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Decentralized autonomous organization

Definition

Decentralized autonomous organization (DAO) also known as decentralized autonomous corporation (DAC) is a blockchain-based system that allows people to coordinate and self-govern themselves through a set of self-executing rules deployed on a public blockchain, and whose governance is decentralized, that is, independent of central control. The precise legal status of this type of business organization is unclear. It functioned as a venture capital fund, utilizing open-source software and lacking a conventional management structure or board of directors. To be completely decentralized, the DAO was unaffiliated with any nation-state, despite utilizing the Ethereum network.

Characteristics

  1. The absence of a single, overarching authority - a government or central bank, for example.
  2. The DAO can independently execute operations without human intervention.

  3. The DAO, like any other organization, is governed by its own set of rules.

  4. DAOs are initially considered decentralized due to their server-less decentralized infrastructure (a public blockchain). Second, as a result of their reliance on decentralized governance mechanisms, the decision-making process is contingent on the consensus of its members. This procedure typically involves voting in which DAO members can take part. Such decisions may concern, for instance, the allocation of DAO resources (e.g., funding projects or paying members), but they may also concern modifications to the DAO code. In other words, a DAO may be updated to operate differently, with a new set of encoding rules, with the consent of its members. This may be necessary to fix a bug in the code, but also allows it to adapt to the needs and desires of the community.

  5. DAOs are regarded as autonomous because, unless their code states otherwise, they are independent of their creators. Their operations are governed by the rules embedded in their code, as well as the (human) governance of their members. In addition, because they are deployed on a public blockchain, they are censorship-resistant, as there is no central authority that can shut down the DAO and its service. Thus, DAOs will continue to operate as long as there are members willing to execute their code, e.g., providing services, buying/selling resources, and hiring individuals.
  6. DAOs are organizations in the sense that they negotiate the interactions of a group of people, usually an open community of people who join as members. Members of some DAOs are token holders of a specific token that allows DAO participation, similar to corporation shares.

DAOs Functioning

DAOs mainly function in three steps:

  1. Setting the rules: The first step of creating a DAO is to establish and define the rules that will govern the entire ecosystem. These rules are written in and stored in a smart contract that is open, transparent, and immutable.
  2. Funding: While decentralization is crucial to the success of DAOs. Throughout the funding phase, it will be able to distribute its tokens as widely as possible. Moreover, when acquiring these tokens, users are granted a variety of rights and privileges within the environment, one of these privileges is the right to vote on specific issues.
  3. Autonomy: After deployment, the DAO attains complete autonomy, i.e., independence from external control. Everyone who possesses the native tokens of the DAO has a stake in the network. Consequently, their voting power in the ecosystem is proportional to their stake. The required majority approval percentage can vary from proposal to proposal.

Voting System

DAOs' most important characteristic is that they enable new models of governance. Typically, internal processes and especially decision-making processes rely on novel instruments such as tokens. The different decision-making methods, such as holographic consensus, conviction voting, and dandelion voting, represent a burgeoning diversity of options that are being both theorized and tested in this field. Therefore, it is essential to examine DAO voting systems in order to comprehend the differences in DAO usage across platforms. Each platform has its own voting system. There are four metrics used to compare these decision-making systems:

  • The percentage of users who cast a vote, which provides insight into the engagement of the community.
  • The number of cast votes per voter, which shows how active voters are in terms of participation.
  • The percentage of proposals that are accepted, which can indicate how the voting system may affect the outcome.
  • The percentage of positive votes among those cast.

