Overview of Decentralized Autonomous Organization (DAO)

First Published on @IOSG Medium on Jun 2, 2020

Source: Sohu
Source: Sohu

1. What is a Decentralized Autonomous Organization

1.1 Introduction: to catch bandits first catch the ringleader

We often see such a plot in war movies, the defending army lead by our main character is under the attack from crushing enemy forces. Some of their own soldiers have surrendered or fled, the wall is about to fall. But in the Nick of time, the main character somehow managed to cross the enemy crowd, successfully kill the enemy leader. Even with a huge leading edge, the enemy’s soldiers immediately collapse and retreat (in some fantasy scenarios, enemy even vanishes into ashes). Although it is exciting and cheerful to watch, but I can’t help myself thinking, this kind of failure is truly stupid.

In every corner of modern society, the disadvantages of a single leader also exist in enterprises or organizations. In the recent Luckin Coffee fraud incident, the stock price plummeted from $24 to $2.40 and was forced out of the NASDAQ; Musk pumped one of the most expensive marijuana in history (Tesla’s market value evaporated by $4 billion) on a radio show; the Liu Qiangdong incident, despite suspected of being framed by competitor, wiped $7.2 billion off the market value of the well-run JD.com. From this series of events we can see that for a traditional company, the ability of leadership, credit and even personal life of their leaders are sometimes like a time bomb.

So what’s the solution for the future?

1.2 Decentralized Autonomous Organization(DAO)

We envision a world in which all systems, management, charters, and performance bonus are written into smart contracts and stored in the blockchain in an enterprise. Connect all the individuals and organizations in the house through smart contracts. We no longer need roles such as CEO, CFO, CTO, and our members are all over the world, we don’t even need offices, we don’t have utilities, nor going to pay for water and electricity. All choices and governance will be adopted through rules and incentives, we can avoid relying on the central authority or person, which can also greatly reduce the risk of fraud.

First of all, here, the double-entry accounting method becomes a distributed ledger technology;

Second, the law to protect private property becomes a smart contract;

Finally, the enterprise becomes a decentralized autonomous organization.

Decentralized autonomous organization (DAO), we can understand it as an autonomous company or organization that builds on a blockchain in which governance and rules are encoded in the form of smart contracts. The most important and basic characteristics of DAO are “decentralized” and “autonomous”.

  1. “Decentralized ” is reflected in a complete “code is the king” ” organization, with all day-to-day operations based on decentralized infrastructure — blockchain. So it’s not built around executives or shareholders, it’s not controlled by an individual or organization
  2. “Autonomy” is reflected in the fact that its daily operations are programmed and automatically enforced when meeting a specific condition. So the “xxx has the final interpretation” ” clause naturally ceases to exist.
Figure 1::The difference between DAO and traditional companies, Source: BlockchainHub
Figure 1::The difference between DAO and traditional companies, Source: BlockchainHub

Vitalik defines DAO as “an entity that lives on a network and exists independently, but also relies heavily on the human person to perform certain tasks that it cannot. “ Richard Burton even made it more clear: “DAO is a strange way, it’s a digital system that lives on top of Ethereum.” Decentralized autonomous organizations blend “decentralization”, “autonomy” and economic incentives, tokenized blockchain elements, in order to maximize organizational effectiveness and value flow. If the above-mentioned scandal-plagued organizations and enterprises adopt a decentralized and autonomous organizational structure that is open, democratic and transparent enough, we believe that we can avoid such unnecessary losses.

2. Blockchain community from IOSG

Figure 2: Blockchain Community, Source: IOSG Ventures
Figure 2: Blockchain Community, Source: IOSG Ventures

We believe the community is really a place where users come together and interact. According to Figure 2,we broadly divide the blockchain community into three broad categories:

  1. Information Community : Mainly a platform to provide industry information and in-depth analysis for investors and developers.
  2. Forum Community: Mainly a platform for industry technology discussion. Medias and developers can freely exchange technology and experience in regards to blockchain.
  3. DAO: Various types of decentralized autonomous organizations (segmentation and comparison of key players will be made in the next section).

3. Decentralized Autonomous Organization(DAO) Overview

2019 is the year of DAO, with a variety of new concepts emerges, especially this year we saw the rise of new funding with legal compliance and asset management DAOs, and we have divided the existing DAOs into two broad categories — financing and management , and divided Moloch and its forks into four stages, with introduction and comparison of features, size, areas, governance models and other dimensions (Figure 3).

