Communities are inherently valuable in all spheres of human endeavours as it provides an avenue for groups of people to collectively collaborate and deliver different forms of value. Many of the Web 2.0 applications such as Facebook and Reddit have experienced significant growth and traction in the 21st century because of the capacity to enable groups of like-minded individuals to connect, share resources and form valuable communities. However, there have been associated concerns of centralism, centralization, and censorship. Therefore, this emanated the need for self-governing, decentralized community structures, tools and governance systems that could enable members collectively work on a common goal with fewer bureaucracies and centralized power structures. This research examines the key DAO related projects and tools that enable projects to seamlessly form communities and DAO structures.
What are Decentralized Autonomous Organizations (DAOs)?
A Decentralized Autonomous Organization (DAO) is described as a community-based entity with no central authority, as decisions are typically made from the bottom-up. The rules of a DAO, including the community protocols and incentive structures, are coded as smart contracts and deployed on a blockchain. Once deployed, these rules are autonomously executed in a consistent manner and cannot be changed except through a collectively agreed consensus approach. After the smart-contract creation, the DAO then determines a way to receive funding and enact governance. In most cases, tokens are sold to raise funds. Typically, to gain membership and voting rights in a DAO, an individual needs to own the governance tokens that are tied to the project. DAOs can take different forms, structures, governance, and rules depending on the community objectives and goals.
In general, projects can implement their DAO structures through three basic procedures which are: smart contract creation, funding and deployment. The projects and tools for these functions are analyzed below.
DAO Projects and Tools
Aragon
Aragon is a decentralized application (dApp) on the Ethereum blockchain comprising of a suite of tools and services that enables the formation and management of decentralized communities such as DAOs. Blockchain projects and other types of organizations can use Aragon to form governance structures, fundraise, manage community finances, resolve disputes, and reward contributors. Aragon essentially provides broadly applicable templates for projects to define the boundaries and protocols for their communities. This is in addition to other financial management tools that enables tokenization and incentivization structures for community participants in a decentralized manner.
The basic prerequisite for using Aragon to create a DAO are:
1. A web 3 compatible browser and an Ethereum wallet such as Metamask, or an Ethereum compatible hardware wallets such as Trezor or Ledger with a minimum balance of 0.2 ETH. This is to facilitate the payment of gas fees when deploying a DAO or making transactions within the organization. Also, Aragon provides an option for projects to deploy thier DAO on Polygon or Harmony so as to reduce the fees associated with DAO deployment, management and voting.
2. Alternatively, using Aragon services on its testnet is possible through the Rinkeby Test Network. Although test-ETH is still required in the Rinkeby test network to pay for gas fees when deploying a DAO or making transactions within the organization.
3. An Ethereum Name Service domain. Aragon uses Ethereum Name Service to assign names to DAO.
Aragon suite of products and full-stack community solution frameworks includes the: Aragon Client and Govern (for DAO deployment), Aragon Voice (for community management), and the Aragon Court (for dispute resolution).
Aragon Client (V1): This is Aragon’s core application used by projects for creating and deploying a DAO. The AragonOS is the main Operating System (OS) that runs the DAO, alongside smart contract enforcements which ensures that only authorized accounts (members) or programs have permission to perform specific actions within an organization, based on the requirements of the project. This application comes with pre-installed templates to enable projects seamlessly set-up DAO membership conditions, token allocations and voting mechanisms. In addition, it further gives organizations the flexibility to integrate plugins or apps such as multi-sig wallets that could expand existing Aragon functionality for DAO management.
The token application feature of the Aragon client service enables projects to manage membership and voting power in an organization. Hence, adding new members to a DAO simply entails minting and assigning a token to them. On the default organization template, one token equals one vote. The token application further shows associated token information such as the token supply, current list of token holders, balance of organization token held and other distribution options.
Aragon Govern (V2): This is basically an enhancement of the existing features of the Aragon Client (and is presently in its beta state). The Aragon Govern DAO framework fundamentally relies on optimistic governance, thereby empowering projects to operate a frictionless governance model with on-chain execution*. *By default, this DAO framework does not require the community to vote on every single proposal, rather the DAO operates by continuously executing actions unless these are challenged. Projects can seamlessly create a DAO on the Aragon Govern platform by simply specifying all the DAO identifiers such as the name, associated tokens, membership criteria, proxies, and other configuration details.
An Aragon Govern DAO works with the principle that community participants will respect the DAO agreement and act in the best interest of the respective community. However, to prevent bad actors from executing non-confirmatory actions, all transactions come with a cool-off period, allowing all community members to review it before it can be executed. During this period, the community can challenge any proposal or transaction. Thereby, ensuring an extra layer of security. Challenged actions are all resolved by Aragon Court, a subjective dispute resolution system.
