Spotlight: Decentralized Autonomous Organization (DAOs)

You may have heard of Decentralized Autonomous Organizations (DAOs), but can you name the criteria that make a DAO a DAO? Which DAOs should you have on your radar? And most importantly: should your organization engage with DAOs?

With my colleagues Dr. Steffen Reidt , Helen Schwarz , Maximilian Melchert , and Seyhan Ilhan , we got to the bottom of these questions.

I. DAO Definition

A decentralized autonomous organization (DAO) refers to an organization where at least some governance rules (e.g., funds allocation) are coded into a computer protocol that runs autonomously on a blockchain.

These criteria typically describe a DAO:

• ?? Common goal: In order for a Decentralized Autonomous Organization to be qualified as an organization ( in contrast to purely individual or collective efforts without an organizational approach), members of a DAO must share a common goal or purpose (in line with the Oxford's Learner Dictionary definition ).
• ?? Decentralized online community: The decentralized character of a DAO? implies a self-governing group of people connected via the Internet.? There may be varieties in the degree of decentralization of a DAO, but at a minimum, a DAO should not entirely be managed by a single authority.
• ?? Allocation of community funds: Typically, DAOs manage a pool of tradable crypto tokens that can be used to fund the development of the DAO or any other common goal. These tokens are usually decoupled from another type of DAO tokens, the governance tokens, used for voting purposes. Even though the implication of community funds provides financial incentives for people interacting with a DAO, the community aspect of DAOs should not be overshadowed by solely speculative engagement (read more about this in the article on Cointelegraph).
• ? Trust and transparency via blockchain technology: Relevant transactions (e.g.,: results of votings, transfers of community funds) must be validated on the blockchain, and typically the voting results of a DAO require automatic enforcement through a smart contract.?

II. Examples of DAO Projects

There are various online platforms listing DAOs and their traction. While CoinMarketCap lists 188 tokens tagged as DAOs on the DeepDAO platform, you'll find over 4800 organizations (including many projects without substantial traction, though).?

Picking the exemplary selection here isn't easy since there are dozens of interesting candidates. To illustrate the concept of a DAO, we'll take a closer look at eight specific projects that help better understand (a) different use case scenarios as well as (b) interesting examples of pitfalls for DAO projects.

Uniswap

What is Uniswap? Uniswap is a decentralized cryptocurrency exchange (DEX) that uses a decentralized network protocol. The protocol facilitates automated transactions between cryptocurrency tokens on the Ethereum blockchain through the use of smart contracts. Changes to the protocol are voted on by the owners of a native cryptocurrency and governance token called UNI and then implemented by a team of developers.?Uniswap is completely open source and licensed under the GNU General Public License. The automated liquidity protocol is implemented in a system of non-upgradeable smart contracts on the Ethereum blockchain.??In contrast to centralized exchanges, no fees are charged to the users when listing their tokens on the decentralized exchange. Users also have full control over their private keys, which means that they don’t have to give up control over their funds.?Anyone can become a liquidity provider for a pool by depositing an equivalent value of each underlying token in return for pool tokens. The prices for each token are worked out using a mathematical algorithm.??

What is the function of the Uniswap governance token? The creation of the UNI token in September 2020 was triggered by the offering of SUSHI tokens on the competing DEX platform SushiSwap. They offered users special governance rights regarding the new protocol as well as a share of all transaction fees. To prevent users from leaving, the UNI token was created, which is a governance token that gives holders the right to vote on new developments and changes to the platform, including a say in token distribution and changes to fee structures.?

MakerDAO

What is MakerDAO? MakerDAO governs the stablecoin cryptocurrency Dai. As of November 2022, Dai is integrated into over 400 apps and services and has a live market cap of 5.6B USD, ranking the 12th largest cryptocurrency by market capitalization on coinmarketcap.com. MakerDAO refers to both the overall project and the organization made up of people holding the MKR token.?The MKR token can be used for two different reasons: First, it allows token holders to vote on changes to the Maker Protocol. Second, it can be seen as an investment asset for all token holders. Each purchase of the MKR token is used to buy and burn MKR tokens on the market, reducing the supply of tokens.?

Is MakerDAO fully decentralized? MakerDAO is not the only organization related to the Maker Protocol. There are also two foundations based in Denmark: the Maker Foundation and the Dai Foundation. The Maker Foundation developed the Maker Protocol with the goal of driving fully decentralized governance within the project. The Dai Foundation is independent of the Maker Foundation. The goal is to secure what cannot be technologically decentralized in the Maker protocol, such as trademarks and code copyrights.?