Figure 3: DAO Comparison table, Source: IOSG Ventures
Figure 3: DAO Comparison table, Source: IOSG Ventures

3.1 DAO Builders and Infrastructure

Although this category is the underlying service provider, it is not strictly DAO. But these service providers are designed to provide tools and platforms to build a decentralized organization and so are critical to the development of DAO. The most well-known DAO builders and infrastructure platforms that support decentralized governance are:

Aragon: is a Dapp on the Ethereum blockchain that allows anyone to create and manage any organization (companies, open source projects, NGO, hedge funds, and so on). Aragon focuses on providing a secure and common backbone for the formation of a general organization, rather than building products around specific decision-making mechanisms. The biggest bright spot about Aragon’s governance mechanism is that all of its ANT Token holders have the right to oversee all decision-making proposals, including (the highest to lowest order): the upgradeability of smart contracts, the court (grade, structure, trial fees),the ANT Token policy, Treasury’s fiscal policy. In addition, Aragon is building a very complete ecosystem, including arbitration, and recently established the Aragon Court. All Aragon-based companies, organizations, or individuals can be reconciled through the Aragon court if a dispute arises.

DAOstack: Focuses on building a larger coordination platform for DAOs, using so-called holographic consensus and forecasting markets to find out what members of their organization should focus on (as a scarce resource). DAOstack clearly attaches importance to decentralized decision-making mechanisms, and the project focuses more on solving the inherent problems of large-scale decentralized decision-making. Daostack’s governance model is to adopt a Token named GEN, which allows owners of GEN to “promote” ” a proposal they consider important. Since the influence of GEN is added to Daostack’s algorithm, which will prioritize those proposal “promoted” by GEN, thus attracting more effective attention from DAO members.

Colony: A digital company platform with plug-in-like collaboration and payment tools that can be used by companies to take advantage of community-led DAO. Colony is based on web, therefore is more open and borderless than Aragon which is organization based.

3.2 Financing type DAO

The most iconic feature of this type of DAO is that the primary voting decision is to allocate funds for a project or proposal.

The most famous of all is The DAO, which is an investment fund, except that its investment decisions are made by a collective vote, rather than entrusted to a dedicated investment manager. It was hacked in 2016, which led to a hard fork in Ethereum, and later announced its closure. Although The DAO is a failed project, its innovation is unprecedented, laying the foundation for the rise of various types of DAOs in the future. Here we focus on the Moloch project and the various forks it derives from.

Figure 4: Moloch DAO, Source: ETHFANS
Figure 4: Moloch DAO, Source: ETHFANS

3.2.1 Moloch

Moloch is an Ethereum fund program designed to fund infrastructure projects in Ethereum (crowdfunding).

Moloch DAO operates as a mechanism where interested parties can send (donate) a certain amount of ETH to the system, and existing members vote to decide whether to accept them as members. Members may submit funding proposals to the platform and vote on other funding proposals. After the vote, Moloch DAO will fund certain projects. It is worth mentioning that Moloch DAO members are anonymous; voting and donating ETHs are all done on-chain, and voting rights are determined by the number of donated ETHs. If one member has a large number of voting rights and makes a wrong grant decision, the other member may opt out (Ragequit). What is new about Moloch is that unlike traditional organizations, equity does not mean that you can continuously control and manage the organization’s capital. Conversely, there is only one way to gain access to the right to use capital, which is to destroy their own equity and the corresponding right to vote to issue additional shares, which effectively undermines the traditional separation of corporate sectors to stimulate collaboration.

3.2.2 Moloch v1 Fork (total number: 89)

Representative project: Metacartel, Marketing DAO

Moloch v1 Forks are generally not-for-profit and are characterized by:

  1. Support only one asset — ETH.
  2. After the proposal is passed, the assignee receives some “share”, which could be exchanged to ETH available in the guild bank. The assignee then exchange these shares with wETH through the “ragequit ” mechanism.
  3. Only DAO members can initiate a proposal.
  4. Queue directly into the voting session after the proposal is initiated.
  5. It takes about two weeks to process the proposal, which means the value of “share” will vary with the fluctuation of ETH.

Metacartel is a fork of Moloch v1, that provides funds to Ethereum’s development teams, aiming to explore smart contracts and new forms of community governance. The main difference from Moloch is that Metacartel is providing fund to application-layer development teams, primarily based on the performance and completion of the development team’s products.

