Beyond decentralized finance (DeFi) and non-fungible tokens (NFTs), the trustless digital infrastructure has powered a new type of social structure called DAOs. These give independent entities the power to govern open-source infrastructure collectively and democratically manage shared assets. DAO embodies the core concept of Web3, which emphasizes an era of the internet that is transparent, decentralized, and based on distributed networks such as blockchains.
This blog attempts to present an understanding of what Web3 DAOs are and their benefits, accompanied by some popular examples.
Web3 is a notion of a new stage of the internet that incorporates concepts such as blockchain, decentralization, and token-based economics. Unlike Web1 and Web2, Web3 does not depend on central authorities or servers. It stores data across millions of computers around the globe. The idea behind Web3 is to create a decentralized and democratized internet where power is distributed fairly among users instead of a few corporate giants. And one of how this can be made possible is through Web3 DAOs.
DAO, short for Decentralized Autonomous Organisation, is a fully decentralized blockchain governance model with no central authority. It is a fully transparent and autonomous community-led entity where smart contracts lay the foundational rules and execute the agreed-upon decisions.
Web3 DAOs allow like-minded people from around the globe to work together without having to trust a benevolent leader to manage the operations and funds. A DAOs built-in treasury helps you access received approval from the group.
A DAOs is collectively owned and governed by its members. It works without any hierarchical management. Community members create proposals about the future operations of a protocol and then vote on each proposal. Proposals that succeed in achieving a predefined level of consensus are then accepted and enforced by the rules incorporated within the smart contract.
No Central Authority: The biggest appeal of Web3 DAOs is the lack of a central authority. A DAO enables the creation of communities with clear goals. As such, it allows truly democratized control over what happens within a particular community. The basic design principle of DAOs focuses on achieving the maximum extent of decentralization. The members of a DAO can express their voice for the organization’s future because of their voting power, which is significantly more distributed than in traditional organizations.
Transparency: Everything in a DAO, from foundational rules to transactions, is recorded on a fully verifiable public ledger. DAOs also eliminate human error and fund manipulation. So, this makes DAOs particularly beneficial for fund-raising projects.
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Automation: Smart contracts help move things along quickly since there is no need to wait for a vote or the leader to decide. The smart contract effortlessly self-executes every time it needs to.
Community-driven: A DAO is truly community-driven to run through the people who are a part of the community. So the members vote on all proposals submitted by the community and make autonomous decisions. DAOs give participants a sense of ownership which drives them to innovate and set new precedents. Every member of a DAO holds the unique privilege of shaping the organization’s future. Multiple inputs from DAO members power innovative developments.
The technology, structure, and modus operandi classifies DAOs into the following types.
Protocol DAOs: They focus on the governance of decentralized protocols. Protocol DAOs support the development and management of dApps or the infrastructure used by dApps. For example, Automated Market Maker (AMM) DAOs use smart contract protocols to offer DeFi services such as lending and borrowing applications.
MakerDAO is a notable example of protocol DAO. It is an organization that manages the decentralized stablecoin DAI. The DAO members are responsible for setting protocol parameters such as:
Philanthropy DAOs: Less common at present, philanthropy DAOs focus on supporting social responsibility initiatives concerning a shared goal of delivering a positive impact on the web3 landscape. They are sometimes called Cause-based DAOs. It helps you achieve collective goals in philanthropy, politics, public goods, etc.
Big Green DAO is a popular example. The organization leverages blockchain to engage community members in a collective decision-making role. Members discuss potential projects on Discord and vote on the direct distribution of funds to non-profit organizations. The selected organization receives funding from the Big Green DAO.
Grant DAOs: A Grant DAO helps fund and foster projects and ventures in the DeFi space. Grant DAOs can be a charitable extension of a larger project or an entirely separate entity in the DeFi space. These DAOs strategically deploy capital assets throughout the web3 ecosystem and facilitate non-profit donations.
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Aave Grants DAO is a community-led DAO that funds projects that power the development of the Aave Protocol. Uniswap Grants focuses on managing the funding of new products related to DeFi and UNiswap, while MetaCartel awards grants between $1k and $10k for dApps built on Ethereum, creation of new DAOs, and new consumer-facing use-case experiments, etc.