ConstitutionDAO

ConstitutionDAO tried to buy one of the remaining 13 copies of the US constitution and raised $47M to win a bid at the Sotheby's auction. Sotheby's had to verify that the bidder held money in reserve for taxes, fees, and storage. After deducting these fees, the bid of ConstitutionDAO went down to $43 million, and ConstitutionDAO lost to a bid of $43.2 million to the famous investor Ken Griffin. What makes this project different from a regular crowdfunding campaign is that the token holders would have been granted governance rights over the documents of the US Constitution.?

MoonDAO

MoonDAO describes itself as an "international collective of people united by the mission of decentralizing access to space research and exploration."?The DAO collects money to send people to the moon. On the 4th of August 2022, MoonDAO sent the "Dude Perfect" Coby Cotton on Jeff Bezos' Blue Origin NS-22 sub-orbital spaceflight?mission. Among the organizers of the MoonDAO is Pablo Moncada-Larrotiz, an original member of ConstitutionDAO.

Decentraland

Decentraland is the first fully decentralized virtual world, built on the Ethereum blockchain, where users can completely own their custom creations (games, hotels, casinos, etc.) through LAND Non-Fungible Tokens (NFT). The token can be bought and sold through Decentraland's Marketplace using the Mana Token. Users interact through a virtual avatar with the world around them.

The DAO owns the main smart contracts comprising Decentraland and acts as the decision-making tool in the Decentraland virtual world. Through the DAO, users can vote on governance updates, future LAND auctions, approval of NFT contracts in the world, in the Builder and in the Marketplace, and much more. Voting takes place through the Decentraland DAO's governance interface, which is powered by Aragon. The DAO itself is supported by the Security Advisory Board (SAB), consisting of five members selected by the wallet-keeping community.?

The DAO

The DAO was intended to allow cryptocurrency "investors" to directly fund and manage new businesses and became the first high-profile implementation of a DAO running on the Ethereum platform. As such, The DAO attempted to raise funds directly from peers (decentralized peer-to-peer crowdfunding). However, the project failed.

On May 28th, The DAO officially went “live” after an initial 28-day funding period. During this “creation phase,” the community of investors discussed “proposals” for how The DAO funds might be used. The proposal with clearly the most community support was Slock.it’s own: use The DAO funds to hire Slock.it to design and manufacture a “smart” lock system that would enable “sharing economy” members (such as Airbnb homeowners) to programmatically grant access to their homes to approved renters. The DAO failed due to a massive “race to empty attack in June 2016. This resulted in the first hard Ethereum fork.?

With the first hard fork of Ethereum some major problems with decentralized organization became apparent. While the majority of Ethereum holders agreed to the proposed fork, a few decided against participating in the fork. Therefore, there are now two competing Ethereum blockchains, one called Ethereum Classic (ETC) and the forked blockchain, which is known as the “official” Ethereum, ETH.? In ETH, the history of the blockchain was changed to redeploy the stolen funds.??

It is worth noting that even as ETC clearly has some major flaws, which were exposed by the DAO hack, still a significant part of the community refused to accept a central intervention to save the whole project. This raises the question if decentral decision-making is suited for such complex decisions, which require at least a minimal amount of understanding of the underlying technology. Clearly, some participants were willing to continue with a protocol that had already proved its imperfection. The attackers profited of the unwillingness to participate at the fork and were able to keep 8,5 million USD in ETC in the months following the attack.??

In the end, the decisions made by?Vitalik Buterin, the conceptual inventor of Ethereum,? during the DAO hack saved ETH. Afterward, ETH became one of the key protocols within the crypto space and is a cornerstone of Decentralized Finance.?

KlimaDAO

KlimaDAO is a fork of OlympusDAO with a focus on accelerating the price appreciation of carbon offset certificates by engaging in a voluntary market carbon offset certificates and bringing these offsets on-chain. KlimaDAO tries to bring the carbon emission offsets on-chain in the form of BCT (Base Carbon Tonnes) tokens. The BCT tokens can be burned to claim it against emissions and used to create the backing for the reserve currency: KLIMA. The price of KLIMA is regulated by supply and demand. You can go way deeper down the KlimaDAO rabbit hole in the article by Florian Strauf.

The adoption of KlimaDAO was curbed by the crash of high-yield DAO tokens at the start of 2022. This crash was followed by the announcement of the most prominent voluntary carbon credit standard Verra, that it would suspend blockchain tokens. The Verra organization, which sets voluntary standards for the carbon credit industry, said it prohibits the practice of creating instruments or tokens based on retired credits. Verra noted that it is exploring the possibility of incorporating carbon credit into its registry in order to establish a transparent and verifiable way for market participants to manage their accounts. This would allow them to avoid fraud and ensure that the environmental integrity of their transactions is maintained.