Marketing DAO focuses on the promotion of Ethereum. Grants have been given to 10 proposals, each of which is 80 DAI. In the future, they will continue to make efforts to promote Ethereum, make it reach more audiences.

3.2.3 Moloch v2 Fork (total number: 24)

Representative Project: Daosquare, Metafactory

Generally for profit. Enhanced collaboration at the technical level.

  1. Support more than 200 different assets
  2. After proposal has passed, any assets obtained do not need to initiate the “ragequit” mechaism, therefore avoid being affected by volatility.
  3. Added GuildKick, which can be initiated by any member and force a member to quit.
  4. Any person may submit a proposal.
  5. A transaction proposal may be initiated for DAO members to trade its underlying assets.
  6. The proposal requires a member to choose “funding” option to enter the voting stage.

Moloch v2 is designed to extend the operation of MolochDAO from a purely single public donation to an unlimited portfolio of assets. It allows DAO projects to hold many different assets — optimizing their ability to invest and getting different types of tokens as a gain.

DAOSquare is a commercial start-up project run through DAO, which issues a token called RICE that maps the company’s equity. The aim is to create a global network due to 1) the establishment of communities can increase the motivation of participants. 2) Realize the interconnection of value with the presentation of map-based visualization. Members receive the DAO equivalent share by staking RICE, which has the right to govern and receive dividends. Members can exit through “Ragequit” at any time.

Metafactory is a business-oriented DAO, a incubator focused on fashion brands. It is a type of organization that is more like a company, primarily for the purpose of a business, such as making a product and providing services. The auction participants on the platform actually purchased a portion of the brand’s voting rights (and receive profits in proportion), and users can participate in brand management and vote on the future direction of the brand label.

Figure 5: Metafactory, Source: Defi Rate
Figure 5: Metafactory, Source: Defi Rate

3.2.4 Moloch v2 Fork with legal compliance

Representative project: Metacartel Ventures, The LAO

Prior to the start of this type of project, DAO model was flawed, and under current law, DAOs that are only subject to smart contracts are limited in terms of member fundraising and profitability. If the DAO is for profit, then you will be bound by securities law like SEC. Even if the DAO is non-profit, it still touches the gray area of the law. This type of DAO is legally commercialized, providing a bridge between the traditional business world and the blockchain world.

MetaCartel Ventures is a for-profit investment DAO project in conjunction with a legal entity. MCV has all the features of a traditional venture capital fund, but lowers the entry threshold for those who want to participate. From legal documents, MetaCartel Ventures is a limited liability venture founded in the United States, consisting of 33 certified investors and builders and maintaining decision-making partnerships. From the essence, it is a decentralized organization utilizing Moloch V2 to manage the organization’s funds, distribute shares, and manage voting among members of the organization.

The LAO, or “ Legal Autonomy Organization”, is an investment vehicle based on blockchain and smart contracts designed to redefine joint-stock companies, aiming to build an experimental venture capital of $2.5 million for investors. It uses OpenLaw tools that can be used to create binding legal agreements and bind them to the execution of one or more smart contracts. In this way, any token and any smart contract that runs on Ethereum have legal effect. The LAO established a legal entity (in this case, a Delaware-based limited liability company), but with primary management done through an online application (DApp) and related smart contracts. The LAO will provide a legal structure that allows members not only to provide grants, but also to invest in blockchain-based projects in exchange for tokenized stock or utility tokens. Financing of projects can be obtained within days once submitted to LAO.

3.3 Management Type

This type of DAO’s main voting decision is not to fund a project or donate, but to make decisions about protocols or blockchain governance. Another difference is that, unlike financing DAOs, which are primarily intended primarily to contribute to the development of an ecosystem, management DAOs tend to focus only on themselves.

3.3.1 Protocol-specific DAO

Representative projects: MakerDAO, Kyber

Governance decisions are mainly made for exchange or lending protocols.

MakerDAO is an autonomous lending platform on Ethereum and a provider of stable coin DAI. Maker also used the DAO framework to make protocol governance decisions, so that the entire decentralized lending system can be operated. MKR voters participate in Governance Poll and Executive Vote to make changes to the Maker protocol and governance mechanisms. The main function of Governance Poll is to research whether the stabilization fee and DSR need to be adjusted. If the voting decision is different from the existing interest rate differential, the governance system initiates executive vote and MKR holders will vote again on whether to incorporate the previous Governance Poll’s interest rate differential adjustment result into the Maker.

