The Year of the DAO Comeback

Understanding What’s Leading the Charge

Yeah, it’s about that time again.

It wasn’t that long ago that even muttering the word “DAO” would make an Ethereum developer stir uneasily in their seats in angst from the drama that ensued from that tumultuous period in Ethereum’s earlier days. The “DAO Hardfork” — as it is endearingly remembered as — was one of the most trying moments in Ethereum’s young history, one that some would argue was a pragmatic turning point as the social dust settled following the fork, as many futurist idealists were brought firmly back to Earth (that ether high was one most couldn’t resist).

Since then, developers have become more keenly aware of the potential calamity that ensues from unchecked software dependencies or another pesky case of someone neglecting re-entrancy vulnerabilities. Tools and new smart contract languages and utilities to formally verify contracts have slowly emerged, as well as the proliferation of tools and services to deploy and check your contracts for known-vulnerabilities prior to their mainnet deployment. Have we finally compiled enough best-practices to really try again? Let’s explore that thought further.

Governance Has Many Inputs

In prior essays, we explored what mental models to apply when attempting to understand how to map crypto-specific governance, and which layers were of utmost importance. The point of it was to give everyone a holistic, high-level view in how other loosely-coupled entities play a role in the overall function of a blockchain’s governance; with each layer possessing a greater degree of importance depending on where it lived in the overall topology.

Fig.1: A graphic from the “Crypto Governance Manifesto” has a new node on its outermost layer, notated in red. We’d suggest reading that first before continuing on.

Now, discussing the deep inner legal ramifications of decentralized governance is not something we wish to explore; we’re going to be focused on how DAOs fall naturally into the overall multi-layered ecosystem that emerges and persists in sustainable public blockchain communities.

We suggest reading this post on emergent governance before continuing further as well. The concept of emergent governance is an info dense area to explore, all while considering in parallel how the various functions interplay given the blockchains’ innate social incentives — which are driven by the financial value-creation of PoW mining, and encapsulates a major component of the game theory maintaining a blockchain’s consensus and state.

In order for a suggestion/improvement to permeate into Layer 0 (indicated by “BIPs/EIPs, Pull Requests, etc in Fig. 1), a technical community has to make it through the various layers of importance that ultimately govern the public chain systems they’re a part of. This tiered system of social governance is just a natural derivative of the various agents that have pull in how system improvements will be integrated, and which will be ignored.

Sharing and maintaining collective first principles while refining decision-making processes concurrently can be a difficult task for any high-functioning organization — even a distributed one.

Fig. 2: You should remember this from the Crypto Governance Manifesto as well, a simplified breakdown of the funnel of agents that affect governance in a communities’ funnel.

Orchestrating, interpreting, distributing and eventually disseminating the needs of various stakeholders is a complex task, but a very critical component when modeling and managing a distributed project (See Fig. 2). The existence of other mechanisms and sub-systems that affect Layer 0 governance are plentiful given a public blockchains open accessibility to build a myriad of different functioning technical layers.

This socio-technical juggling act seems daunting, but when you watch it in practice it’s rather straight-forward and elegant; it’s a phenomenon that’s more easily observed quietly from afar. Creating this alignment is crucial, and for successful projects, it happens innately (see Ethereum’s governance as a prime example).

Inevitably, when left to perform, a system with many interlocking objective viewpoints will make any revisions to the root-chain more resilient and socially battle-tested across an array of socially mis-aligned ulterior interests.

We want to align these factions fluidly, as when left alone — combined with the governance derived from the game theory surrounding the public chain itself — people will feel empowered, in lieu of feeling oppressed or under the control of some persistent, shadowy plutocracy.

As indicated by the red DAO node in Fig 1, the more inputs into the system, the more rich and diverse the overall collective becomes; fluid and agile governance becomes possible — a second-order effect stemming from balanced incentives.

Coordination is ultimately what we’re after; oddly the more you try to coordinate inside decentralized systems, its decision-making becomes centralized. This is why it’s best the many various layers exist and govern independently.

It wasn’t long after the DAO fiasco that Professor Emin Gun Sirer of Cornell University/IC3 posted an article calling for a “moratorium on DAOs”. That was in 2016, almost three years have nowpassed, it’s time we get serious about how DAOs will push us forward with more precise and scalable coordination.

