The concept of DAO from cyberpunk fantasies has long turned into a full-fledged economic factor. Such projects play political games, control information and financial flows, work for the benefit of the state, manage business, speculate on the stock exchange and form technological trends. If DAO has not peaked your interest, then this is for you. Additionally, we will review the DAO projects.
What is a DAO in cryptocurrency?
The idea of Decentralized Autonomous Organization (DAO) is much bigger and more radical than the opportunities that the crypto industry is currently using. It is customary to call a DAO system any structure with distributed rather than hierarchical management on the terms of autonomy, independence and anonymity.
Control and coordination between the participants in the process do not require a common center and are performed only by program code without human participation. In fact, it is an operating system of open trust cooperation, and crypto turned out to be a suitable tool for such systems.
DAO in crypto projects consists in using “smart” contracts, and tokens (“shares”) with the help of the blockchain mechanism allow you to support the process of anonymous voting and distributed management. All events are stored in the blockchain history in a transparent format.
The decision-making rules and procedure are determined by the participants of a particular project. Theoretically, all ecosystem clients should receive equal rights, but in real projects there is a system of privileged rights. DAO projects are usually cross-border – participants may be located in different jurisdictions.
The principles of the DAO, together with the potential of smart contracts, make it possible to decentralize. Not exclusively the financial system, but also any control and/or management bodies: production, banks, registries, the judicial system.
The history of the appearance of the DAO in the crypto
The first DAO prototypes appeared back in 2013, but then the idea was just beginning to take shape and had almost nothing with its current form. The concept was formulated systematically in 2015 by Dan Larimer, the founder of Block.one (EOS) and Steemit − he called it a decentralized anonymous company (DAC) and applied it in the BitShares virtual trading platform for direct communication between customers and sellers.
Vitalik Buterin optimized the idea of the DAO in 2016. He implemented it globally and curently the most successful project – the Ethereum ecosystem: smart contracts have learned to create autonomous systems and have almost completely eliminated human manipulation of data.
Then the era of DAO − DApps applications, DeFi protocols, decentralized exchanges DEXs began. Now such projects can be implemented on any blockchain, for example, Cardano, Polkadot, Solana.
The DAO objectives
The primary objective is to make the most effective structure out of any group of enthusiasts. To be brief, participation in the DAO project is:
- the voice of each participant in decision-making;
- flexible management process;
- lack of administrative pressure;
- effective communication;
- high transaction processing speed;
- pooling resources to find a solution to a specific problem.
What is a DAO: an alternative opinion
What is a DAO in cryptocurrency? We believe that it is more correct to call it just a separate business, and the implementation of the classical idea is only a management system. For example, Uniswap is a crypto exchange, but its management infrastructure is already a DAO project. Just like for Decentraland, only its control system can be considered a DAO project.
Nevertheless, both DeFi with assets of more than $2 billion, 10,000 token holders and a voting system on the blockchain, and a Telegram channel with a budget of 1 ETH and 10 subscribers, fully comply with the principles of the DAO. The scale is not important, the main thing is the effectiveness of the structure.
Types of DAO projects
To really assess what a DAO is in the crypto, it’s worth knowing what type of business can be built on this principle. DAO projects can be:
- investment DAOs – for commercial investments of a group of small participants in financial projects with a high entry price (MetaCartel Venture, Flamingo):
- grant DAOs – the very first schemes where participants directly invested in the development of the system (Uniswap grants, Moloch);
- protocol DAOs are purely financial mechanisms for exchanging/speculating cryptos and launching new tokens (Maker, Aave, SushiSwap);
- service or technical DAOs – for example, when a blockchain scheme is used to search and optimize resources between projects (deepDao, Llama);
- operational DAO – for creating new DAO projects based on ready-made templates (Aragon, Colony);
- media, gaming (De central and), social (Friends with Benefits, Steamid), collectible (FlamingoDAO, PleasrDAO).
Further, the imagination has no limits: e-commerce, crowdfunding, freelance exchanges, charity, venture investments, etc.
