DAOs: A Quick Overview of Decentralized Autonomous Organizations
If you have been following the cryptocurrency and blockchain industry for the past few years, there is a high chance that you must have come across the word DAO. While the word is used frequently within crypto circles, not many people know the meaning of the term and its wide implications.
In this guide, we will dive deep into the world of DAOs, short for decentralized autonomous organizations. We will learn what this word means, why it is creating such a buzz lately, its various benefits, the top functional DAOs today, and how RSK is contributing to the development of DAOs.
What are DAOs?
As mentioned earlier, DAO is an acronym for decentralized autonomous organization. While the word sounds self-explanatory enough, it is important to draw a parallel between DAOs and typical hierarchical corporate organizations we see today. However, before we draw these comparisons, let us first understand how DAOs came to be and what were their major sources of inspiration.
Essentially, DAOs can be considered an organizational version of decentralized cryptocurrencies. Unlike typical organizations that are led by a CEO or a Board of Directors who take the majority of crucial decisions to chart its future course, a DAO facilitates thorough discussion of every proposal among the DAO token holders before it is passed by the council.
The first DAO came into existence in 2016 in the form of the Genesis DAO when a group of Ethereum developers fascinated by the merits of blockchain technology decided to replicate its features in an organizational setting. This DAO was able to raise 12.7 million ETH worth $150 million at the time. The primary motive behind creating a DAO was to enable quick decision-making via automation and enable transactions via cryptocurrencies. At the same time, DAOs also take into consideration the voice of all within the organization which makes it an egalitarian structure based on the respective individual’s token share.
DAOs are becoming increasingly popular as a form of organizational structure as some organizations still suffer from a multitude of problems such as strict hierarchies, nepotism, favoritism and unclear communication channels. DAOs aim to tackle all the aforementioned problems facing organizations today by leveraging the benefits of distributed ledger technology. DAOs take the human element aside in many aspects as they are fully automated and provide enough transparency and security to all the DAO members.
Which Are The Inner Works of DAOs?
As mentioned earlier, there are several ways in which DAOs differ from legacy organizations or corporations which we will highlight in this section.
First and foremost, DAOs trump their traditional counterparts in that they use blockchain technology to record all their financial transactions on-chain with timestamps so they are not subject to any manipulation, whatsoever. It is up to the DAO to choose whether to store all the financial data on a permissionless or permissioned database. For the uninitiated, a permissioned database is typically controlled by a few select entities or individuals in charge and, as such, is not available publicly for everyone to go through. On the contrary, a permissionless database aligns with the ethos of blockchain technology in that it can be freely accessed by virtually anyone with a decent internet connection. Data contained in a permissionless database is wholly public and guarantees absolute transparency and authenticity.
A DAO also eliminates the need for a trusted third party in any financial transaction. As the DAO uses the blockchain to execute transactions, all transactions are peer-to-peer in nature and do not require the involvement of any third-party service to function as an escrow. The elimination of a third-party means that the costs associated with the financial transaction for the involved parties are also reduced.
As DAOs use smart contracts for their routine operations, the possibilities are endless as to the scope or level of sophisticated work that a DAO can execute without any human involvement. For the uninitiated, a smart contract is a piece of code that executes automatically should a certain condition be met. Subsequently, individuals with a stake in the DAO in the form of the number of tokens they hold get to vote on new governance proposals shaping the future of the organization.
Typically, a DAO proposal is considered to be passed by the governance if the majority of the token holders support it. However, the definition of such a majority differs from DAO to DAO and, as such, must be studied in detail before voting on governance proposals. For instance, some DAOs might follow the absolute majority, i.e., over 50% of votes while other DAOs might have a minimum threshold for the majority which could be even as high as 70% of the total votes. The majority rule is applied to DAO governance to ensure the DAOs are not being spammed by useless and trivial proposals that could hamper its efficiency and waste its capital away.