Examples of DAOs

  1. Dash (2015)
  2. The DAO (2016)
  3. Steem (2016)
  4. Augur (2018)
  5. Uniswap (2018)
  6. ConstitutionDAO (2021)
  7. AssangeDAO (2021)
  8. FreeRossDAO (2021)

Issues on the DAO

Although the DAO held a massive proportion of all issued ether tokens in 2016, it has faced some issues and criticisms:

The legal status is ambiguous and may vary from one jurisdiction to another. The U.S. Securities and Exchange Commission has viewed certain prior approaches to blockchain-based companies as illegal offerings of unregistered securities. A DAO may be functionally equivalent to a corporation without legal status as a corporation: a general partnership, despite its frequently ambiguous legal standing. If known participants or those at the interface between a DAO and regulated financial systems are not in compliance with the law, they may be subject to regulatory enforcement or civil actions.

Security Issues

There are several potential security flaws. For example, once the system is up and running, A DAO's code is difficult to change, including bug fixes that would otherwise be trivial in centralized code. Corrections to a DAO necessitate the creation of new code and the agreement to migrate all funds. Although the code is visible to all, it is difficult to repair, leaving known security holes open to exploitation unless a moratorium is declared to allow bug fixing.

Researchers discovered several flaws in The DAO's code. Based on these security flaws, hackers attacked the DAO in June 2016. The hackers gained access to 3.6 million ETH, which was valued at around \$50 million at the time. This sparked a massive and contentious debate among DAO investors, with some suggesting various solutions to the hack and others calling for the DAO to be permanently disbanded. The DAO's operating procedure allowed investors to withdraw money that had not yet been committed to a project at any time; the funds could thus quickly deplete. Despite safeguards aimed at preventing shareholders' votes from being used to win investments, there were a "number of security vulnerabilities." This allowed a large withdrawal of funds from The DAO to be attempted in mid-June 2016. The Ethereum blockchain was forked on July 20, 2016, to save the original contract. This incident also played a significant role in the subsequent hard forking of Ethereum.

Characteristics of a successful DAO

A successful DAO must have at least five of the following characteristics:

  1. A purpose.
  2. A voting mechanism.
  3. A governance token or share system.
  4. A community.
  5. A good funding management.

Creating a DAO

A DAO is created in three steps:

  1. A coded governance system should be used to update the rules of the smart contract once it is launched.
  2. Sources of funding and governance must be defined; normally, governance is funded through the sale of tokens with voting rights.
  3. Deploy smart contract on the blockchain, from that point on, stallholders will determine the future organization of the market. The developer(s) have the same level of influence as any other stakeholder.

A platform is required for the creation of a DAO. The platforms that provide DAO deployment as a service allow users to create their own DAO using a customizable template. Aragon, DAOstack, DAOhaus, and Snapshot are the most important platforms. All are free/open-source projects in various stages of development and maturation. All platforms will offer roughly the same structure, but their implementations may vary. Some DAO systems utilize on-chain polling while others utilize off-chain polling. Which option you choose depends on what your DAO deems essential. In addition, when deploying your DAO to a blockchain, you must have sufficient crypto to cover transaction fees.

Aragon

Aragon is possibly the largest DAO platform, with 1700 DAOs managing a total of \$900M. Aragon intends to expand the use of DAOs as a free and open-source technology to enable the creation and management of various types of decentralized organizations, including corporations, cooperatives, nonprofits, and open-source projects. Aragon allows DAOs to be created on Ethereum, Polygon, Andromeda, and Harmony. Through its Aragon client, the project offers open-source software for the creation of customized DAOs. Apps (sets of smart contracts) that can be voted on to be installed or removed from DAOs enable customization. A Finance application is used to allocate the DAO's funds; an Agent application is used to interact with other Ethereum smart contracts; a Token application is used to manage membership, and a Vote application is used as a decision-making system. In addition to being administered by a DAO, the project's funds are managed by its own non-profit organization.

You must first have an Ethereum Name Service domain in order to generate an Aragon. Second, make sure you have enough cryptocurrency to pay the DAO creation fee (0.2 ETH plus gas fees). Third, use the Aragon DApp to create an organization that is linked to the ENS domain; there are several predefined organizational structures available. Finally, configure your settings, including the length of the vote and the required percentage of support, before launching the DAO.