Recall the most famous and instructive (even if they are unsuccessful!) DAO projects.
Historically, the first project based on the principles of decentralization, launched in 2016. It was supposed to create a fund that would be fully, anonymously and simultaneously transparently managed by a specific community – people and organizations. All questions had to be determined by a protected anonymous vote.
An autonomous venture fund was supposed to support the functionality of complex smart contracts based on Ethereum.
The DAO managed to attract more than $160 million from 20,000 participants, tokens were successfully implemented through the ICO mechanism, but the project did not live a year – it died as a result of a hacker attack.
It was the failure of the smart contract protection that allowed the withdrawal of approximately 3.6 million ETH coins from the fund, or about $ 50 million. Finally, in 2016, such a sum of losses guaranteed financial collapse.
The result was a forced “rollback” of the base crypto before the start of the project and a hard fork. In one segment, all transactions, both hacker and legitimate, were simply canceled. This network remained the main Ethereum blockchain.
The second segment of the blockchain − Ethereum Classic − implemented the idea of “code = law”, kept hacking operations unchanged and assumed the main loss. Both ecosystems function separately and users own tokens in each of them.
Capitalization as of 05/20/2022: Ethereum $249,695,761,987,
Ethereum Classic $2,937,099,656
The mission of the Ethereum-based platform is stated as “ensuring stability in the world of decentralized things” with the help of the ERC-20 standard DAI stablecoin secured by popular crypto assets.
The project was created by Dane Rune Christensen, who, after studying biochemistry and international trade, chose to organize the Maker Foundation together with Amazon programmer Andy Milenius in 2014.
The marketing feature of the project was the motivation of market makers (Keepers) for providing liquidity with “premium” Maker tokens (MKR),
Today, the ecosystem lives on two tokens: DAI (stablecoin) and MKR. DAI is implemented as a system of crediting and supporting a secured debt position (CDP) through the Oasis smart contract, as a result of which the borrower receives the “right to tokens”. DAI is freely traded on all crypto and conventional platforms and is represented in popular ETH wallets.
The MKR token guarantees the stability of the MakerDAO protocol and is “burned” as the fuel of smart contracts (similar to the “gas” of Ethereum). MKR owners participate in voting (DAO Governance) on the composition of protocol parameters.
In 2020, MakerDAO joined the Global Difi Alliance, and also added tokenized royalties for music streaming and a number of other tokens as collateral for loans to DAI. The project has gone through several structural and technical crises, but now it is confidently keeping up with the global trend.
The capitalization of the project as of 05/20/2022 is $117,484,923
This is a decentralized protocol for transactions with crypto based on Ethereum smart contracts. In the rating of DeFi applications, Uniswap confidently holds the top five in terms of working capital.
The first working version of Uniswap was presented on November 2, 2018. The authors are considered to be former Siemens mechanical engineer Hayden Adams and Gnosis developer Alan Liu, although this is a multi-factor collective project.
Uniswap is the first fully automated market maker, but today, unlike conventional exchanges, it uses only liquidity pools – it, simply, rents them out. The protocol adds several tokens to each smart contract of the transaction, and in return, a percentage of the spread/commission is provided to liquidity clients.
There is access to Unishop via DeFi aggregators (1inch, InstaDApp, Zapper), which allow you to simultaneously connect to several decentralized protocols through a common platform.
For Uniswap transactions, the platform does not require KYC and AML procedures, even registration is not required. It is enough to have any browser-based Ethereum wallet, for example Meta Mask. The listing is free, any user can add a new asset of the ERC-20 standard to Uniswap.
Capitalization as of 05/20/2022 was $3,843,813,534
Today Dash (fans still remember it as Darkcoin or XCoin) is a popular blockchain payment system that fully complies with the principles of the DAO. Since the presentation by Evan Duffield in 2014, the project has grown from a single transaction platform to a global network with numerous services and a self-funded management mechanism.
