The state and future of Decentralized Autonomous Organizations (DAOs) including 6 leading examples
When Wyoming became the first state in the US to recognize CryptoFed DAO as a legal business entity, the Decentralized Autonomous Organization (DAO) moved from an esoteric concept largely confined to the Web3 community into something that merited the attention of the wider world.
In this piece, we’ll attempt to give you a working knowledge of the current state of the ‘DAO’, and some firms that are implementing the idea in novel ways.
The DAO: Past, Present and Future
The philosophy of the crypto-utopian is to replace flawed institutions in the fiat world by building a blockchain-based version from scratch.
Cryptocurrency was not originally conceived as an asset class, but as an alternative payment system. Smart contracts are an attempt to make an incorruptible form of legal governance. Decentralized Finance (DeFi) is combining both to create an entire financial system (loans, deposits, payments, insurance) that is fairer, more reliable, and more efficient than the one that imploded in 2008.
As for the DAO, it is the re-imagined on-chain version of the traditional corporation.
While it was Stan Larimer who created the concept of a DAC (Decentralized Autonomous Corporation), inspired by science fiction novels, it was Vitalik Buterin, the creator of Ethereum, who later rebranded the concept as a ‘DAO’.
He defined it simply as “an entity that lives on the Internet and exists autonomously, but also heavily relies on hiring individuals to perform certain tasks that automata itself cannot accomplish.” The AI component, he went on to emphasize, must be central, with the human component supporting.
The promise of the DAO is that this configuration should in theory allow a corporation to grow faster and operate more efficiently, absent internal politics or flawed leadership. This stands in sharp contrast to the usual role assigned to AI, which is of a supporting role to a central human mastermind or master group.
So what is the current state of play?
DAO pioneer Ameen Soleimani has joked that many DAOs are little more than ‘group chats with a joint bank account’. As with any hot new thing, people are evidently keen to share in the hype without necessarily understanding what it is. So let’s build on Buterin’s definition, and stipulate in more detail when a DAO is not a DAO.
This is a hallmark of all pure blockchain-based civilizational thinking: the notion that there is no central management committee, and no hierarchy.
To the extent that the human element plays a role, it is when a fragmented group of coin holders spread around the globe exercise their voting rights, contribute capital, or perform other tasks that entitle them to more issued currency.
This however does not mean that any organization that collaborates or makes decisions by ballot is a DAO. To qualify, it must also fulfill the second part of the definition: autonomy.
What is autonomy? It’s not easy to define precisely.
A toaster, for example, is not autonomous. In the process of making toast, it is the human operator who initiates the process, and the toaster is a passive agent.
In an autonomous relationship, the human is the supporter, and the technology is central. It’s easy to find science fiction examples, such as the central AI in the Matrix using humans as zombified power sources.
An example closer to home might be a self-learning algorithm that impinges upon human affairs, such as Alexa. Amazon has refrained from making Alex too autonomous, for obvious legal reasons, but it would be quite easy to encode.
Authoritarian regimes are taking closer steps in this direction with social credit scoring systems that encode state orthodoxy, and autonomous restrict the movement of citizens based on their actions and those of their associates.
DAOs that you should know about
In the most fully realized form of the cryptopian ideal, all companies would eventually become DAOs. It’s been suggested that news aggregation, advertising, patents, copyrighting, voting certification, and next-generation search engines are all near-term candidates for the DAO model.
However, this currently looks a long way in the future, with the concept still struggling to prove itself since the original demise of venture fund “The DAO” in 2016.
Aside from the pseudo-DAO organizations that are in reality communities of crypto-investors who like to share resources and decisions, there are a growing number of genuine DAOs that are starting to gain traction.
Here are six that have caught our eye, with many more aspirants and doubtless many more coming.
DAOs are almost by definition a province of the Web3 community, and (in many cases) are built with the explicit goal of aiding the longer-term development of the metaverse, often as a non-profit with a mandate to raise funds and allocate grants to promising new projects.
The MetaCartel Ventures website has an eery early 90s vibe, as if in evidence of the fact that there is no centralized marketing team in charge of web design. Despite this low-key ambience, it is a for-profit DAO created by the MetaCartel community to make venture investments in early-stage Decentralized Applications (DApps).
According to MetaCartel, the company is governed by a combination of “code and law”. Although “MetaCartel LLC” exists in the real world (because it is legally obliged to), the firm’s workings are mirrored by smart contract-based mechanisms and Ethereum-based technology in the crypto-realm.
Members of the DAO are known as “Mages”. Naturally, their role is to perform the tasks the smart contract cannot: originating investment ideas, performing DD, and of course voting on whether to fund.
They also control who enters as a new member (a good precaution, as a majority member could upset the decentralization requirement). Exiting the group is governed by the AI protocol with no need for human intervention. The technology awards the departing member their full share of the DAO assets (again, an excellent role for an impartial algorithm).
Uniswap is one of the most successful applications of the DAO premise. That is, to take the traditional underlying mechanism underlying a currency exchange – the order book – and replace it with a blockchain equivalent that (so far) works as well, if not better.
The central innovation is the combination of the Automated Market Maker (AMM) and the Liquidity Pool concepts. These permit investors to trade assets without the need for a human intermediary, thanks to an algorithm that ensures that prices are regulated fairly.
The protocol facilitates automated transactions between cryptocurrency tokens on the Ethereum blockchain through the use of smart contracts. Humans and bots work together on the periphery to police the system, with the bots undertaking tasks such as automatic liquidation of positions when markets make sudden moves.