The creation of any DAO begins with launching its smart contracts. The logic is fed into these smart contracts according to the desired functionality of the DAO. It is also important to ensure the smart contracts are safe and do not carry any major exploit. Hackers and other nefarious elements are unforgiving when they detect even the slightest of vulnerabilities in smart contracts and to prevent this, sufficient smart contract audits from blockchain and cyber security firms must be conducted before the DAO is formally launched.
The next step is to determine a way to receive funds and initiate the process to enable on-chain governance for the DAO. The most common way of raising funds is by creating and selling tokens or, in some cases, airdropping them to an existing community. Once the tokens have been distributed to the recipients’ wallets, on-chain governance is enabled where the token holders get to draft upgrade proposals, vote on them and implement them on the protocol should the proposal receive majority support.
The third and final step in setting up a DAO is deployment. Once the smart contracts have been time-tested and on-chain governance is enabled, the DAO is required to be rolled out on the blockchain or the respective smart contract platform. The deployment phase of a DAO is generally marked with the transfer of its management from the developers to the many stakeholders who take control over the DAOs future via governance proposals.
Why are DAOs Necessary?
DAOs are a breath of fresh air in the long untouched field of organization structure as they ensure a level playing field for all the stakeholders within the organization irrespective of their title. There are numerous reasons why DAOs are the need of the hour in a world that is becoming increasingly complex and secretive about confidential information. Staying true to the ethos of blockchain technology, DAOs offer the following benefits:
DAOs ensure complete transparency as all the financial transactions of the project are stored on-chain on a public distributed ledger. The chances of collusion are close to negligible as all the members’ wallets are publicly available to all DAO members at all times. The fact that all information is public ensures that all DAO members behave in good faith and are completely transparent about all their financial interactions that concern the DAOs treasury and other funds.
Further, on-chain transparency ensures no scope for the infamous insider trading is rampant in legacy organizations where a select few tend to share important confidential information among themselves for financial gains.
DAOs keep the community at the center of all their affairs, thanks to on-chain governance. The egalitarian and democratic nature of an organization is something that is made possible because of DAOs and allows all its stakeholders to have their say in all the matters of the organization.
A few examples where a DAO can leverage the opinions and expertise of its community could be the possible use of the DAOs treasury funds, liquidity mining programs, integration with other smart contract platforms for greater efficiency, insurance pools, UI/UX upgrades, DAO rebranding, etc. All of the aforementioned changes can be put in front of the DAO in the form of a governance proposal by any stakeholder. Such governance proposals can then be voted on and should they meet the required criteria, they can be implemented in the DAO.
Security and Privacy
DAOs provide unparalleled security to the organization’s funds and affairs, assuming the smart contracts powering the DAO have been duly audited by cyber security and blockchain research firms. As the distributed ledger powering DAOs is updated simultaneously and permanently after every single transaction, there is enough transparency and a sense of security that nothing occurs without the DAOs knowledge or approval.
A transaction that is fed into the blockchain cannot be reversed until the blockchain undergoes a block reorganization which is almost impossible to pull off when it comes to strong and reputed smart contract platforms such as RSK, Ethereum, Solana, and others. Even the world’s largest and strongest blockchain to date, Bitcoin, has stood resiliently since its launch in 2009 and has not suffered a single attack that could threaten the blockchain’s integrity and security.
Similarly, while blockchains do not offer absolute privacy as wallet addresses are visible on-chain, it offers pseudo-anonymity since the wallet addresses cannot directly be tied to a person’s name without tracking the user’s IP address.
As you might have learned by now, the benefits offered by DAOs are tremendous and they seem to be the logical next step of evolution for corporations that suffer from vast operational inefficiencies, lack of security and transparency.
Top Crypto DAOs in Existence
Today, the crypto space is sitting just shy of a staggering $3 trillion market cap. While the premier cryptocurrency Bitcoin (BTC) continues to assert its dominance in the industry, one cannot ignore the contribution of DAOs from other blockchains.
