What is a DAO in crypto?
Regulations specify what is acceptable and not for corporate enterprises. These governance principles may exist between firm owners, such as shareholder contracts. Corporations could only act through individuals. The law can compel the enforcement of such agreements.
However, enforcing rules results in two fundamental problems: parties only sometimes adhere to the rules, and mutual consent is only sometimes obtained before executing such regulations. Therefore, who is affected the most?
The stakeholders with little or no authority to participate in governance decisions or who lack the power to identify issues are susceptible to financial mismanagement and waste. Exists a solution to this dilemma?
Decentralized autonomous groups are, in fact, a solution to the problems above (DAOs). However, what function does a Decentralized app Development independent organization serve?
Transparency, a remedy to the Principal-Agent dilemma, is one of the benefits of DAOs (more on this later). However, what is a DAO?
The distributed ledger technology known as a blockchain and smart contracts are at the core of the DAO ecosystem, where governance rules are established, automated, and enforced using software, and participants supervise contributed cash without needing a third party.
To join a DAO, users must first purchase its native cryptocurrency. DASH, Augur, MakerDAO, and virtual worlds like Decentraland are examples of decentralized autonomous organizations. However, BitShares, the first successful DAO, was a virtual e-commerce network. Bitshares was labeled a decentralized independent firm coined by the company’s founder, Dan Larimer.
Moreover, the DAO (investor-operated venture capital business) was Slock’s first decentralized autonomous organization created on the Ethereum blockchain in 2016. It. However, the DAO was compromised owing to the discovery of a coding error, resulting in the theft of $70 million in Ethereum by the attacker (ETH).
This article will explain what a DAO is in blockchain, how decentralized autonomous organizations function, the many types of decentralized independent organizations, the significance of DAOs, and how to construct a decentralized independent organization.
How do decentralized autonomous organizations work?
The DAO’s rules, established by core community members, are constructed using smart contracts. These transparent, verifiable, and publicly auditable smart contracts are the foundation for the DAO’s functioning. They enable any potential member to comprehend the protocol’s operation at all times.
Once these rules have been formally recorded on the blockchain, the DAO must determine how to obtain funding and exercise governance.
Typically, this is accomplished through token issuance, in which the protocol sells tokens to raise funds and replenish the DAO’s treasury. In exchange for their funds, token holders typically acquire voting rights proportional to their holdings. The DAO is deployable as soon as funding is finalized.
To generate DAO code, the “Solidity” programming language is utilized. The deployment of a DAO onto the Ethereum blockchain activates it. Once deployed, the code of a DAO requires Ether (ETH) for Ethereum transactions. A DAO cannot accomplish anything without ETH; therefore, receiving ETH is the primary order of business for a DAO. Following the deployment of a DAO’s code, ETH can be sent to the DAO’s smart contract address during the code-specified initial creation phase.
Once the code has been deployed to production, it cannot be modified without a consensus obtained through a vote by members; in other words, no single authority can change the DAO’s rules. The decision is entirely up to the DAO’s token holders.
How do you start a DAO?
Follow the steps below to create a DAO:
Build a strong foundation
Determine with your peers why DAO is necessary, what role it will serve, and how it will function. To establish a DAO, human decision-making is required to recognize the opportunity, recruit co-collaborators, validate the need, and outline the processes that can be automated and incorporated into smart contracts.
To prevent disagreements on the DAO’s governance structure, it is important to clarify the purpose with other DAO supporters. In addition, you must possess a wallet that enables storage and transactions.
Before investing in a company, investors and financiers will examine the company’s revenue stream. How, then, does a DAO earn money?
DAOs derive the majority of their revenue via dividends. DAOs engage in investments that generate dividends. DAO creators can also profit by convincing peers to invest in the DAO based on its business model.
Determine ownership
The next step, following consensus on the DAO’s purpose, is establishing member ownership, which aids in the development and growth of decentralized autonomous organizations. Since ownership is typically tokenized, a DAO can transfer it to its members in various ways. “Airdrops” and “rewards” are the two standard methods decentralized autonomous organizations use.
Airdrops involve the distribution of tokens to members based on their contributions and community behavior. A reward is a bonus paid to members who accomplish their duties and objectives. Members acquire ownership by obtaining tips based on native tokens. Tokens may also be achieved using decentralized autonomous exchanges such as Uniswap.
Establish a governance structure
This phase determines how choices will be made once a DAO is established. “Token-weighted voting” is the most used way for establishing decision-making guidelines. Voters are token holders, and each token represents one vote. Members submit their ideas using a tool such as Snapshot, vote depending on the preferences of other members, and then the results are performed automatically using smart contracts.
Set up rewards and incentives
Establishing rewards and incentives as the various benefits provided to DAO contributors and members builds trust. Members and contributors who have ever utilized the DeFi protocol under consideration receive governance tokens. These tokens represent ownership rights, but they are worthless on the market.