The success of the DAO model is apparent by comparing Uniswap to its competitor Coinbase (which uses the traditional order-book method). Despite having only 7 employees, Uniswap processes a higher daily transaction volume than Coinbase, which has over 1200 staff.
There is a reason there are so many pseudo-DAOs (Whatsapp groups with a shared bank account). Making a real DAO isn’t easy, because it requires the team of original developers to create an autonomous central nervous system that isn’t vulnerable to hacks or with in-built logical flaws.
The Phoenix DAO foundation is a do-over of the original attempt by the Hydro community to create a decentralized financial ecosystem called Hydrogen.
The original plan faltered following complaints by the members. These complaints centered around the overly-concentrated ownership of the token supply (violating the decentralization principle), a governance plan that was also perceived to be insufficiently decentralized, and the lack of safeguards to prevent currency dumping by the major coin holders.
The newly unveiled ecosystem (coin: PHNX) contains a raft of enhanced protocols to address the original objections. The ‘Team’ section on the website features no leader, but only “directors” in charge of verticals such as communications, partnerships etc.
Like a poker game, there is a minimum commitment required to become a voting member of the new DAO (1,000 PHNX). Members can make proposals to the wider community about marketing, grants, and dApp development. And as with many community-based tokens, coin holders receive rewards as a form of return on their investment.
The tagline of JennyDAO is ‘democratizing NFTs’.
That is to say, by holding the uJenny token, one becomes a fractional owner of the NFTs acquired by the JennyDAO organization, which includes its very first purchase: a $1m NFT of an unreleased Steve Aoki/3LAU song, reported earlier this year.
The central AI is governed by the Unicly protocol, which ‘fractionates’ the NFT assets, and controls the vault containing the organization’s NFT portfolio. If a certain threshold of voting members is reached, the protocol will unlock the vault and NFTs can be sold.
An AMM function allows Jenny members to sell their tokens at will, and this, combined with the fractional ownership concept, is hoped will increase the liquidity of the NFT market in a way that would be impossible for the traditional high-value art market.
While the Unicly protocol holds things together, the human token holders also have to work hard: for example, assessing the value of NFTs under consideration for purchase. Their reward is similar to that of an asset holder in a regular investment fund, with the exception that – in the DAO model – everyone is an active participant in the fund’s management.
Fans of the Bankless podcast, which releases new episodes seemingly every couple of days, will be familiar with the zeal of the presenters David Hoffman and Ryan Sean Adams, and their obvious dedication to the long-term potential of Ethereum-based alternatives to traditional solutions.
They may not be aware that it is part of a broader project to change society’s perceptions and attitudes regarding the potential of decentralized or ‘bankless’ financial concepts.
The Bankless organization is backed up by ‘the world’s first-ever media and culture DAO’. BanklessDAO’s stated mission is to “help the world go Bankless by creating user-friendly onramps for people to discover decentralized financial technologies through education, media, and culture.”
While currently limited to a newsletter, podcast, and YouTube channel, the BanklessDAO organization has big plans for growth. Its founders are currently proposing to its members to create 250,000 new BANK coins in return for an infusion of capital to help attain these plans, by building more products and involving more labor.
By ‘labor’ they mean that that DAO ‘will need content creators, media nodes, designers, builders, and people to manage all of these projects’. It is like a public offering, except there is no distinction between public and private in the crypto world.
Centrally, the BANK token is distributed under a “fair launch mechanism” with a 30% retroactive airdrop at Genesis to community participants and 70% allocated to the community treasury. You don’t need to understand what this means to appreciate that the founders have succeeded in encoding their principles, hence making their organization autonomous, and worth of the name of DAO.
Along with Uniswap, MakeDAO is one of the founding companies of the new DeFi financial ecosystem. While Uniswap made it possible to trade cryptocurrency without a middle-man, MakerDAO allows participants to borrow and lend, in a way that mirrors (but is not exactly equivalent to) a regular bank.
In ordinary banks, the lending and borrowing function is determined by something of a political process, involving various internal departments haggling over what the spread should be between deposits and loans.
In MakerDAO, a smart contract manages the borrowing and lending. By pairing a cryptocurrency with the Dai stablecoin (pegged to the value of the USD dollar), it is possible for a crypto investor to borrow a coin, and predict how much they would have to pay back (see here for more info).
In the short term, this has enabled the explosion of sophisticated speculation via leveraged positions (so-called ‘yield-farming’), again creating an analog to similar advanced trading strategies in the stock market. In the long term, it has brought the crypto market one step closer to being an environment in which regular investors can operate with a sense of familiarity.
Interestingly, MakerDAO has come full circle in terms of decentralization. While it began as a small decentralized operation, a “pure” DAO, explosive growth necessitated the addition of an administrative layer at the top to help the organization rise to meet the new challenges of operating at scale.
The founders recently announced that it is completely decentralized again, after a lengthy process of discussion and design among the global community of MakerDAO members, and the temporary “Foundation” (central managing structure) will shortly be dissolved.
While a lot remains to be proved, and the field is still embryonic, it seems clear that there is something at the heart of the DAO revolution that is here to stay.
There are clearly some elements of business that are better left to an automated agent. The evolution of the DAO is the ongoing attempt to determine which elements of the corporation should be encoded, and which should be left to human actors.
The controversial claim behind the DAO movement is that the organization should become at its heart independent of the humans that work to achieve its goals. This may not be so different from the concept of the United States constitution, which remains sovereign over the human agents, even the President, and can only be altered in case of the entire country coming together (which is essentially how the Ethereum community corrected the original hack on The DAO).
It’s also clear that there will be a fair amount of rack and ruin on the road to finding out the answer to the question. But looking at the history of evolution, that also is hardly new.