The first in the list of top crypto DAOs is the previously discussed Ethereum-based DeFi protocol Uniswap (UNI). At the time of writing, Uniswap commands a market cap of more than $16 billion and boasts of $5.7 billion in total value locked (TVL) of digital assets in the protocol. Uniswap is the de-facto leader among decentralized exchanges on the Ethereum blockchain and currently allows users to seamlessly swap ERC-20 tokens. Liquidity providers can earn swap fees from the pools they provide liquidity to, depending on the volume of transactions of the concerned cryptocurrencies.
The Uniswap DAO is a fairly active one and has, to date, discussed and passed several unique and significant governance proposals such as creating a new fund called the “DeFi Education Fund” to spread awareness about DeFi and its relevant regulations.
Following Uniswap in terms of reported market cap is the leading Ethereum-based lending and borrowing protocol, Aave. The top DeFi protocol adopted a DAO governance model shortly after deploying itself on smart contracts and allows all AAVE token holders to actively manage and contribute to the governance of the platform.
Any conversation about DAOs is incomplete without the mention of Maker, which brings us to the next protocol among the top DAOs in existence today: MakerDAO.
For the uninitiated, Maker was one of the earliest DAOs to realize the benefits of on-chain governance. Accordingly, shortly after its formation, the protocol launched the MKR governance token. At the time of launch, a total of 1 million MKR tokens were minted. However, unlike the vast majority of other DAOs, the total supply of MKR is elastic as it changes depending on the debt obligation of the protocol.
RSK & DAOs
RSK offers a wide range of benefits and use-cases that make it an ideal smart contract platform for projects looking to deploy DAOs.
Leveraging Bitcoin’s Security
RSK is the world’s only smart contract platform that uses Bitcoin’s network security to offer unrivaled protection and security to all the dApps and protocols built on top of it. RSK allows developers to code a DAO using its security which, in turn, is derived from the Bitcoin network.
We usually come across incidents in the crypto industry about how DAOs and crypto protocols fall victim to sophisticated hack attacks or see their treasuries getting drained off of funds with no countermeasure in place. RSK fixes this by offering network protection that is practically impossible to breach or compromise.
To date, no single entity has been able to compromise the Bitcoin network’s security and there is no reason to assume that it would change in the future.
Use-Case: Governance as a Service
A prominent use case that showcases RSK’s utility in blockchain-based governance models is RSK Enterprise’s Govern offering. Govern allows users or developers to easily implement a governance operating model. Govern can also be used for permissioned blockchains as it allows any entity to implement a governance operating model for their consortium network with just a few clicks via the Governance-as-a-Service platform.
There are several different uses for which Govern can be leveraged, such as developing provisions for voting on admitting new members and on protocol upgrades, managing consortium and participant life cycle, runtime operations, data governance, third-party management and platform management.
In all, RSK’s Govern offering makes blockchain-based governance a hassle-free process that can be utilized by any DAO or institution with just a few clicks.
The Future of DAOs
While they are a relatively novel concept, the future looks promising for DAOs, specially after considering recent regulatory approvals.
For example, the Wyoming Decentralized Autonomous Organization Supplement approved the world’s first legally registered DAO LLC. The watershed moment indicates that regulators around the world are viewing DAOs as a force to reckon with.
Following the footsteps of Wyoming, the Australian Digital Law Association worked with Senate Committee to propose the creation of a new limited liability legal entity to represent the interest of DAOs.
It should not come as a surprise if an increasing number of countries around the world begin to regulate DAOs and consider them as legal entities under national law.
We saw that DAOs ensure a level playing field for all the stakeholders and, as such, do not discriminate among individuals based on their titles or other accolades. RSK emerges as the best platform to build a DAO as it not only ensures ease of entry for all due to its minimal transaction fees but also promises the best security any DAO can ever offer.