DAOs may also compensate contributors with cryptocurrencies such as ETH, Tether (USDT), or USD Coin (USDC), as well as titles and grades. After the conceptualization phase of the DAO concludes, the reward structure can be modified further.
Types of decentralized autonomous organizations
Depending on the mode of operation, structure, and technology, DAOs can be classified into the following categories:
Protocol DAOs
When tokens are used as a vote metric for making protocol changes, this governance structure is a protocol DAO. For instance, MakerDAO’s DAI stablecoin has changed the DeFi industry.
Other examples include decentralized exchanges (DEXs) such as Uniswap, which rewards liquidity pool contributors with native governance tokens. The tokens can be used to vote on governance-related decisions made by the DEX.
Collector DAOs
Artists who create art using nonfungible tokens (NFTs) rely on collector DAOs to establish ownership. Flamingo is an instance of such a DAO. The Collector DAO PleasrDAO, which reduces the restrictions on NFT investments, is an example.
Operating systems
Operating systems are independent platforms like Colony that organizations can employ to construct DAOs.
Service DAOs
Service DAOs are projects like MetaverseDAO, which offers individuals and organizations talent scouting and support acquisition models.
Investment DAOs
Also known as Venture DAOs, they enable the pooling of resources to democratize investment in various DeFi businesses. Generation Y supports Investment DAOs because they are transparent and accessible to everybody worldwide. Krause House is an example of a venture DAO that NBA enthusiasts run.
Grant DAOs
In a Grant DAO, the community contributes funds to the grant pool and votes on allocation and distribution decisions. These DAOs fund innovative DeFi projects, demonstrating that decentralized autonomous communities are more flexible with funding than conventional organizations.
Aave Protocol, one of the most well-known Grant DAOs, uses the Grants infrastructure to foster and expand its community of DeFi initiatives. Those with excess funds can use this protocol, while those in need can borrow from protocol members.
Entertainment DAOs
Entertainment DAOs provide decentralized autonomous entertainment, allowing creators to bring their innovations to life while retaining control over the organization’s governance. For instance, Flufworld users can customize and license 3D NFT Fluffs (a collection of unique bunnies).
Bored Ape Yacht Club (BAYC) will launch its Entertainment DAO, enabling holders of BAYC native tokens to vote on creative decisions.
Media DAOs
Media DAOs enable product owners of content (i.e., readers) to contribute directly without the involvement of marketers in exchange for the native token. For example, Forefront provides DeFi fans with a platform for crypto education and growth prospects for incubated enterprises.
Social DAOs
Social DAOs are collaboration platforms for social networking in the cryptocurrency space, such as Blockbuster. These platforms provide a digital democracy in which all voices are heard, and individuals may discuss their shared interests.
Technology layer for DAOs
Various protocols, including Dash, Cosmos, Colony, and Ethereum, are constructed atop the blockchain technology. On the platform, companies such as DAOstack and Aragon use solidity and may be referred to as DAO software as a service (DSaaS) models.
DAOs developed with Aragon and DAOstack are deployed at the application layer. It is only sometimes necessary to use these platforms to build DAOs, as you can fork existing DAOs to create the one that meets your requirements. DAOs, for instance, are a component of the layer-2 ecosystem built on Ethereum.
Through a feature known as composability, bitcoins and digital assets can be moved directly within the DAO (a.k.a. money legos). Thanks to composability, protocols and applications can be combined in various ways.
How much does it cost to start a DAO?
As there is no fixed cost associated with creating a DAO, the price depends on the gas fees on the network at the time you intend to create a DAO. For example, if you make a DAO on the Ethereum blockchain, you will incur gas fees, which are the cost charged by the network for loading smart contracts onto the blockchain.
Approximately 0.2 ETH and 30gwei in average gas fees may be charged. Additionally, you will be required to file an annual report, which may cost $60 or more, depending on the operations of your business.
How to create a DAO on the Aragon network?
Follow the steps listed below to create a DAO on Aragon:
- Acquire some ETH. As noted in the preceding section, you will require at least 0.2 ETH to launch an Aragon DAO.
- Move your Ethereum to your Web3 wallet.
- After receiving your ETH, navigate to https://client.aragon.org/, click Connect Account, and select your wallet service from the drop-down menu. Until your wallet is linked, you must complete the approval process.
- Go to “Create an Organization” and follow the instructions to create your DAO.
DAOs tension triangle
The tension triangle in a DAO can be viewed as a delicate balancing act between three distinct but equally important elements: voice, exit, and loyalty. The extent to which a DAO respects the individual’s sovereign nature is proportional to their freedom of entry.
Individuality is the capacity to participate in decision-making. Individuals can choose when to join and leave a DAO and whether to participate in and vote on all other DAO decisions.
