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Source: DAO Ecosystem Overview of Deep DAO at 12/13/2021

Features

Comparison with Traditional Organizations

Untitled

DAO-A traditional organization
Usually flat, and fully democratized.
Usually hierarchical.
Voting required by members for any changes to be implemented.
Depending on structure, changes can be demanded from a sole party, or voting may be offered.
Votes tallied, and outcome implemented automatically without trusted intermediary.
If voting allowed, votes are tallied internally, and outcome of voting must be handled manually.
Service offered are handled automatically in a decentralized manner (for example distribution of philanthropic funds).
Requires human handling, or centrally controlled automation, prone to manipulation.
All activity is transparent and fully public.
Activity is typically private, and limited to the public.

Generally, DAO has following key features:

  1. Distributed and decentralized: There is no central node and hierarchical management structure in DAO. It achieves organizational goals through bottom-up interaction, competition, and collaboration between network nodes.
  2. Autonomous and automated: In an ideal DAO, the "code is law", management is coded, procedural and automated.
  3. Organized and ordered: Relying on smart contracts, the operating rules in the DAO, the responsibilities and rights of participants, and the reward and punishment mechanism are all open and transparent.
  4. Intelligence and tokenization: DAO is based on the development of technology such as blockchain, and coordinated governance on chain and off chain. At the same time, token is an important incentive method in the governance process of DAO, which realizes the organization's Intelligent management.

DAO Classification

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With the popularity of blockchain technology, blockchain projects and various eco-applications have emerged, and many different DAOs have been created. People categorize them according to their characteristics, guidelines, project parties, etc., such as infrastructure, protocol, investment, service, collection, etc.

Protocol DAO

The protocol governance DAO, or Protocol DAO, is currently the most involved and dominant player in the DAO circuit, mainly playing a community governance role.

Decentralization is an important part and process of DAO, Protocol DAO decentralizes the power from the core team to the community, and the community users vote on the community proposal by the proportion of recognized assets they hold, and decide whether the proposal is passed or not to directly influence the direction of the decision.

In DeFi, like Uniswap and Compound, DAO voting is often used to decide Token allocation, introduce liquidity mining, pledge mining and network deployment.

Venture DAO

A Venture DAO is a community governed group that seeks to invest combined capital of the community.

Venture DAOs stand out from traditional investment vehicles because they are typically egalitarian, transparent and meritocratic by design, lacking a single leader and instead relying on community voting and consensus.

Application DAO

Application-based DAO includes service, social, media and other atypical DeFi fields.

This kind of DAO usually adopts the model of "traditional application + DAO", which is also the most likely DAO to emerge from the development of the blockchain world, because it reflects the combination of the traditional world and the blockchain world, and the application-oriented DAO reflects the needs of practitioners and users in addition to the pursuit of revenue.

Collector DAO

After NFT entered the mainstream, some Collector DAOs focused on collecting NFT were born. FlamingoDAO, PleasrDAO, and Jenny Metaverse DAO all belong to this type of DAO. They all are for-profit DAOs that focus on NFT collecting and have been actively investing in NFT.

Development Dilemma

Although the current DAO has provided some distributed and autonomous collaboration paradigms in specific scenarios such as protocol governance and investment financing, it also faces some problems:

  1. Insufficient degree of decentralization: The characteristics of the DAO we talked about are all in an ideal state. As far as the current development stage of DAO is concerned, due to issues such as high handling fees and public chain performance, current DAOs are on-chain and off-chain collaborative governance model, this will weaken the degree of decentralization of DAO to a certain extent and affect its development.
  2. Insufficient governance incentives: Due to insufficient incentives, the low voting rate, governance pledge rate is much lower than the overall pledge rate of the industry, limited participation scope, limited attracting funds, and insufficient project support.
  3. Unbalanced development of various ecological DAOs: At present, the main DAO organizations are concentrated in the Ethereum ecology, Ethereum has attracted the main resources in the entire crypto market. For related ecology and heterogeneous ecology outside of Ethereum, the insufficient development of DAO will reduce the community vitality and diversity of market players.
  4. Lack of legal support: As DAO has the characteristics of decentralization, cross-border, and anonymization of members, once legal problems occur in the actual operation process, it will lead to problems such as difficulty in accountability. In addition, the current DAO has not yet been clearly defined at the legal level.

Development Trend

  • Integration of DAO and traditional corporate governance

In April of 2019, dOrg became the first DAO to be legally recognized in the United States. The Wyoming State Senate approved the legal status of the DAO, through its first committee member, and gave them the ability to be a limited liability company (LLC). This allows the virtual digital management jurisdiction on the chain to be given the identity of the jurisdiction under the chain.

  • Composability with more ecosystems

The identity reputation system based on DAO enables users participating in DAO to generate precious value data, provides tools for credit rating, on-chain identity review, and diversified scenarios. Because of the great development potential of DAO, there will be more uses in more ecosystems in the future and integrate with more track development.

In summary, the development of DAO is still hindered and long, with technically amplified risks and limited development; application scenarios are still in the early stages of exploration; the single function of the DAO ecosystem is limited. In the short term, DAO will develop towards more diverse scenarios, clearer identities, and higher participation. In the long term, there will be more in-depth theoretical research, a more reasonable incentive system, and a more distributed development, and finally become an indispensable part of the Web 3.0 system.

You can find the following project with DAO on Mexo:

Aave is a blockchain-based protocol powering a non-custodial money market that involves borrowers and lenders/depositors. It is a decentralized cryptocurrency collateral loan protocol that is open source and unregulated, its code is accessible to all users, it is fully transparent and trackable, and it can be audited by all.

Badger is a decentralized autonomous organization (DAO) with a single purpose: build the products and infrastructure necessary to accelerate Bitcoin as collateral across other blockchains.

It’s meant to be an ecosystem DAO where projects and people from across DeFi can come together to collaborate and build the products that our space needs. Shared ownership in the DAO will allow builders to have aligned incentives while decentralized governance can ensure those incentives remain fair to all parties. The idea is less competing and more collaborating.

Compound is an algorithmic, autonomous interest-rate protocol on the Ethereum blockchain. Compound has grown to become one of the cornerstones of the DeFi industry. Built for developers, Compound creates efficient money markets where assets can be supplied and borrowed by individuals without any restriction (e.g., KYC). Interest rates are compounded at a block-level on the Ethereum blockchain, and no central party is required.

Unifi Protocol DAO is a group of non-custodial, interoperable, decentralized, multi-chain smart contracts providing the building blocks for DeFi development. The project provides a bridge to connect the economy of Ethereum-based DeFi products to the growing DeFi markets on other blockchains.

yearn Finance is a suite of products in Decentralized Finance (DeFi) that is designed to generate yield on smart contract platforms like Ethereum. The protocol is maintained by various independent developers. The yearn ecosystem is controlled by YFI token holders who submit and vote on off-chain proposals that govern the ecosystem.

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