What’s a DAO?

“DAO”, is a powerful three letter acronym that stands for, “Decentralized Autonomous Organization”. If you’ve explored the specifics behind “Ethereum”, then chances are you’ve come across this acronym, a lot. It’s an aspect of decentralization and autonomy that has futurists and tech enthusiasts salivating at the mouth; though that salivation has since dried given previous calamity, the ingredients to bring blockchain-based technologies another step closer to “disruption” remain ever present.

The next point of DAOs to explore are: “What does a DAO do?”; “Why is it important?”; and most importantly, “How can it benefit me”. Let’s move step-wise to those points, we’ll get there.

Aside from its literal meaning (Decentralized Autonomous Organization), a DAO, frankly, can be a lot of things. But, in the context of this text, we’re defining a DAO as:

“An organization that runs autonomously, in a decentralized manner, that functions without the need for centralized parties to make decisions for the organization to grow, to be profitable, or *physically* exist to serve its overall purpose. A DAO can be an on-chain contract, or a series of on-chain contracts that interoperate to complete some greater organizational function.”

Some have referenced DAOs as being akin to things like worker co-ops, except that those stores of course have hierarchies and roles/expectations — otherwise who would be tasked the burdensome duty of getting the grocery carts in the sun? Due to being programmatic, roles can be dynamic and voted on in real-time as opposed to awaiting long bureaucratic processes associated with social hierarchies and organizational behavior. This algorithmic form of management is ideal, given the right implementation and safe-guards for your use case.

So, to recap quickly: A DAO is a non-human specific entity, who’s sole duty is to abide by a specific programmatic set of rules; or by the rules granted to it by decentralized, distributed consensus (some majority decides what to do in a distributed manner).

The main purpose — and one of the large reasons many DAOs will exist, will be to emulate many of the functions of corporate business entities/non-profit organizations/guilds, but without the “inefficient” bureaucracies and red-tape that also come with running those types of organizations, given the friction of coordination between those agents and their given sub-agents. In the real-world, there are costs associated with friction in business and organizing large crowds of people.

The power of DAOs lies in that they aren’t one specific person, or persons. They again govern themselves in a decentralized manner, based on consensus or a preprogrammed set-of underlying rules (often referred to as “smart contracts”). And, they have to be able to do all of this, without a single, sole individual stepping in to make business/logistical decisions to the software that programs those rules directly, unless voted upon by a quorum to accept those changes.

Sounds all futuristic and dreamy, right? Now let’s move on to the good stuff. Like, why in the world you should even care they exist, or rather, are beginning to exist?

Why Are DAOs Important?

Let’s break this down. In order to fully grasp the power of a DAO, we’ll start with the present day, ending with what an entity run on a DAO can do in the future for end users.

The organization of entities via the assistance of programmatic governance can be analogical to the application of oil to a series of gears in a fixed-plant asset. The structure is there, it will operate, but with a little programmatic assistance, you can ensure the interactions with those associated agents remains fluid, and the state of your planet asset doesn’t depreciate to a point where it needs to be replaced (as that can be costly in both sides of this analogy).

Fig. 3: When making decisions, it’s important to focus on prioritization of needs, plan and organize the provisioning of resources, and eventually structure and form your plans into actions while moving fluidly via programmatic governance. Social organizations form, storm and norm themselves into fluidity in the real world, creating friction.

For a quick example relevant to the investor audience, in the world of venture investing, there exists a current ethos when it comes to startups and businesses in relation to investing in hyper-growth focused ventures:

Someone has a ground-breaking idea or technical concept. They share that vision with a group of like-minded peers; get people invested in the idea mentally and perhaps even financially. They build the product, make it great, make their case to a VC, and finally raise some (more) money. Take that money, hire smart folks. Double down. Iterate. Create value, deliver that value to stakeholders (your LPs [investors] ) via greater valuations. Reinvest new gotten wealth from your ventures to improve the business and reward the investors who got in early to your fund. Sell, merge, or go public; make a lot more money, rinse hands and repeat. Maybe you start another fund from those outsized returns?

