Abstract: After NFTs, DAOs have been all the rage for 2021 and probably the next frontier where new innovations may surface in the crypto economy. DAOs or Decentralized Autonomous Organizations intend to replace conventional ways of organizing people.
In A Beginner’s Guide to DAOs, Scalar Capital’s Linda Xie defines DAO as follows:
A decentralized autonomous organization (DAO) is a group organized around a mission that coordinates through a shared set of rules enforced on a blockchain.
DAO is a web/crypto native entity run by a community based on a set of rules enforced on a blockchain. But unlike conventional organizations, DAOs do not have central leadership.
In a conventional organization, rules are enforced by management based on what is written on opaque policy documents while in a DAO, rules are enforced by an open-source blockchain-based on code. Let's unpack that.
DAO operates based on the rules encoded on smart contracts that automatically execute whenever a set of criteria are met. Besides being autonomous, DAOs are also transparent as their open-source codes can be viewed and treasuries can be audited since all transactions are recorded on the blockchain.
Then the automatic question that arises is how are decisions made in a DAO, how is it governed?
The decision making playbook varies from DAO to DAO. While some DAOs have bottom-up decision-making mechanisms, some other DAOs have a few core team members take a decision and then either seek consensus through voting or ensure the entire decision-making process is made transparent to the community members.
DAOs usually have tokens that are distributed in return for fundraising or as compensation for contribution, where the tokens provide voting rights to community members.
There are a bunch of amazing articles out there explaining how a DAO functions or why DAO is the future of organizations. The focus of this article will be on those DAOs that are on a mission to integrate DAOs with non-crypto/conventional markets.
0. DAO Infrastructure:
For a DAO to operate, an intricate web of infrastructure is necessary to manage things like governance tools, community engagement, membership management, treasury frameworks.
Aragon provides plugins to build, operate and govern DAOs on open-source infrastructure. Tribute DAO provides modular and extensive smart contract frameworks to launch a DAO that can scale at a minimal cost. Colony is another such protocol that offers Ethereum smart contracts to launch a DAO. SuperDAO is building an OS for DAOs. The OS maintains the real-time status of DAO ownership, offers governance structure among many other applications.
SyndicateDAO is building an infrastructure exclusively to democratize investing by allowing individuals and communities to form syndicates and launch investment funds.
"Fintech startups are focused on the frontend while blockchain is the solution that aims to fix the backend." -Balaji Srinivasan
Syndicate DAO is aiming to build the backend infrastructure to move all investment vehicles on-chain.
Lots of other platforms are building governance protocols, treasury frameworks and compensation suites to support the rapid growth of DAO communities. Eg: Snapshot is building a voting protocol; Discourse DAOs such as Llama, Parcel and Gnosis are building tools for treasury management. On the compensation front, Superfluid is building a platform for programmable cashflows while Sablier is building an autonomous payment stream to compensate contributors.
1. DAO for stablecoins
MakerDAO is one of the earliest DAOs. Built on Ethereum, it allows anyone to generate a stablecoin DAI backed by leveraging Ethereum (ETH) as collateral through unique smart contracts known as Collateralized Debt Positions (CDPs). A DAI is pegged to the value of the US Dollar and therefore it is subject to the limitations of USD such as inflation. Unlike DAI, OlympusDAO issues OHM tokens that compete with USD to act as stablecoins while being held as reserves by the Olympus Treasury.
But until the volatility of the token is addressed, the true adoption of the token will remain a question. Despite being less than a year old, the token has garnered high market supply, price and attention leading to at least a couple of dozen different forks. Wonderland and Snowbank offer decentralized reserve currency protocol that is built on the Avalanche Network based on the TIME and SB tokens, respectively. There are many other forks that are mere copycats and probably here for the pump and dump scheme.
2. DAOs for non-crypto economies:
There aren't just forks of Olympus that act as reserve currencies on different networks but there are some really interesting forks that go beyond the crypto economy.
KlimaDAO, a fork of OlympusDAO, is trying to establish the market for a carbon economy. Klima DAO gives Web3 builders and users the opportunity to participate in the carbon market through the KLIMA token. KLIMA tokens are fungible and are backed by at least 1 tonne of tokenized verified carbon offsets locked in the Klima DAO treasury. The mission of KlimaDAO is to accelerate the price appreciation of carbon assets to enable quicker adoption of low-carbon technologies.
Each carbon offset that could come in the form of
Carbon Sequestration: Reforestation
Carbon mitigation via forest protection
Carbon removal via soil sequestration
Direct Air Capture Solutions(DACS)
represents a measurable and verifiable reduction, removal or avoidance of greenhouse gas (GHG) emissions. A key component in the KilmaDAO framework is the verification of carbon offset by 3rd parties based on Verra/Gold Standard certifications.
Another project that is slowly gaining traction in this space is Diatom DAO that tokenizes plastic credit, i.e tokenized representations of plastic removed from oceans.
3. DAOs for funding research
VitaDAO is a decentralized membership collective funding early-stage longevity research. VitaDAO is powered by VITA token that can be obtained by contributing work, data, IP, or funds to VitaDAO. The core function of VITA is to curate and fund novel open science data creation around longevity.
4. DAOs for healthcare and city-building
Definitize Finance is a DAO at the intersection of healthcare and funding. The concept behind the DAO is to find worthy projects in healthcare and fund them, such as medical device leasing, insurance, drug research and many more.
CityDAO is a project that aims to extend the concept of DAO beyond digital assets to physical land and even build new cities in the future. By tokenizing land, rights, and governance, CityDAO aims to build cities on-chain to unleash accessibility, interoperability, and opportunity. The DAO also intends to mint pieces of land as NFTS that could be owned by members of the community.
Concerns for DAO:
While DAOs are certainly an interesting approach and may become the conventionally agreed way of organizing people in the future, there are quite a few pitfalls and challenges.
To start with, not everything needs to be decentralized. Decentralization has its tradeoffs. The right question to ask when a project claims to be decentralized is 'Does decentralization provide added benefits like security, ease of operability or better coordination as compared to centralization?' The current answer is no in most cases.
The second is the volatility of the token and the relatively early nature of the Web 3.0 economy compounded with high gas fees for transactions on DAOS built on Ethereum.
Another concern for DAOs is the fiduciary aspect. Ideally in a corporate, ownership and control are well separated to avoid a fund manager acting in their best interests. However, the DAO structure has no such clear boundaries and therefore, the concept of fiduciary duties i.e the demarcation between supervision and imposition of legal duties is unclear. Perhaps, the fact that the smart contracts are autonomous and can be openly audited ensures that the principal-agent problem is solved.
In the case of Klima or Diatom, it is unsure what happens to the carbon/plastic credits once we move to a low-carbon economy or in general. Do they simply remain in the treasury?
Finally, the regulatory roadmap is practically non-existent on whether DAO tokens should be treated as utilities or securities. The legal rights for members associated with DAOs are also uncertain and more work needs to be done along with regulators and policymakers.