A Simple Guide to Understanding DAOs And Why They are a Force in 2022 by@antagonist

A Simple Guide to Understanding DAOs And Why They are a Force in 2022

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Decentralization suggests absence of central authority in decision-making. Mark Cuban says DAO is the ultimate blend of capitalism and progressivism. DAOs work through several frameworks, depending on purpose, operation, and technology. The common ones include: Operating Systems, Service DAOs, Protocol DAOs and Investment DAOs. The tooling DAO landscape provides a landscape of DAOs for users to create DAOs.
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Aremu Adams Adebisi

B2B B2C FinTech writer. Cybersecurity technical writer. Covers cyber tech, DeFi, tradFi, web3, blockchain, & startup.

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Without a doubt, winter is here. A new world order sits majestically on every throne as new systems replace the old. There’s a new form of paying for goods, a new means of making, saving, and investing money, and a new way to smile.


The new era has been even more profound in tech and finance. Today, almost everything fintech-related is decentralized. From what we eat to what we pass out, there's no authority over how we do it or the way we do it. Our privacy is assured.


One crucial aspect of fintech management screaming through headlines is decentralized autonomous organization (DAO). According to Mark Cuban, DAO is the ultimate blend of capitalism and progressivism. What could have prompted this statement? What is DAO? How does it work? Is it objective enough to rely on?


Strap on your seat belts!

What Is DAO And How Does It Work?

To understand what a decentralized autonomous organization (DAO) means is to dissect the three keywords that constitute the term: decentralization, autonomy, and organization. Decentralization suggests the absence of a central authority in decision-making. Autonomy is self-governance. An organization is a group of people with a common goal.


Putting the words together, a DAO is a group of people sharing the same goals through a self-governing system devoid of authority. Thus, it's different from traditional organizations where executives or board members are responsible for decision-making. By not waiting for a leader figure to make decisions, a DAO is more flexible, independent, and efficient.


Purpose Of DAO

The purpose of a DAO is to ensure collective ownership through coordination and collaboration. For that to happen, it requires open-source software, known as DAOStack, to facilitate genuinely decentralized cooperation. Therefore, what makes a DAO is the full stack of self-managing social, moral, and economic incentives for collective efficiency on the blockchain. From a self-governing server-side stack to a client-side stack, a DAO ensures non-hierarchical decisions.


Image credit: g2.com

Image credit: g2.com

Blockchain And Frameworks In DAO

DAOs work through several frameworks, depending on the purpose, operation, and technology. Regardless, they can be categorized into two major landscapes: operating DAO landscape and tooling DAO landscape.

Operating DAO Landscape

This typifies DAOs based on their structure and operations. The common ones include:

Operating Systems

Contain decentralized, open-source platforms that allow users to create DAOs. An example is Orca.

Protocol DAOs

Contain platforms that use tokens to vote and implement protocols and financial decisions. An example is Yearn.

Investment DAOs

Contain platforms that facilitate capital raising for Defi operations and investments. An example is LAO.

Service DAOs

Contain platforms that use service-based operations. An example is MetaverseDAO.

Social DAOs

Social networking platforms, such as SeedClub, for decentralized interactions.


Image Credit: BanklessDAO

Image Credit: BanklessDAO


Tooling DAO Landscape

The DAO tooling landscape provides the opportunity to design and manage incentives to keep the collective members in a positive-sum, decentralized relationship. Common tools include:

Community

The community of a DAO is its self-governing people. The larger the community, the more improved the network.

Contribution Management

It’s a functioning membership process. The contributor finds its way into the DAO to enjoy ownership and a sense of belonging.

Governance And Voting

Every DAO has built-in governance tools that allow members to self-govern and vote on projects.

Treasury Management

The DAOs need to manage the treasury for compensation. Tools such as Gnosis Safe have made treasury easy to manage.

Front end And Analytics

The DAO contains analytic tools such as Etherscan. This provides insight into network traffic and frontend improvement.

Frameworks

The DAO frameworks range from smart contracts to interfaces that allow workers to operate with easy, clickable efficiency.


Image Credit: BanklessDAO

Image Credit: BanklessDAO

Understanding DAO: Matters Arising

Being relatively new, several conversations revolve around the operation and structure of DAOs. While some pundits believe the Defi management innovation is self-governing, others think it’s not. There are also issues with its membership size, centralization, and organizational behaviorism.

Evolution Of Decentralization

The evolution of decentralization in DAOs is like a product lifecycle that works through time to generate value. Besides that, DAOs’ evolution follows the same processes as product growth, from introduction to maturity and repeat.

Introduction

In April 2016, a team of developers believed they could place decision-making into the hands of an automated system. Thus, they developed the DAO to eliminate human errors and investors’ manipulation.

Growth

The growth of the DAO was facilitated through crowdfunding. Developers raised over $150 million in funds to kickstart the project.

Maturity

By May 2016, the DAO had amassed a considerable number of ether tokens, pegged at 14% by the economist. However, this maturity led to several vulnerabilities and eventual cyber attacks.

Repeat

The DAO has experienced moments of embrace and denial. But at present, the processes are on repeat as interest in the initiative continues to grow.


Image Credit: NewBreedRevenue

Image Credit: NewBreedRevenue

Centralization Or Decentralization

The issue of centralization and decentralization of the DAO has led to discussions about holacracy and hierarchy.  In holacracy, there’s distributed leadership. By nature, power and authority are resident in the collective and not reserved for any special individual, such as a CEO. In hierarchy, layers of the organization establish decisions, from CEOs to staff members.


