GV 141 - DAOs

Decentralized autonomous organizations are the newest experiments in governance mechanisms, this time on the blockchain. This introductory course to DAOs will cover the following:

• Defining DAOs

• Understanding DAO Functionality

• Exploring the Pros & Cons of DAOs

Suggested Prior Reading:

None.

Introduction

Decentralized autonomous organizations take their name from the first DAO, adequately named 'The DAO'. While the first ever DAO failed in its mission to create an autonomous organization that, the experiment allowed many other organizations to learn from their mistakes and implement some of its aspects that made it great.

In theory, a DAO is the following:

• Decentralized - There is no sole controller or owner of the organization, and there is as little concentration of power as possible, be it financial, control or otherwise authority.

• Autonomous - The organization is governed by smart contracts, and functions automatically based on the member's preferences and governance decisions.

• Organization - Is by definition a group of people with a particular purpose.

It could be said that the autonomous nature of DAOs is the most important experiment being done, but it is truly decentralization that allows this autonomy to not be misused, controlled or otherwise manipulated by any one party.

Functionality

How does a DAO work in practice? Well, a DAO requires smart contracts in order to control its rules, governance proposals, voting, membership, and so on. These contracts allow these governance structures to happen on-chain, autonomously and remaining completely transparent. Problems like voter fraud or trusting the government to count votes accurately during elections are non-issues for DAOs. Let's look at some other aspects of these governance structures:

Token-Based Voting

Sometimes referred to as 'coin voting', this is the main voting mechanism utilized by DAOs lately. This makes it so that in order to vote, a member needs to hold or stake a certain amount of the DAOs token. This usually means that the more tokens you hold, the more your vote has an impact. This alignment of economic incentives with governance has allowed a lot of projects to succeed. It makes sense that someone with a lot of their funds invested in a project will want to see that project grow, and thus make good proposals, vote positively on proposals that will improve the project, and so on.

There has been harsh criticism to this model of voting though, most recently by Vitalik Buterin (the creator of Ethereum), who posted an article about it here. There are concerns regarding centralization due to vote delegation, the lack of privacy allowing for bribing to take place, and many others.

Rules & Security

There are many rules to a DAO, in order to maintain its integrity and allow for its governance structures to run smoothly. These rules are up to the DAO to configure, but can include many of the following:

• Timelocks for smart contract changes

• Limits to actions regarding the DAOs treasury

• Minimum stake / tokens in order to vote

• Minimum stake / tokens in order to make a proposal

• Minimum votes in order for a proposal to be valid

These rules can only be changed through voting, depending on how the smart contracts are structured, and are impossible to change suddenly due to timelocks, or secretly due to everything being public on the blockchain.

Hierarchy

Compared to a traditional organization's hierarchical structure, a DAO's structure would be much flatter if not completely flat. There can still be hierarchies, but usually these are decided on through votes, similar to any other governance decision in the organization. These would be made to promote someone into a particular role in the DAO, lead a team of developers to implement a proposal, or something of the sorts.

Economic Incentives

DAOs, through accomplishing their purpose, usually provide some economic incentives for people to become members, contribute and vote. For a yield farming platform like Snowball, for example, it makes perfect sense to share a portion of the project's revenue with members, since it is a direct indication of the project's success due to its member's contributions.

Other platforms may have drastically different ways of providing incentives though. For example, MakerDAO, once of the largest DAOs out there, burns MKR tokens (their governance token) based on its revenue from DAI interest, increasing the value of the MKR token.

Public Goods Funding

A great aspect of DAOs that is often discussed is the ability to easily allocate treasury funds for public goods, either proactively or retroactively. Proposals can be made and voted on to give a certain amount from the DAOs treasury to anyone who has or wants to make something that provides value to the community. If enough people see the value in the public good, the vote will pass and the treasury will react accordingly.

Closing Thoughts

It is awesome to see the new applications of this decentralized technology, and all the amazing projects being born as DAOs. There are, however, many other aspects of DAOs that haven't been covered in this course, and many of ones that were can be looked into in a lot more detail in future courses.