Mining remains the source of tokens. 90% of the premium is taken by miners and masternode operators, while 10% goes to development. Dash’s main feature is rapid confirmation of transactions; it takes no more than 200 seconds to create one block. The deposit of a 1000 dash creates one masternode, with the continued investment we can see that the interest group is highly engaged in this blockchain. Thus, it is no coincidence that Dash is in the TOP 10 in demand tokens and in the TOP 30 by capitalization.
The current client software has a built-in payment mixer service (PrivateSend) using the CoinJoin method, which enhances protection by combining inputs from several different users with multiple outputs in one transaction. The chance of controlling financial flows is decreasing, but there is still no guarantee of complete anonymity.
Speculators will find spot assets and futures involving Dash, direct currency and crypto crosses, on any crypto exchange and with all self–respecting brokers.
As of 05/20/2022, the capitalization of the project with a full issue is $1,121,649,613.
DAO Compound Finance
The vending decentralized protocol offers automatic formation of interest rates on the current supply/demand balance. This is a digital analogue of the real financial market, where you can place a crypto and get a loan.
Compound Labs, Inc. was registered in 2017 by Robert Leshner, a financial analyst and web developer, and Jeff Hayes, a programmer.
The first mention of the protocol appeared in January, and the first investments began to arrive in May 2018. Already in September, Compound Labs launched a functionality that allows you to borrow in ETH, USB, ZRX, BAT and REG.
The COMP branded token appeared only in February 2020, in April the management completely passed to the owners of the token. They have the right to influence the “assortment” of borrowed coins, risk parameters, interest rate dynamics, etc.
The project works like a regular bank. The user invests the crypt and receives a percentage. However, Compound does not form deposits, the capital is placed in smart contracts and the user interacts with them independently.
Lenders/borrowers do not interact directly, all parameters – rates, collateral, fines, execution control − are regulated by the protocol.
There are no counterparties who directly “hold” money in the system. The platform is available to any owner of a Web 3-wallet of the Meta Mask type. Tokens are traded on all major crypto exchanges.
The capitalization of the token on 05/20/2022: $523,120,187.
Benefits and pitfalls of DAO
So, we figured out what a DAO is and evaluated investment DAO projects. Warning: this is not a panacea for all the problems of our multifactorial world. Recall the positive:
- decentralization of management;
- high degree of trust due to open source;
- autonomy of fulfillment of obligations;
- availability for any level of capital;
- the speed of decision-making;
- democracy and openness of information.
Furthermore, what can be considered as disadvantages:
The legal regulation of the cryptocurrency sphere is problematic in almost all countries, and especially in terms of DAO systems. How can one explain to supervisory or fiscal state agencies what a DAO is if there is no control over this project initially? The regulatory framework, especially the tax one, in this topic is being formed extremely slowly.
Most crypto projects look more profitable than the old bureaucratic schemes, but their guarantees and protection are much weaker. With any unsuccessful or uncoordinated modification, the project will collapse much faster than any state program.
The regulatory rules established by the state must be specified in the charter of the project and may hinder its development. Currently, only hybrid projects are consistently profitable, with partial (piecemeal) decentralization and the possibility of correcting the basic rules.
Hackers are constantly improving in search of money. Moreover, such a DAO forms “flat” systems in terms of architecture and errors in smart contracts or loss of control at the lowest level can quickly ruin any project.
Prospects and development of DAO projects
Thus far, the effectiveness of the idea is clearly visible only in the cryptocurrency industry, which initially required complete decentralization. In the world of real money, the problem of guarantees, financial and legal, invariably arises.
What is a DAO in terms of structure? This is a kind of collective, that is not personalized, property.
The main driver of development was the DeFi sector, which has grown 15 times in volume since the collapse of The DAO. Usually, for decision-making in DeFi protocols, centralization is needed only at the first stages of development, and an effective project then migrates to DAO schemes. As an example – eversiFi, Bankless DAO, Gitcoin, Raible – all went this way.
The potential of the DAO is just beginning to unfold − experts are confident that in five years, instead of shares, the company will issue tokens, and all processes will be optimized and completely go online. Nevertheless, the DAO standard is our future.
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