Aragon Voice: This is a gasless voting and verification service for DAOs. Proposals are processed on Aragon’s layer 2 protocol known as Vochain, and the vote metadata is stored on an InterPlanetary File System (IPFS). This, therefore, facilitates decentralized, permissionless, and scalable governance solutions for DAOs that make use of ERC-20 tokens (although more token types would be included eventually). Aragon Voice can also be used for permissionless signalling, deterministic on-chain execution, as well as dispute resolution when combined with Aragon Govern and Aragon Court services.
Aragon Court: Aragon Court is the core components of the Aragon OpenStack that enables dispute resolution within a DAO, particularly for subjective disputes that cannot be solved by smart contracts. This is achieved by having a set of guardians (judges) drafted for each dispute indicating who will vote to guarantee a certain ruling. The Aragon court guardians are drafted by activating the ANT tokens in Aragon Court’s smart contract. Hence, the more tokens a guardian has activated, the higher the probability of getting drafted.
However, unlike traditional courts, Aragon Court guardians are not asked to rule impartially on disputes, but rather,* *are asked to rule the way they expect the majority of other guardians to rule. Every time a guardian is drafted for a dispute, a portion of their tokens is activated and locked until the dispute is finalized. To incentivize consensus, guardians who do not vote in favour of the final ruling have their locked tokens slashed. Whereas the guardians who vote in favour of the final ruling are rewarded with dispute fees and tokens from the guardians who voted for a minority ruling.
Finally, Aragon further allows projects to hire an internal Aragon Expert that will tailor a DAO to best fit their community needs.
ANT TOKEN
The ANT token, an ERC-Token, is Aragon’s native cryptocurrency, that grants holders the ability to vote on key decisions about the project’s future. Also, the ANT token is the main coordination mechanism of the Aragon network DAO (anDOA). Therefore, ANT token holders can make proposals, vote, and participate in dispute resolution within the Aragon network DAO. In 2017, an initial coin offering (ICO) was held, raising 275,000 ETH by selling ANT coins.
SNAPSHOT
Snapshot is an off-chain multi-governance application that enables clients such as DAO to create proposals through which community members can vote on them, without incurring any gas fees since all processes are performed off-chain. In this case, the votes are simply signed messages that are verifiable online. This application is open-source, and it offers clients multiple voting systems such as (single choice, quadratic voting, and approval voting depending on the project requirements). In addition, Snapshot also enables flexible voting options (such as the choice to vote with NFTs, ERC20s, and other contracts).* *Before creating a proposal, the project must first create a space on Snapshot.
The main prerequisite for creating a DAO space on snapshot is:
1. An Ethereum Name Service (ENS) domain, and
2. Snapshot compatible blockchain wallet such as MetaMask, Portis, Fortmatic, or Argent.
Afterwards, to create a project space on snapshot, a client can simply link their ENS Domain to Snapshot by modifying the snapshot URL with their ENS domain name, and then login with the wallet that owns the ENS domain .
The Spaces profile settings on snapshot gives clients the flexibility to customize their project spaces with the appropriate branding choices including custom color schemes, avatar, proposal description, terms, and thresholds in line with the community needs. A Proposal threshold is the minimum number of tokens required to create a proposal. Snapshot offers a proposal validation function to validate if someone can post a proposal or not.
PROPOSAL CREATION AND VOTING TYPES
A DAO can simply publish a proposal within their project space on snapshot by first connecting with their wallet provider, and then selecting “New Proposal” after which all necessary details about the proposal title, summary, duration, snapshot block number and voting type would be filled. Snapshot also enables clients to integrate the plugins of other DAO management tools such as Aragon, Gnosis, SafeSnap, and Quorum in order to add more features to their DAO Proposals.
Depending on the Voting type, the voting power for each vote by voter can be distributed across multiple choices they may make.
Some of the main voting types includes:
1. Single Choice Voting: In this case, every voter may select a single choice within the community proposal to allocate their entire voting power to.
2. Approval Voting: Each voter may approve any number of choices on proposals. Each selected choice will receive equal voting power.
3. Quadratic Voting: Every voter within a DAO can spread their voting rights across multiple choices, and the results are then calculated quadratically.
4. Ranked Choice Voting: Each voter may rank any number of choices. Votes are initially counted for each voter’s top choice.
5. Weighted Voting: This voting method was initially introduced by the float protocol, and just like the quadratic voting, it enables voters to spread voting power across a number of choices.
OVERVIEW OF PROPOSAL VOTING STRATEGIES ON SNAPSHOT
A strategy is a JavaScript function that defines how the voting power is calculated. Strategies are being used on Snapshot to calculate the result for a proposal. A project would need to select a specific voting strategy for their proposals.
Typically, snapshot proposal votes are measured by the amount of voting power held by the community member. Only the community members that hold relevant amounts of tokens at the time of the creation of the Snapshot block number would be able to vote on the proposal.
The default strategy is to calculate the balance of ERC20 tokens for each voter in which (1 token = 1 vote).
A proposal can have multiple strategies for voting, and snapshot also enables projects to customize their voting strategies as well, depending on the community needs. Other options available to community projects are:
- NFT voting with an ERC-721 or ERC-1155 based strategies.