Collector DAOs: A collector DAO pools the members’ funds to ensure that the community has the potential to invest funds into NFTs and other collectibles. Here each member owns a share corresponding to their investment. FlamingoDAO is a collector DAO where platform members collect high-value NFTs from different artists and collections.
Social DAOs: Also called Creator DAO, collectively own something of artistic value, manage a shared social space, and cultivate culture and events for their members. Social DAOs focus on bringing together social communities around art, entertainment, games, etc. Bored Ape Yacht Club is a limited NFT collection where NFT also serves as a membership in the DAO and gives the holders special perks.
Investment DAOs: Investment DAOs or Venture DAOs, these pool funds with the intent of investing in early-stage web3 protocols, start-ups, and off-chain investments and gaining access to portfolios not available in traditional finance. Krause House is a venture DAO aiming to buy a professional NBA team. The DAO members would take part in decisions relating to the operating procedures of an NBA team, such as ticketing, general management, partnerships, merchandising, etc.
Media DAOs: Media DAOs reinvent traditional media platforms by empowering the creation of community-driven content. An easy way to understand this is by comparing it to social media, except instead of a corporate giant controlling profits, the individuals within the media network earn a piece of the profits. BanklessDAO is a media DAO propagating bankless media, education, and culture to encourage the adoption of a monetary system independent of intermediaries.
SubDAOs: This is a new kind of DAO which is essentially a subset of DAO members assigned the task of managing specific functions such as marketing, partnerships, operations, grants, etc. Moreover, It is a way to distribute functions from a central DAO to allow organizations to pass proposals without requiring the entire DAO to reach a consensus. Balancer Protocol implemented a SubDAO to manage decision-making and execute proposals without involving the entire DAO.
Different DAOs can have different governance processes. Before we review the actual governance of a DAO, let us understand the different governance structures used to form consensus in a DAO.
Direct on-chain democracy: This governance model of DAO uses snapshots to conduct votes off-chain. But some thresholds need to be met to get relevant approvals. Most DAOs are employing this governance structure to use token-weighted voting. Here the number of tokens a user holds determines the weight of their votes.
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Direct off-chain democracy: This governance model of DAO uses snapshots to conduct votes off-chain, and some threshold must be met for approval. DAOs using this structure also mostly use token-weighted voting. However, a multi-sig of trusted entities must push the proposed change on-chain. That is to say, off-chain democracies require trust that the multi-sig signers will vote, similar to the snapshot results.
Quadratic democracy: It is based on quadratic voting, which is represented by the following equation:
Cost to the voter = (total number of votes)^2
This method prevents the outcome of DAO votes from being determined by a few members who hold the highest token balances. As such, this results in a dynamic where many individuals can become equally, if not more, impactful when voting in unison.
Representative democracy: This model of DAO governance uses representatives who vote on-chain to approve the submitted proposals. The DAO generally elects these representatives. So, it can use off-chain snapshots to estimate the interest of the wider DAO community before final voting.
Now that we understand basic DAO governance structures let us look at how Uniswap governs.
Uniswap is a decentralized crypto exchange built on the Ethereum blockchain. It uses an automated liquidity protocol that incentivizes people trading on the exchange to become liquidity providers. Uniswap users pool their money together into a fund. In addition, the execution of trade happens using these funds. With this system, a seller or buyer does not have to wait for the second party to complete a trade. They can execute any trade instantly, given that a particular pool has enough liquidity to facilitate it.
Anyone holding a UNI (Uniswap governance token) is a member of the Uniswap DAO and can take part in governance by:
Before submitting a paper proposal, the idea must pass the temperature and consensus checks.
The temperature check gauges whether or not there is enough will in the community to change the status quo. At the end of two days, a majority vote with 25k UNI yes-vote threshold wins.
The consensus check lays down a formal discussion around a potential proposal. At the end of five days, a majority with a 50k UNI yes-vote threshold wins.