That’s straight-forward. You find an original idea, invest and help build it out accordingly, hone in on what’s best for both the customer and the “bottom-line” — then ride it out until success and an eventual exit. The process of applying capital here can be filled with friction emanating from the social complexity of venture investing and the costs associated with admins, auditors, and the opportunity cost of sourcing new capital from LPs. That doesn’t even begin to consider the complexity of the lives of your portfolio founders, or the fluctuations of your more liquid investments from intra-monthly movements affecting your NAV statements— so many moving parts to keep up with, especially if you’re a lean firm.

What if you could eliminate a bulk of these frictions by corralling liquidity, setting a programmatic series of processes for handling investment proposals, and automate out a lot of the costs/headaches?

That’s the idea of DAOs in many forms: reduce a complex process to its most bare principles that does what you need it to, automate it, and make it hard to game or break. By having your DAO only subsist of the most basic primitive you need (i.e. MolochDAO and its grants-focused system, more on that soon) you enable yourself utmost optionality when eventually coordinating with other Layer 2 coordinators that may affect overall the governance as well.

The Collective Becomes the Coordinator

You want to construct a fluid system of actively engaged participants, consisting of incentivized entities who enable a sound and sustainable governance mechanism for your crypto-ecosystem. Doing this has many benefits outside of constantly irrigating a fertile foundation of participants.

Other Layer 2 governance entities (layer 2 in crypto governance is slightly different than layer 2 when referring to scaling mechanisms in say, Ethereum) consisting of state channel networks, plasma networks (and for some architectures, shards), push their social-governance related influence inwards, which finally affects the progress & direction of the core protocol itself (layer 0).

With the creation of DAOs of varying flavors with differing focuses, they impose their own influence on the overall governance of their underlying public chain asset. DAOs have the capability to exert outsized influence compared to other entities that could affect governance given their potential for profit-incentive games, depending on their purpose.

Equilibrium in Emergence

These distributed governance systems exist on an unbalanced social plain, teetering constantly in the direction of the most influential forces (which emphasizes the need to have more programmatic governance for DAOs that may garner outsized influence early, and strengthens the chains social integrity & social scalability).

Fig. 4: When fighting between the rampant selfish interest that arises from systemic coordinated chaos, to the opposite end which is avoiding the burden of overly complex coordination structures, you have to find a balance to avoid a transition into a state of destruction or oppression.

As you can see in Fig. 4 above, the ideal sweet spot that still leaves room for innovation and major breakthroughs to be uncovered lies at the border between chaos and order. When in a constant, orchestrated flux, you allow the flexibility for randomness, while maintaining the necessary social and organizational structure to hone in on those moments of randomness when they’re deemed economically and organizationally beneficial. This agile balance of creativity and interconnectivity, convergence and divergence, is where you’ll find the most sustainable, long-term equilibrium for your communities’ governance.

Here are some of the unique decisions you can participate in as a member of a DAO-backed organization/system:

Voting on outside expenditures that the organization makes. This could include who to partner with, or who to pay money to outside the organization (i.e. developer grants).

What products/focuses will be on a distributed organization’s roadmap.

Which additional members can be permitted to mobilize mobilize the plan into actual products and code.

How potential profits/dividends will be distributed amongst the DAO’s members and contracted agents.

The list can go on, but it’s clear DAOs can empower a large array of various business models that previously were impossible to create due to cost of coordination, legal, and labor. This leads to the possibility of all sorts of autonomously structured and run organizations; which include but aren’t limited to: distributed venture capital firms, decentralized hedge funds, decentralized municipal services & public utilities — basically any decentralized entity our imaginations can create and build into a safe and modular library of contracts.

This idea can be taken a step further if you consider the implications of legally-linked DAOs, all existing via on-chain contracts that could even be mapped to real-world legal entities/agents. For a recent example of this, check out the “LISA” tokenized share agreement, which was constructed on top of Ethereum smart contracts, here.

Who’s Leading the Pack?

Now that we’ve made it this far in the exploration of distributed organizations and autonomous smart contract-based entities, we should have compiled the necessary tools and Solidity best-practices to finally allay that moratorium, and focus on the proliferation of distributed organizations and disseminating that knowledge accordingly.