The Big Green DAO

The Big Green Dao is based on the idea of disrupting existing donor structures by making philanthropy more decentralized and accessible to its contributors. As such, the Big Green DAO is designed to put money into the hands of nonprofits and other local groups that know best how to invest the funds raised and distribute them according to the rules encoded in the blockchain.

Through the distribution mechanism of the Green DAO?voting scheme, the DAO engages community members and?organizations in a collective decision-making process about?their financial resources and the donation process.?Ultimately, the funders of this DAO want to bring together?impact-driven people to increase the adoption of such?technologies and social structures. Specifically, they hope?to build a community that drives Big Green's mission of?food and gardening advocacy, including (but by no means?limited to) food justice, school gardens, home gardens,?urban gardens, food advocacy, and regenerative?agriculture.

The?Big Green DAO empowers both donors and grantees?to vote on who receives funding and how much. Each?donor receives a governance token with a voting power of?one. The tokens are publicly?traced?on the Ethereum?blockchain. There are several ways to participate in the?DAO:??

1. Donate money to receive DAO governance tokens
2. Receive funding from the Big Green DAO?
3. Vote on donation preferences and direct distribution of?funds to nonprofit organizations
4. Engage on- and offline with the Big Green community

The Big Green DAO will consist of two bodies: the DAO?Committee and the DAO Community. While the Committee?includes 2-5 nonprofit organizations appointed by Big?Green, the DAO Community is composed equally of donors?and organizations. The Committee protects the fiduciary?interests of power and manages the transfer of?government power. The DAO community, on the other?hand, will primarily drive the vote on the distribution of?funding.

III. Business Relevance of DAOs

1. Should your business engage with DAOs?

Let's tackle this question from different usage scenarios:

• ?? Empowering self-organization in your company: DAOs are designed to engage communities and help them achieve a common goal without any interference need of a central authority. This may resonate with decentralized and self-organizing teams. It doesn't mean that any team goal can be pursued with a DAO. In fact, the specific use case for a DAO may be very niche on its own. What could be such a goal? For example, governing a common-use asset in a similar fashion, how the token holders of the ConstitutionDAO should have been granted governance rights over the documents of the US Constitution. In your specific case, such a common-use asset could be an event space in your office, a decarbonization or charity fund (see the NGOs accepting crypto ), or an autonomous robotic farm . This DAO experiment could contribute to the greater goal of empowering self-organization and cater to the need for more autonomy in your teams, helping you keep your talents happy and engaged.
• ?? Decentralized Finance: In the Decentralized Finance space, we see DAOs of decentralized crypto exchanges (e.g., Uniswap with a treasury of $3B), stablecoins (e.g., Maker DAO with a treasury of over 60M) and lending platforms (e.g., Aave with a treasury of ca. $150M). It may not seem much, but consider these projects as the grassroots in a crypto market with a capitalization of over two trillion USD at an all-time high. This ecosystem holds keys for new financial products and crowdfunding opportunities and may become especially relevant in the fields of financial inclusion, sustainable finance, and ESG investments.
• ?? PR, marketing, and online communities on steroids: DAOs unite communities to join funds on common goals and in a hardly regulated space. These decentralized organizations run autonomously without a central authority or single point of fault. This bears a huge potential to amplify projects aimed at the philanthropic and common good and a huge risk of amplifying less honorable causes. Social media has shown us how the most extreme voices on both sides of any given social discourse get viral. DAOs are the next generation of online communities. These communities go beyond tweeting and posting thoughts and collecting likes. They use common funds worth millions of dollars to reach a common goal. At the very least, PR and Marketing should understand the DNA of DAOs and incentives of these communities, e.g., by experimenting with a sandbox DAO of their own.

2. ?? The elephant in the room: decentralization trends beyond the DAOs?

The constant interest in DAOs and the development of many applications in this area are the results and the tendency of a society that wants to change constantly hand in hand with the technology in order to be able to use the full advantages of DAOs such as decentralization, democratic community involvement, and active staking.??Nevertheless, the increasing shift away from the traditional workday and the decreasing trust in traditional companies will not cause any company to function completely as a DAO tomorrow.??However, their very existence has the potential to change the landscape and lead the business world into new ways of working.?

DAOs can be considered as a pinnacle of the megatrends of decentralization and self-organization of organizational structures. To see the impact of these megatrends let's forget about the DAOs for a second and take a look at examples, where decentralization made a dramatic impact in how companies operate today:?