Then, an official governance proposal is added to initiate the voting after it passes both checks. What follows is a 7-day deliberation period to discuss the worthiness of this proposal on governance forums. A 40 million yes-votes with no-votes as a minority at the end of this period contribute to the approval of the proposal. The proposal is enacted after a 2-day time-lock.
A fully-functioning Web3 DAO often uses tools to achieve its operations. Let’s have a look at some of these tools:
Governance tokens: These refer to a cryptocurrency token issued by the DAO. This token grants specific powers to its holders. DAO members often need governance tokens to cast votes.
Multi-sig wallet: A smart contract requiring m-of-n predefined addresses to sign a message that will directly implement protocol changes. DAOs often use multi-signature wallets to implement on-chain changes based on an off-chain snapshot by smaller, predefined committees or as a security measure during emergencies.
Voting contract: A smart contract responsible for coordinating an on-chain token-weighted vote on a proposal that must meet a predefined threshold and quorum by DAO members or delegates to be approved.
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Delegation system: This mechanism allows holders of governance tokens to delegate their voting power to other parties to vote on their behalf.
Off-chain snapshot: It is an off-chain platform responsible for conducting token-weighted votes via signed off-chain messages. A snapshot of on-chain balances and addresses determines the voting power. An advantage of this approach is that members don’t have to pay an on-chain transaction fee to vote. As such, this encourages community participation.
Discussion forum: A social layer for members to come together and present/debate ideas. E.g., Discourse, a Discord server, a Telegram group.
With the rising acceptance of Web3 and blockchain, there is a wide range of DAO creation tools and platforms that any user or organization can use to create their own DAO platform.
Here are the five main steps to starting a DAO:
Founding team and community: A strong community driven by a shared purpose is the foundation of a DAO. The best way to form a founding team is to select partners with similar perspectives but bring different and complementary skill sets.
Smart contracts: The smart contract executes instructions and sets the rules for interaction between users and the platform. There are different governance structures that DAOs can use (as discussed above). You can either create a DAO on an existing blockchain like Ethereum, Cardano, Solana, BNB Chain, Polkador, etc. or base it on your custom network.
Token creation and allocation: In most cases, tokenomics will serve as the underlying incentive structure for your DAO. So, most DAOs use tokens to vote on proposals, reward members, unlock access to other benefits, or combine the three. It is important to decide the purpose tokens will serve in your DAO. At the same time, it is important to consider how well the tokenomics of your platform differ from your competitors.
Treasury: Treasury funds are, more often than not, the lifeblood of the purpose your DAO aims to serve. The highest possible security modules keep them secure. Most DAOs opt for a multi-signature wallet to achieve this.
Test and launch: Put your DAO in the hands of the community and test its features to avoid unforeseen circumstances. Once successful, you can create a formal DAO release. Above all, the development of the DAO depends on the organization members who own governance tokens.
While these steps can seem overwhelming, using a whitelabel DAO platform is one of the easiest and most effective ways to create a DAO. They offer pre-decided templates with customization options based on the business’s needs to provide security, application, tokenization, voting, and liquidity features. Whitelabel DAOs allow you to launch your platform within days, saving time and money.
Contrary to traditional systems, a DAO gives all its members participate in the decision-making process. DAOs play a key role in realizing a truly decentralized internet, especially since offering new management structures for businesses, projects, and communities across virtually all industries is their primary objective.
To date, DAOs have proven beneficial in numerous use cases, including administering grants (e.g., Aave Protocol), acquiring cultural collectibles (e.g., ConstitutionDAO), building communities (e.g., Friends With Benefits), private investing (e.g., Krause House), content creation (e.g., Bankless), etc.
While there is no perfect governance system, Web3 and DAOs allow builders to experiment more flexibly with governance systems. At the same time, it allows users to align their values and beliefs with how the governance systems work in the protocol.
DAOs may be an exciting space, but they are still nascent. So, there’s no way to concretely predict how DAOs will evolve in the future. One can only hope that experimentation paves the way for a diverse marketplace of DAO designs that support a broad range of values and embody an increase in governance transparency in a dynamic way to be set apart from Web2 systems.
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