Kyber is a decentralized token exchange protocol that can be executed on any blockchain that supports smart contracts. KNC holders will vote on network fee rates, how fee benefits are distributed, and value creation options. Members can delegate their voting rights to a third-party “pool” to vote on their behalf. At the end of each voting cycle, reserved ETH will be granted as a voting reward.

3.3.2 Layer 1 Chain Management DAO

Representative project: Dash

Token holders vote directly on the corresponding blockchain measures using the network’s tokens. Protocol will then calculate vote and execute subsequent results automatically.

Dash is the first public chain that use DAO for governance, with its code allocating a portion of the block reward (usually used to pay for financial rewards for validation) (10 percent) to network members. Rewarding useful technical development and promotion activity. To date, hundreds of proposals have been approved in DashDAO, covering areas such as funding development, marketing, and community awareness efforts.

3.3.3 Financial Asset Management DAO

Representative projects: StakerDAO, Stake DAO

StakerDAO is a community of investors, based on the Tezos blockchain, to create a governance process with a new investor model to launch a new decentralized financial application. It utilizes STKR as a shared token and rely on the Tezos blockchain to manage the allocation and exchange of tokens. STKR token holders are responsible for the election of five Staker council members, and working with the operations team to submit monthly Staker proposals. Proposal examples could include initiating synthetic tokens, index funds, or stable tokens. Five Staker council members voted on the proposal. The project profit sits eventually back to the STKR token holder. It’s a bit like MakerDAO but with wider decision range. StakerDAO recently released the first Blend token product, backed by a basket of POS public chain tokens.

Figure 6: StakerDAO Governance Cycle, Source: StakerDAO
Figure 6: StakerDAO Governance Cycle, Source: StakerDAO

Stake DAO serves Stake Capital, a Stake service provider, and distributes the value generated by a package of DeFi services to Stake Capital representatives or participants through Stake Capital token (SCT).

Users can put SCTs into the DAO and receive regular stake rewards. SCT tokens can also be used to govern voting for key decisions, including the type of stake service, modifying the earnings duration cycle, and the SCT spending rate (which will be reduced after each cycle to reward early investors). At the same time, each staked asset will generate a Liquid Token (LToken) at a ratio 1:1, which can be traded as a derivative on the secondary market.

3.4 Summary

Of the above-mentioned DAO, the largest and most successful are DASH and MakerDAO. I personally think the most innovative one is StakerDAO, which follows the Maker’s dual-token model of governance, but is not limited to stable coin, with unlimited possibilities. Funding with legal compliance DAOs like the LAO are those most coincide to future trends. We did not go deep into every DAO to feel the community atmosphere, so there’s no way to judge which DAO is the best. However, we believe that a successful decentralized autonomous organization must have the following four characteristic: (1)Diversity and inclusion; (2) Excellent code and incentives design; (3) high levels of community consensus and (4) A strong development team.

The best way to get to know an organization is to join it.

4. Advantages and Problems of DAO

4.1 Advantages

  1. Decentralization of governance

    It provides every investor with an equal opportunity to shape the future success of their organization and to have a say in the decision-making process. Since the organizational structure is not limited by traditional hierarchical lines of management, every innovative idea and suggestion can be fully considered by the entire organization.

  2. High efficiency:

    Bureaucracy has been a challenge within hierarchical organizations, greatly slowing down the process. In a fully decentralized organization, transaction processing times are faster and more efficient. In addition, since submitting proposals and participating in the vote requires a certain number of tokens for each stakeholder, this encourages them not to waste time on invalid solutions.

  3. Transparency

    As a DAO built on the blockchain, every financial transaction, rule, and decision is uploaded on a public ledger for everyone to view. Adopting a consensus system also means that each stakeholder is involved in helping to decide how to spend the organization’s funds and tracking the amount spent.

4.2 Possible problems

1. Security issues

The immutability of smart contracts is both an advantage and a disadvantage for DAO due to the immaturity of the technology itself and the existence of security risks. Once the contract rules are encoded, the system will be up and running, making it difficult to change them. In addition, any known security issues can be exploited because the code is visible to everyone and difficult to repair. Other known smart contract security issues include transaction ordering dependence (TOD), timestamp trading, mishandle exceptions, and so on.