• Holocratic organizational structures: Zappos, one of the largest online shops in the world, has been following a holocratic approach since 2014. This approach is a big step towards decentralization and collaborative management style while ensuring free scope for self-organization and self-management of each individual employee as well as the teams.?
• Microservices vs. monolithic architecture:?The trend toward service-based software architecture based on microservices is growing steadily with the digitalization that is taking place in parallel. The best example of this is the video streaming service provider Netflix, which was one of the first companies to be forced to change its IT infrastructure in 2009. The great demand and the rapid growth in offerings prompted Netflix to migrate its private data centers to a public cloud. Another important step was the replacement of the monolithic architecture with a microservice-based architecture. Today, Netflix's IT landscape is divided into more than a thousand microservices, ensuring daily management and deployment of new code to developers.?Agile development methods have also contributed to this trend away from monolithic approaches, which as a "single point of failure," for example, are not very practicable for changes as well as scaling of applications. Continuous deployment results in shorter feedback loops for the individual modules, which means that the idea of optimization through several distributed development teams comes to the fore and that bug fixes can also be implemented more quickly and easily.
• Collaborative role of DevOps: As a holistic approach, the DevOps role has shaped people, methods, and tools into a community since 2007, replacing the previously separate model of software development and IT operations.??Further characteristics of DevOps are the automation of processes in the IT infrastructure and in the source code and the resulting transparency based on shared configuration and deployment rules.??According to Statistica, 25% of software developers are eager to learn DevOps skills, with 21% of teams have already adopted a DevOps approach to source code management.?
• Open source community collaboration on GitHub: With a user base of over 40 million and data repositories of over 140 million, Github is the most powerful decentralized version control system. It enables location-independent management of development projects and promotes team collaboration among developers who can work on the same project at the same time.??The commits of the developers can be viewed transparently by the entire team.

So we see that collaboration, decentralization, and self-organization already change the way how we work together if you're into DAOs or not.

3. How feasible are DAOs??

In recent years, the DAO concept has emerged more clearly as it gained traction. As such, the scenarios presented highlight potential use cases while drawing a detailed overall conclusion.?

• Tradable tokens can make or break DAOs.?Crypto tokens can be a powerful tool to motivate the community to participate in a project. If these tokens are designed to be scarce (limited supply and burn mechanism), it can be expected that these tokens will be traded - intentionally or not. This, in turn, opens up a can of worms of compliance and volatility issues that can harm the DAO.?
• Smart contracts will always have exploitable loopholes. Auditing smart contracts is crucial.?No computer program is ever completely proof against bugs and loopholes. The problem with smart contracts is that they are executed autonomously, making corrections during operation or rollback solutions extremely difficult. That risk can be mitigated by a comprehensive smart contract audit and a carefully planned rollout.?
• We shouldn't approach DAOs as something that will replace existing governance constructs. Let's think of them as an extension to the regular governance constructs instead.?DAOs are often understood as the next evolution of governance, eliminating the need for centralized governance structures (such as legal entities or expert councils). In reality, DAOs are complemented by centralized structures with legal authorities (such as the Dai Foundation for MakerDAO and the DAO Committee for The Big Green DAO).?

4. How to get started with your DAO project??

DAOs are complex constructs with sophisticated smart contracts and tokenomics concepts at the core.?We see the following important stages in building a DAO:?

• ?? Strategy: First, you'll need to decide what implications your DAO should have on your business. Do you want to invest in other people's DAOs, build an innovation project with an internal pilot of a DAO to give your employees freedom to govern internal funds or assets, or design your DAO as a nonprofit crowd investment product? These are some of the questions that a good DAO strategy should answer:

• ???Governance:?As seen in the examples above (Section II: Examples of DAO projects), DAOs have different levels of decentralization. Some DAOs (like MakerDAO) have foundations that own IP rights. Beyond that, there may be functions which need to be executed by an authority or an appointed committee. For the decisions designated for the DAO itself the founding team cannot make any changes without the input of the community of governance token holders.
• ?? Tokenomics:?The next phase is to secure funding for the launch of the DAO, but also for its ongoing operations. This is often achieved through token sales, which also cover the governance side of the process - usually, the number of tokens you own is equal to your voting rights within the organization.
• ???Smart Contract Architecture:?It’s important to figure out what the smart contract needs to do for the DAO. These sets of rules are often very extensive and cover a wide range of things. If you forget to set something up in the initial development phase, you can change it later through voting by the network. So this code also needs to be tested and audited over and over again so that nothing is lost.?

Our team at 凯捷咨询 is most experienced with all of these focus areas and is happy to support you with the exploration, design, and implementation of your DAO project. Just send me a message on LinkedIn, and we'll find out how we can get you the decentralized future you want.