The beauty of open source, is anyone can fork your contracts, and augment them for their own needs and projects. Here are some of the projects and teams who, despite the many security risks, are trying (and succeeding) where others failed to garner traction.

Moloch DAO:

The MolochDAO (or as it’s referred to on Twitter: “👹”), is an attempt to boil away smart contract complexity, and create a barebones, minimum viable DAO, that could serve as a programatic decentralized coordinator.

The core purpose of this DAO is to review proposals and issue grants to developers who already maintain the core Ethereum protocol, as well as those that contribute secure and audited software to the commons. The project is also an experiment in coordination to see if there can exist a compounded series of mechanisms to ensure members can allocate capital efficiently without the added complexity of social disorder and friction devolving into chaos.

The project is now boasting over 14 members, and roughly 2200 ETH under its management since the contract was deployed at ETHDenver in mid-February 2019. Members who are voted into the DAO as a managing member of the treasury can then vote on active proposals for how the funds will be spent. And, similar to competitive online games, members have flexibility to “ragequit” (leave abruptly) taking their unused portion of shares/funds minted when they joined the DAO, with them.

Though an in-depth breakdown of the project and its underlying smart contract is outside the scope for this post, you can get more familiar with the project by checking out posts some of its creators in the resources following this essay, and check the current status and proposals in the DAO here on its website.

MKR Token Governance

One of the more battle-tested and production focused DAOs thus far in Ethereum’s short history has to be the MakerDAO. Maker is a DAO that was created as a means to govern a transparent series of processes and proposals used to dictate the parameters around how its underlying pegged stablecoin, the DAI, has its monetary policy managed in real-time by the holders of the MKR token.

In its current form, MakerDAO serves as a decentralized autonomous financial organization, primarily focused on lending. Through Maker’s elegant governance system, individuals who possess ETH can utilize this P2P system to borrow value directly from the DAO itself, in order to generate DAI (which is soft-pegged to the USD). The process of creating DAI requires a user to commit to what’s called a CDP (collateralized debt position), wherein your collateral (150% collateralization is required) can then be used to generate a fixed ratio of DAI.

Currently, over 2%+ of all Ether in circulation is presently tied up into Maker’s governance ecosystem (check out DAIStats.com for more).

Image courtesy of DAIStats.com

Holders of the MKR asset are also incentivized, because they continuously earn a return, as MKR is continuously burned in order to stabilize the system itself, and the percentage used for that fee is called the “Stability Fee”.

When a user wants to withdraw their ETH they used to generate DAI back, they have to repay any DAI they withdrew using the CDP they created, as well as pay the small Stability Fee in order to complete the process and regain access to their ETH from the MakerDAO contract. Holders of the MKR asset also use it as a weighted means to vote on changes to the Stability Fee, which is important for the stability of the DAI/USD peg.

Performance of CDPs and their relative sizes and distributions between February 2018 and February 2019. This figure is courtesy of Alex Evans at Placeholder VC in his Maker Network Report.

Though somewhat hard to grok at first, the beauty of the MakerDAO lies in its construction, and multi-token approach. Their team continues to be one of the most advanced in the industry thus far, even being one of the first firms to formally verify their MakerDAO contract back in September of 2018.

More in-depth explanation into how MakerDAO works can be found in the resources below.

AragonDAOs

Aragon is one the oldest projects solely focused on decentralized coordination and governance for decentralized entities. Since the inception of Aragon, there has been the creation of for-profit firms and entities that are now building tools and further researching how to improve the Aragon DAO platform.

Creating a community and providing the necessary tools and platform-specific services necessary for running a decentralized organization of various forms can at first appear to be monumental task with many edge-cases to consider.

Though a difficult task, the Aragon team and the developers that make up the community have taken this task with gusto, and have provided a slew of open source tools and modules to effectively deploy your own decentralized community/organization.

The stack that currently makes up the Aragon SDK that developers can use to build and deploy decentralized applications that are more robust and extendable outside the actual mainnet Aragon platform for creating communities. Image is courtesy of the Aragon blog.