DAOstack

DAOstack is a platform designed to address the governance scalability issue. Matan Field, the co-founder of DAOstack, asserts that the larger a DAO is, the more difficult it is to manage it, which parallels the traditional challenges of group governance. In essence, we can define DAOs in which all decisions are made by vote and a majority of 51 percent is required to pass. This model suits small DAO communities where the number of proposals is limited by the number of members. However, the more members there are and thus the more proposals each member must review in order to participate. Simple solutions, such as lowering requirements (i.e. voting by a relative majority), introduce new flaws.

DAOstack proposes the Holographic Consensus (HC) decision-making system to address this issue. Members of the DAO in HC submit and vote on proposals, which are approved by an absolute majority (51 percent ). Nonetheless, there is another method for passing proposals. As a proposed middle layer, a prediction market would allow community members to "bet" on whether a certain proposal will pass or fail by staking a certain amount of their tokens (cryptocurrencies). If a proposal receives a sufficient number of votes, reaching a predetermined threshold, it may bypass the requirement for an absolute majority vote and be approved with a simple majority. Depending on whether they guessed correctly (earning tokens) or not, players may then settle their wagers (losing tokens). If HC functions properly, it will serve as a filter for the community, which may prioritize proposals that garner interest from stakeholders. Thus, takers eliminate bad proposals, enhancing the scalability of large DAO communities. And the DAO may rely on stakeholders, as they are incentivized to align with the DAO's overall opinions, as they must predict whether the voted proposals will ultimately pass or fail. Initial studies indicate that HC operates as intended.

DAOhaus

DAOhaus is a platform that enables the creation of DAOs that mimic the Moloch DAO's behavior. Moloch DAO was a decentralized solution to funding Ethereum 2 and other community grant coordination issues. DAOhaus DAOs implement a simple voting system, which is essentially a non-quorum system in which a simple majority is always sufficient to approve a proposal. This course of action simplifies the development and testing of their voting system. A key feature of these DAOs is the "rage quit" mechanism, which allows you to withdraw your portion of the DAO's resources if you disagree with the outcome of a vote. After the voting results have been determined, there is a "grace" period during which DAO members may resign if they disagree with the outcome. Additionally, if there are more than 30% of rage quits, the vote will be rejected automatically.

This voting system has two important characteristics: shares and tributes. Shares refer to the number of resources that each DAO member possesses, regardless of the number of cryptocurrencies held by the DAO. And tributes refer to the number of shares that the applicant for a proposal pays to the DAO.

Snapshot

Snapshot is an off-chain voting mechanism that can be customized. Votes are cast using digital signatures via wallets based on a snapshot of token owners. A specific block is selected, and the holdings of all token holders and/or speculators are recorded. This prevents users from purchasing additional tokens to sway an open vote. Keeping votes off-chain is advantageous for multi-chain projects in which users possess governance tokens on multiple blockchains.

You must first own an ENS domain in order to create your voting system on Snapshot. Regardless of which blockchain your project operates on, this must be on the Ethereum mainnet. Second, associate Snapshot with your ENS domain. Third, personalize your space's settings, such as administrators, voting power strategies, terms, and so on. Finally, double-check your space. This will require at least 1,000 members as well as proof of ownership of the related project.

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Future of the DOA

Despite the fact that DAOs have the ability to change the industry and be a disruptive force in corporate structuring as a whole, they confront security and legality concerns. As is common knowledge, the SEC asserts that some blockchain-based enterprises may have conducted illegal, unregistered securities offerings. New investors also lack knowledge of cryptocurrencies, not to mention the technical proficiency required to comprehend the computational structure and consensus mechanisms within the smart contract in order to feel comfortable investing in it. Wyoming is the first state to recognize DAOs as legal entities. DeepDAO estimates that there are around 181 DAOs, with a total of \$13.4 billion as assets under management (AUM).

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