Considering the systems, experts have argued that while DAOs may be holacratic, they’re not non-hierarchical. In that sense, DAOs are deemed functional through the principle of subsidiarity. This means decentralization doesn’t equate to leaderless but selected leadership that allows shared power and authority to subsidiaries.

Organizational Behavior Theory

Another conversation in the DAO is the extent to which organizational behavior theories apply to decentralization. Although these theories try to predict how and why people react in specific ways within a group, their applications are broad and worth considering.

Taylor’s Management Theory

Taylorism supposes work efficiency through the allocation of tasks and resources. It believes that workers only perform optimally when motivated by money. Therefore, they earn according to their performance.


While this theory applies to remote work, it doesn’t agree with the principles of DAOs. Firstly, DAOs are decentralized, so there’s no need for task allocation. Secondly, workers in DAOs work as a collective unit, making their decisions. Lastly, although DAO workers earn according to their performance, they’re not bound by any practices or rules.

McGregor’s Theory X And Y

McGregor categorizes organizations into two theories of X and Y. Theory X explains that an organization has to micromanage workers for work efficiency. Theory Y proves work performance is a function of workers’ independence and development opportunities.


That said, theory X disagrees with DAOs since there’s no room for micromanagement. However, theory Y ticks some of the boxes. DAO workers are independent, provided with growth opportunities by the collective. Therefore, they produce better results and work in a positive team environment.

Member Optimality

There are questions about what constitutes member optimality in a DAO. At what membership size does a DAO remain functional or non-functional. While there are no concrete answers to these questions, there’s no doubt that the activities of DAOs are driven by members’ engagement. In theory, the higher the members, the larger the network effect and capital pooling base for a DAO.


Having said that, with so many members the engagement of members tends to die down, and more members tend to fall under the free-rider problem. Perhaps one framework is the use of Dunbar’s number, or about 150 members, to drive the core of the DAO.


Image Credit: Wikipedia

Image Credit: Wikipedia


DAO Projects: Examples And Meaning

DAOs are growing. Several projects punctuate the system, seeking a foothold. Some interesting DAOs that have been raised include:

The LAO

This is the original investment DAO after the DAO ran into legal and technical challenges. As of the writing of this article, over 15,199 ETH has been raised for the DAO, and the valuation of the DAO itself is XX with over 30 projects backed.


The LAO is organized as a Delaware limited liability company where capital is pooled and proceeds are shared similar to an investment syndicate, and not a venture capital fund with a separate GP. This DAO is interesting due to its attempt at the beginning of defining what is an investment DAO.

AssangeDAO

A single purpose DAO created to raise ETH for Julian Assange’s defense fund for legal fees and to raise awareness. The average ETH raised to do this was XX, and 14,329 number of ETH, and the most impressive thing is they raised $53mn in just one week, with Ethereum Vitalik Buterin as one of its contributors. This is interesting because of their focus on single-purpose DAOs, which is even more elaborately shown by another Juicebox project ConstitutionDAO, which failed in its bid and returned the money to its investors transparently.

The One DAO

In their words, a collective of anonymous people from all over the globe buying the largest, most opulent house in the world. Parties in the Club, bowling tournaments 21 rooms for the DAO members to enjoy and hosting crypto events throughout the year. The interesting piece about this DAO is its foray into traditional real estate assets, which is not easy.


  • For example, a series of LLCs will be formed that govern both the ownership and management pieces of the Asset.
  • There is also the tax piece, which is paid by the LLC.

Industry Recommendation And Conclusion

Finalizing this treatise on the DAO is incomplete without the perspectives of industry leaders. These are people famed for building key DAO projects and ensuring their efficiency.


One such person is Aaron Wright from Tribute Labs. According to him, there’s only one major issue with the DAO, which is cost. He said, ‘If the costs of creating and deploying a DAO decrease, DAO may (theoretically) coordinate the operation of a growing number of people.’ He continued, ‘If DAOs operate more efficiently and produce better results, centralized and hierarchical organizations will eventually give way.’ Thus, while efficiency matters to the DAO, Aaron believes it’s a function of cost. Improved efficiency will disrupt traditional organization and management, not publicity or large membership.


Another thought leader is Yury Lifshits from SuperDAO, whose recent opinion about the DAO is more pragmatic. He’s quoted as saying, ‘to make (the) DAO economy successful, we need to normalize (the) DAO failure. It should be as easy to dissolve a DAO as it is to start one.’ This opinion rests on the fact that there are still many things unknown and unsolved about the DAO. Recognizing the strength, weaknesses, opportunities, and threats (SWOT) will inform the future of the DAO.


Jango from JuiceBox puts the nature of the DAO more succinctly by saying, ‘Finance: my number is up. DAO: our number is up.’ This statement is symbolic and represents the genuine interest of the DAO, which is collective loss and gain without a central authority.



Sources

https://twitter.com/maddog_xyz/status/1488787275525750784

https://brandgenetics.com/human-thinking/freakonomics-a-rogue-economist-explores-the-hidden-side-of-everything-speed-summary/

https://www.investopedia.com/terms/o/organizational-behavior.asp

https://medium.com/1kxnetwork/organization-legos-the-state-of-dao-tooling-866b6879e93e

https://cointelegraph.com/news/the-evolution-of-daos-and-why-they-are-expected-to-take-hold-in-2022

https://m.economictimes.com/markets/cryptocurrency/dao-explained-types-key-characteristics-flipsides/amp_articleshow/89040222.cms

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