The Mysteries of Web3 DAOs
I first encountered Web3 DAOs on platform X, reading about programmer Guo Yu’s understanding and practice in The Birth of CodeforDAO and the Future of a Self-Organized Internet.
The Web3 DAO market is still in its exploratory phase, with some prototypes of smart contracts available on GitHub, but a complete DAO ecosystem is not yet in place.
Using the methodology of DAOs to improve the structure of startups, and perhaps, taking it further, enabling anyone to easily create a self-organized chain-based company or organization.
Actually, you can easily find examples of self-organization in school clubs, companies, families, friend groups, etc. These instances of self-organization are usually made up of like-minded individuals who come together spontaneously around common goals, rules, values, etc. This aligns well with the principles of DAOs.
Challenges in DAO and Web3 Governance
Web3 emerged because centralized institutions failed to ensure security, fairness, and transparency in managing financial and social infrastructure. Web3 is built on blockchain and oracle networks that minimize trust, utilizing cryptography, consensus protocols, and mechanism design to manage digital infrastructure without the need for trusted human intermediaries, instead relying on cryptographic proofs.
What is a DAO?
DAO stands for “decentralized autonomous organization.” The primary purpose of a DAO is to transcend traditional organizational forms, enabling collective decision-making in a distributed, transparent, and trust-minimized manner. Simply put, a DAO is a new type of organizational architecture. People can independently verify how the organization operates and work together towards common goals based on this consensus.
For a more detailed explanation, see here: Understanding DAOs and the Challenges of Web3 Governance
It is worth noting that although the acronym DAO includes the word autonomous, DAOs are not fully autonomous. DAOs are made up of people, thus requiring manual operations to function, such as voting, deploying code, and discussing proposals. The term “autonomous” is used because some specific functions of a DAO are embedded in unchangeable smart contract code. However, people still need to interact with these contracts (i.e., input data) to perform specific tasks (i.e., produce outcomes).
Types of DAOs
Although DAOs are still in their early stages of development, they can generally be categorized into the following six types:
Protocol DAOs—These DAOs are responsible for developing and managing decentralized applications (dApps) or the infrastructure for dApps. Similar to companies or foundations, their main task is to develop open-source technology.
- Tezos is a blockchain that uses a DAO-like on-chain governance structure, requiring a supermajority vote to initiate protocol upgrades.
- MakerDAO manages the decentralized stablecoin DAI, with DAO members setting parameters such as interest rates and adding or removing collateral assets.
Investment DAOs—These DAOs control funds in the DAO treasury and use these funds to initiate and manage investments. Their main purpose is to generate profits for members, similar to private equity funds or hedge funds.
- BitDAO allows BIT token holders to vote on various investment strategies, aiming to generate returns for the DAO treasury.
- MetaCartel Ventures is a for-profit DAO that invests in early-stage dApps, offering a community-centered membership with more flexible participation mechanisms than traditional venture funds.
Philanthropic DAOs—These DAOs manage funds and plans for a specific cause, such as charity, politics, or public utilities, similar to charitable organizations, lobbying groups, and bonus incentive schemes.
- Gitcoin is a DAO that uses quadratic voting mechanisms to fund public goods and other open-source blockchain projects on Ethereum.
- Big Green is a DAO that provides charitable grants to schools, communities, and families to help them learn to grow food.
Social DAOs—These DAOs manage a shared social space, jointly own assets of artistic value, and create culture and organize events for members, similar to modern social clubs.
- Bored Ape Yacht Club (BAYC) offers limited edition NFTs that serve as membership tokens and provide special benefits.
- Krause House is a social DAO composed of basketball enthusiasts aiming to someday purchase an NBA team. It has already acquired the Ball Hogs team in the Big3 basketball league.
Data DAOs—These DAOs develop and manage data controlled by the DAO. They aim to aggregate user data or develop unique data products for sale to third parties, including developing AI algorithms or conducting market research.
- dClimate is a marketplace for buying and selling weather data and forecasting models, where users can sell innovative data sets and institutions can buy them. The DAO evaluates the published data to ensure quality and provide appropriate network incentives.
- Delphia is a robo-advisor that buys user personal data with native tokens. Delphia aggregates this data to formulate investment strategies, which users can access using native tokens.
DAO Governance Structures
For any DAO, achieving consensus is both the most important and most challenging task because it involves making decisions in a decentralized manner. The following section outlines the governance mechanisms currently used to reach consensus, incorporating some of the tools mentioned above.
Direct on-chain democracy—Refers to DAO members directly voting on proposals on the blockchain. Most DAOs using this model employ a token-weighted voting system where the number of tokens a user holds determines their voting power (typically 1 token = 1 vote). This is the most common and simplest form of consensus in DAOs because it has the lowest complexity and cost and is resistant to sybil attacks.
Direct off-chain democracy—Refers to DAOs using Snapshot for off-chain voting. Most DAOs using this model also employ a token-weighted voting system, but implementation requires a trusted entity to strictly execute on-chain changes according to the proposal through multisignature. Thus, off-chain democracy involves a trust assumption that the multisigners will faithfully execute according to the snapshot of DAO voting results.
Representative democracy—Refers to DAOs appointing representatives to vote on proposals on their behalf. Representatives are usually elected by the DAO and may refer to off-chain snapshots to gauge community sentiment. DAOs might also implement mechanisms to veto or modify results when a representative’s vote significantly deviates from community sentiment.
Quadratic democracy—Based on quadratic voting, the cost to a voter is proportional to the square of the number of votes they cast. For example, casting one vote might cost one governance token, but casting five votes would cost 25 tokens. Quadratic voting prevents control of DAO voting outcomes by a minority of large stakeholders. The collective voting outcome of the majority will have equal or even greater effectiveness. However, implementing quadratic voting effectively requires anti-sybil mechanisms to prevent fraudulent behavior or dispersing tokens across multiple wallets.
The Future and Present State of Web3 DAOs
There are quite a few DAOs on the Internet, but most DAOs seem to operate with a significant degree of human governance, relying limitedly on contract governance. These governance purposes are quite macroscopic, such as whether to allow the use of some money from the DAO treasury to complete an investment or to establish a complex roadmap. Because these purposes are so broad, most governance is done using off-chain voting with snapshot, which is somewhat akin to the representative democracy we are familiar with: you can participate in voting, but no one can guarantee that the purpose of the proposal will be fully executed.
“A network nation is a network society, morally innovative, with a sense of nationhood and recognized founders, capable of collective action, where people live in harmony, issue cryptocurrencies, use social smart contracts to constrain consensus-based government, crowdsource to purchase physical territories forming islands, establish virtual capitals, conduct census on-chain proving the nation’s population, income, and real estate, and thereby gain diplomatic status.” Help me translate this into English.
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