It is consistent with the notion of free will. The voice-related DAO-specific design area is a governance mechanism. Governance requires participation in protocol-related choices and improvement of the DAO through participation. Improving control requires enhancing the voice and reducing exit incentives.
Governance (voice)
Governance rules govern the legal structure, membership, purpose, operations, and off-chain and on-chain voting that enable the organization’s existence and demise.
Individual (exit)
Persons who believe in self-government and the common good and are willing to act independently are frequently referred to as individuals. However, they seek respect for individual rights. The concept may also include registered or unregistered corporations that operate under the sovereignty of their respective regions and are legally considered or categorized as individuals.
Decentralization (loyalty)
Decentralization is a combination of technological and political components that creates a belief system that defines the characteristics of those who join the DAO. Loyalty determines whether participants in a DAO will tilt towards voice or leave when all other factors are equal.
Decentralization and the individuals’ motivations behind the DAO influence the project’s credibility. In addition, the degree of decentralization of each DAO varies based on its capabilities, purpose, and participation fees.
Why do corporations need governance?
As in conventional organizations, the Principal-Agent problem emerges when one person or central entity (the agent) makes decisions and carries out plans on behalf of another person or entity (the principal).
Moral hazard issues arise when agents act in their best interests in ways that conflict with their principles. Recent widespread share buybacks by public firms to enrich agents disproportionately through incentives at the expense of the corporation’s long-term health are an example of this conduct.
Therefore, DAOs must be structured so that management is suitably incentivized to act for the DAOs and all of its stakeholders’ long-term advantage. Otherwise, they risk contributing to the ubiquitous Principal-Agent problem in firms. Governance is, therefore, necessary for the public benefit!
Even if record keeping is the only function utilizing blockchain technology via a digital registry for DAO governance, this is a substantial improvement over conventional infrastructure in terms of transparency. Individual voting decisions on corporate affairs can be conducted more efficiently if proxy advisory services directly counsel individual investors and give oracle services to smart contracts (for smart votes) to automate individual voting.
DAOs vs. traditional organizations
What are the various DAO governance challenges?
DAOs encounter various challenges from time to time, the most prevalent of which are described in the following sections.
Governance systems
All DAOs must have a decentralized governance mechanism consisting of thousands or millions of people making mutual decisions. Consequently, managing the dissemination and communication of information and findings to all members is the most significant challenge faced by a DAO.
Controller nodes empower centralization.
Those with the most tokens are known as controller nodes and have a greater say in governance decisions. In theory, it overcomes the issue of loyalty because stakers or nodes with the most tokens have a greater possibility of incurring losses due to faulty governance decisions. However, large portions of the network need to be represented.
Consequently, the network becomes more centralized, with a disproportionately dominant minority making decisions. Voting systems such as quadratic and conviction voting try to mitigate the issue.
Participants in Quadratic Voting vote for or against an issue and express their strong opinions about it. Similarly, conviction voting is a new decision-making process that finances ideas based on the aggregated, real-time preferences of the community.
Shadow voting
A token holder without an economic stake in the protocol casts a shadow vote by borrowing a governance token to vote and then returning it, reducing the resilience of the DAOs.
Shadow voting is illustrated by an attacker creating a flash loan without incurring interest payments or bearing the cost of capital.
Other instances of manipulating governance processes include decentralized autonomous cartels and dark DAOs that buy on-chain votes in a murky fashion. In the best-case situation, the perpetrator must pay interest over an extended period, capital carrying charges, or collateral penalties.
As protocols have no control over second-market interest rates, they can affect the “cost of governance” by modifying the duration of the voting process. Any system in which a token can control governance exposes the voting process to bribery and conspiracies involving critical decisions.
This is one of the most crucial attack avenues within a DAO. For a DAO to be successful, strong, and well-functioning, cartel-like behavior must be addressed in the rulebook from the outset.
Future of DAOs
It is unlikely that the average person will work for a corporation in the future. People will instead earn money through unconventional means, such as acquiring new skills, creating art, playing video games, and compiling information.
This novel future of work is enabled by the networks that grow around crypto protocols, which are emerging as new ways of coordinating, quantifying, implementing, and rewarding contributions.
This transition is already creating passive income opportunities for individuals, resulting in an increasing transfer of value capture from corporations to individuals participating in crypto networks, such as DAOs.
DAOs will eventually replace the current governance model. Moreover, even though they are still in their infancy, they are no longer merely an optimistic concept. DAOs are transparent businesses that manage billions of dollars in assets and create new ways for contributors and network participants to earn money.
This is an exciting time for industrial and organizational experts to address this new phenomenon with new theories and empirical research as DAOs become more prevalent. In addition, brands must stay abreast of developments that may affect their interactions with customers or vice versa. Although DAOs have not been widespread, they appear to be gaining popularity among optimistic creators.