To understand the stack more, and its extendable future, here’s a bit about each component library in the stack and its function taken from the Aragon blog:

AragonOS is the most advanced smart contract framework. It enables building decentralized organizations, dapps, and protocols. It provides upgradeability and authorization mechanisms for your smart contracts. AragonPM is a decentralized package manager powered by AragonOS and Ethereum. It lets you upgrade smart contracts and also any arbitrary data, like a web app. AragonPM enables decentralized governance over package upgrades, removing centralized points of failure. AragonAPI enables developers to fetch the state from their smart contracts on the blockchain easily. It has a Javascript implementation, AragonJS. AragonUI is a rich component library for building Aragon app front-ends. It provides you with a diverse portfolio of React components, so you don’t have to reinvent the wheel when developing your apps. AragonCLI is a command line tool that enables you to create, test, and release Aragon apps. It makes development and deployment more streamlined, having everything you need to create your app in a familiar interface.

The flexibility and modularity of their library allows developers to get really creative with what components they want to use, and can easily get started with building an intuitive UI. These tools can be integrated into other Ethereum dApps, further compounding the composability of Ethereum smart contracts, and the complex mechanisms you can create from simple and sound, battle-tested primitives.

Even better, with the recent release of Aragon Agent, DAOs created with Aragon can now communicate and interact with outside on-chain Ethereum smart contracts, which further extends how you can utilize a DAO to manage other on-chain assets and participation in other DAOs (or pools of DAOs).

Mattereum

With upcoming tech coming from projects like Mattereum, DAOs could even be used to govern and manage the ownership of real world objects and properties using tools we describe above — with the assistance of real-world legal contracts. With composability being such a low-friction way to make DAOs more fluid and useful, the compounding effects can have some very interesting 2nd order effects.

You could have DAOs that manage a slew of different real-world assets, and maintain vested interest in many different projects. These decentralized governance communities are essentially collecting returns and loot in the form of returns in other decentralized finance projects, or from the appreciation of assets they control in the real-world — making them akin to decentralized guilds. The most successful guilds will participate in many DeFi (decentralized finance) activities, and if they are successful, provide value to the underlying public chain anchor that all these assets operate on top of, as well as the members who choose to pool their capital and talent to improve the overall commons.

This is a breakdown of the Mattereum Smart Asset Registry which will enable individuals to control assets on-chain coupled with legal real-world contracts. More information is available here and in their whitepaper.

Unlimited Extendability, Lateral Complexity

As we continue to experiment and combine these various primitives that affect the underlying decision-making of the public chain and its progression/ease of upgradeability by being able to filter out some appropriate consensus around major changes.

The programmatic nature of these systems, and by adopting them sooner than later, can add more fluidity and accountability early as these systems gain importance in the real-world, and everyday individuals become more dependent on all of us operating efficiently to maintain the sustainability of our individual public chains that we’ve vested interest in.

This granular coordination of decision making across a widespread valley of participants and coordinators refines the division of power to the collective, and allows us to more easily communicate trustlessly.

By working on these systems, and remaining aware of how they will affect decision-making and governance into other lower layers becomes even more important with larges sums of capital (both digital and real) locked in these interoperable contracts.

This will only be further complicated by cross-chain efforts that allow layer 1 (Ethereum) smart contracts, for instance, to bridge into other chains — or individuals bridging Ethereum’s layer 2 scaling tech into other chains. Usage of DAOs allow us to create more clear boundaries of interest, and ensures those affected by the rules participate in amending and creating new rules in their individual organizations, to reduce the propensity for internal dispute and rule violations.

Let’s continue to think in this interconnected vein when formulating partnerships and extending power and resources into the various decentralized organizations that will continue to arise over the next few years to manage and pursue some of our largest challenges. Especially those in regards to our emergent governance.

Subscribe to our Newsletter to get this in your inbox:

Educational Resources and References

DAOs

Academic & Research Essays:

https://www.researchgate.net/publication/268079328_State_of_the_Art_of_Agile_Governance_A_Systematic_Review

Slides:

https://www.slideshare.net/HughKarp/legally-linked-daos-ethcc-2019-hugh-karp

Disclosure: This essay mentions Mattereum — Amentum Capital Fund Alpha, LP is an investor in their firm as of Q4 2018. Our fund does not hold any ANT assets or have invested interest in any firms related to Aragon. We are however holders of MKR.