- Only allow certain members to vote using whitelist strategy.
- Delegate voting power using a delegation strategy.
- Weighting voting power using a quadratic strategy
Importantly, snapshot enables community-based projects such as DAOs to combine the different strategies above for a single proposal.
MULTI-SIG WALLETS
Multisignature (Multi-sig) wallets, as the name suggests, are cryptocurrency wallets that requires two or more private keys to sign-in and make transactions. This implies that the storage and security mechanisms of multi-sig wallets requires multiple cryptographic signatures to access the wallet. Multi-sig wallets offer a built-in mechanism for investment groups or communities-based entities such as Decentralized Autonomous Organizations (DAOs) to diminish the dependance on a single person in terms of funds management. In this case, the co-signatories to a shared multi-sig wallet also referred to as “co-payers”, are collectively determined by the group. Multi-sig wallets also overcome the security risks associated with mono-sig (single-key) wallets, by increasing the number of failure-points that hackers encounter. In addition to this, most multi-sig wallets offer additional features such as oversight of funds and transactions of the wallets. This therefore makes it ideal for DAO and other community-based entities in a bid to enhance transparency and accountability of funds.
How Multi-sig Wallets Works
The underlying mechanism behind a multisig wallet works similarly to bank vaults, in the sense that more than one key is required to open the vault. Presently, there are numerous multi-sig wallet options available for DAOs and other community-based entities, some of which includes Gnosis Safe (which can be integrated with Aragon Client) and BitPay amongst others.
A project must first decide on the type of multi-sig wallets to adopt depending on the community requirements and security preferences. Typically, projects can choose the number of signatories allowed to open a multi-sig wallet, as well as the minimum number of keys needed to unlock the wallet.
For instance
- A [2–3] multi-sig wallet is one that is shared by three co-payers and requires at least two signatures from the three co-payers in order to sign-in and make transactions.
- Whereas a [3–3] wallet is a multi-sig wallet is shared by three co-payers and requires all three signatures to access the wallet and make transactions.
By default, there is no co-payer hierarchy as it relates to the operational mechanism of multi-sig wallets. This therefore implies that any co-payer can create a transaction proposal, and all the co-payers can choose to either agree or reject the transaction proposal.
Recovery
Multi-signature wallets assign a unique recovery phrase to each of the wallet co-payers. To recover a multi-sig wallet, the number of recovery phrases needed is equal to the number of signatures required to access the wallet.
Therefore, on multi-sig wallets where the number of co-payers is equal to the number of signatures required to access the wallet, for instance [2–2, 3–3] wallets, if a co-payers recovery phrase gets lost, it implies that there may no longer be enough co-payers to sign transactions.
The document presents a list of other complementary tools for DAO creation and management.
DAO Limitations and Solutions
DAOs are still subject to some limitations, of which one of the most significant is the regulatory uncertainty. However, part of the undeniable trait of the blockchain industry, is that it is constantly pushing the boundaries of defining what is valid and acceptable in the society. To this effect, some governments have begun to give DAOs legitimacy within their respective jurisdictions. An example of this is the State of Wyoming, which recently passed the DAO Bill in 2021, legally recognizing Decentralized Autonomous Organizations (DAOs), and giving them the same legal rights as Limited Liability Companies (LLC).
In general, a DAO can serve as an avenue for projects to kickstart new initiatives, or for existing projects to coordinate around jointly developed value in a permissionless, transparent, and borderless manner. Members of a DAO are also incentivized to be committed because they benefit directly when the DAO’s goals are achieved. However, another limitation in this case, is that many of the self-described DAOs in existence are neither decentralized, nor autonomous, as most still suffer from enormous centralization-related issues such as generous token allocations to core team members and early investors, as well as minimal community-wide participation in the DAO proposal votes. Thereby minimizing the level of community involvement and network effects to warrant the use of the word “decentralized”. This further goes to show that decentralization, can easily be described, yet very lofty to achieve in practical terms.
Notwithstanding, certain centralized links such as domain ownership are sometimes inevitable, the use of the right legal entity structure along with an efficient DAO governance model that incentivizes community participation, in the long run, is seen as the holy grail for various crypto projects. As a result, the Blockchain Advisory Solution (BCAS) has duly recognized the need to assist projects towards decentralizing itself, to the extent that respective projects can be run autonomously, with enormous community involvement and equitable incentivization structures that would increase network effects.
Therefore, the decentralization and legal risk audit service offered by BCAS, fundamentally involves a comprehensive audit on the level of decentralization attained by the project in question, as well as highlighting any incumbent legal risks, both vis-Ă -vis any legal structure in place, as well as any potential liability attaching to relevant team members. In addition, practical recommendations and on-hand implementation assistance would be provided (as an added service offering). This consequently enhances the level of transparency, accountability and inclusiveness relating to the respective project(s). Thereby maximizing the trust and engagement of community members, while minimizing associated legal risks.