2. Legal status

While some countries have legalized the use of cryptocurrencies and blockchain technologies, the exact legal status of using DAO as a generic structure remains unclear. Start-ups with DAO business structures require a legal framework to operate legally in certain jurisdictions and interact with the traditional financial system and the intellectual property world. Otherwise, DAO participants may be held legally responsible.

3. Decision-making level

Because DAO’s decision-making power is democratic, technical knowledge is complex and profound. Many voters do not have the relevant decision-making skills and knowledges, and some do not even know anything about the issues they vote for. It uses a minority majority mechanism, so the results of the vote are not necessarily optimal and are likely to be dominated by majority voting rights.

5. IOSG Ventures’ Future Vision for DAO

IOSG believes that DAO is the ultimate form of the crypto economy, but still in its early days. Many issues including protocol technology security, compliance, endogenous problems in governance decisions still exist. At the beginning of its existence, it had been a combination of hope and controversy. On one hand, the fall of The DAO has called into question of its safety. On the other hand, the success of MakerDAO and DASH has raised hopes. With more and more technological breakthroughs and the advent of DAO service providers, we are able to predict future trends of DAO:

  1. The emergence of more theoretical research regarding the characteristics of DAO. And continually learn from economics, biology, historical anthropology and other dimensions to conduct in-depth research, laying the foundation for future development and technological breakthroughs.
  2. More innovations emerge to reform and upgrade all shapes of form in physical world. Imagine if Wuhan’s incident was based on DAO to make decisions. We have consistent goals, all information is uploaded to the blockchain, all participants bind by smart contracts can quickly collect materials, and vote to distribute materials in accordance to the chain information, and at the same time quickly transported materials to the hospital. Would this be a better way of resolving the issue?
  3. More compliance. Local government will issue various laws and regulations to restrict the legal liability of DAO. More DAOs similar to the legal form of the LAO appear.
  4. As Defi grows strong after 2019, as the best governance tool for DeFi, DAO will receive more attention.
  5. To find the balance between freedom and efficiency, relevant rules and the incentive design would be further strengthen. Because too much decentralization will reduce the participation rate and therefore lacks unity of goals, resulting in low efficiency. Over-centralization will lead to the lack of listening to the opinions of members and lost of original intention.

Finally, we believe that the concept of digital democracy not only protects the principles of a democratic society, but also improves corruption and system breakdown through technological development, model innovation and reasonable incentive mechanism. With the emergence and upgrading of different types of DAOs in 2020, we have reason to believe that the application of DAO in the future will develop from the bottom up, and continue to improve from the current form of governance and financing on the chain, until it is strong enough to be adopted by the national level or large-scale enterprises.

6. Bibliography

  1. Daohaus [EB/OL].https://daohaus.club/.
  2. Marketing DAO [EB/OL].https://marketingdao.org/.
  3. Moloch [EB/OL].https://molo.ch/.
  4. Metacartel [EB/OL]. https://www.metacartel.org/
  5. DAOsquare [EB/OL]. http://dao2.io/
  6. 初析 MolochDAO:颠覆公司制度的一种全新的组织. [EB/OL]. http://www.lianchaguan.com/archives/6223
  7. Blockchainhub. Tokenized Networks: What is a DAO. [EB/OL].https://blockchainhub.net/dao-decentralized-autonomous-organization/
  8. 区块佣兵:浅谈区块链自治社区的理想模式[EB/OL].https://www.tuoluocaijing.cn/article/detail-27296.html
  9. Lane Retting. The key ingredient to be a better blockchain. [EB/OL]. https://www.etherean.org/blockchain/community/2019/09/19/key-ingredients-better-blockchain-part-iii-community.html
  10. 去中心化自治组织:发展现状、分析框架与未来趋势.[EB/OL].http://blog.sciencenet.cn/blog-951291-1198720.html
  11. 数字民主和治理2.0:从比特币到DAO,区块链的创新是如何影响的?[EB/OL]. https://www.hulianmaibo.com/posts/info/35663
  12. Entering Moloch DAO. [EB/OL]. https://ethfans.org/posts/36791
  13. Staker DAO. [EB/OL]. https://www.stakerdao.com/
  14. MetaFactory Launches Genesis Bomber Jacket Auction. [EB/OL]. https://defirate.com/metafactory-genesis-auction/
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