The very basics of DAOs
Recently, Ethereum co-founder Vitalik Buterin published a long answer to critiques of DAOs’ alleged inefficiencies. He listed three contexts in which DAOs outperform traditional corporations.
“Decentralization for making better decisions in a concave environment”. This is especially true in situations like public goods provision, tax rates, and judicial decisions, where decisions rest in the wisdom of crowds.
“Decentralization for censorship resistance”. This is supported by the immutable nature of the rules and results.
“Decentralization as credible fairness”. This especially applies to DAOs that are taking on nation-state-like functions, so characteristics like predictability, neutrality, and robustness are valued above efficiency.
In the next few blog posts, we’ll cover what a DAO is, what the different types of DAOs are, and how DAOs are evolving so stay tuned! In this post, we’ll cover:
· How the concept of a DAO emerged
· What DAOs are (a precise definition)
· How DAOs are governed
· What are the defining characteristics of DAOs
How did the concept of a DAO emerge?
Before understanding and discussing DAOs, let’s look at how its concept emerged in the first place.
Decentralized Autonomous Organizations are, theoretically, entities which can operate without a manager, replacing human management with a digital technology that cannot be tampered with and falsified, recruiting and paying staff to perform tasks that contribute to the shared mission.
The first real-world implementation of the DAO concept was made possible by blockchain technology. Blockchains combine distributed data storage, peer-to-peer transmission, consensus mechanisms, cryptographic algorithms, and other technologies, which are decentralized and collectively maintained, in order to enable secure and efficient information transmission and value transfer.
In addition, open-source public blockchain development platforms with smart contract functions (e.g., Ethereum) allow individuals and organizations to build decentralized applications (DApps) with the help of blockchain technology. The management and operation rules of organizations can also be encoded on the blockchain in the form of smart contracts. This enables distributed, automated, and autonomous governance by operating autonomously according to pre-defined business rules without third-party intervention.
What DAOs are — a precise definition
The term “DAOs” generally refers to organizations run through blockchain, smart contracts, token economy, and other technologies, where participants share common goals, collaborate remotely in the form of a network, and use code rather than law to protect interests. Relying on blockchain technology, the blockchain smart contract platform guarantees the trustworthy operation of the code and enables the organization to program rules, which are then programmed by the community.
In the realm of political science, this allows to tokenize votes and to minimize election corruption.
In addition, some scholars proposed a five-layer architecture reference model of DAO:
· Basic technology layer
· Governance operation layer
· Incentive mechanism layer
· Organization form layer
· Manifestation layer
Here’s what each layer entails:
· The basic technology layer. This layer encapsulates all the infrastructures supporting DAO and its derivative applications. It includes internet infrastructure protocols, blockchain technology, artificial intelligence, big data, and IoTs.
· The governance operation layer. The governance of DAOs is a kind of intelligent autonomy. According to the nature and objectives of the organization, a series of open and fair, and consensus systems are codified through smart contracts, and the self-governance and self-evolution of the organization are realized with digitization.
· The incentive mechanism layer. The main financial and participatory incentive for participants is tokens, including both native and governance tokens. Each DAO can determine the number of tokens issued & in circulation, their lock-up period, distribution, and other characteristics.
· The organization form layer. The main organizational form transforms from the traditional vertical collaboration of a corporation to parallel collaboration, from well-ordered to mixed-order, from the pursuit of absolute stability to dynamic balance, and from singularity to diversity of opinions. This is reflected in flat, open, parallel, and human-machine integration.
· The manifestation layer. Depending on the service provided, a DAO can be a digital currency, a system or institution, or even a connected, intelligent machine. Each DAO has its unique consensus and protocol, and each node has the right to see the tokens it owns and receive the corresponding dividends. However, the DAO still needs to rely on the existing legal framework to conduct its business activities. Therefore, the legal structure is usually based on the form of “non-profit foundation + entrusted company + performance” (e.g., open source community).
How are DAOs governed?
Since DAOs don’t have a small group of “leaders” to make decisions for everyone, the governance framework falls into the fundamental interaction mechanism of the decision-making process of the full group. There are three main questions to consider when it comes to the governance of DAO.
1. What does it take to become a member of a DAO?
Being part of the Discord group does not make one a member of the DAO automatically. Token ownership, NFT holding, or the need to go through a traditional interview/selection process are all taken into consideration.
2. How does a DAO make decisions?
On-chain governance writes the governance procedure into the smart contract, the users interact with the contract, and the smart contract automatically executes the community vote and result execution, truly realizing “the Code is the Law”. An example of an on-chain governance process is the formal voting on some issues using the governance token of the platform. The results are immutable and the funds, if any, can be sent to fulfill the dedicated function without human intervention.
Off-chain governance entails all the governance-related processes and sometimes informal processes. Examples include voting on third-party voting software. The votes won’t be executed automatically and need to rely on individuals to execute the agreement.
3. What is the voting criterion for the DAO?
Traditionally, DAOs would consider a basic criterion such as a quorum (i.e., the minimum number of people/tokens needed to justify the voting decision), or the passing threshold (e.g., majority rule).Increasingly we see more forms of on-chain governance that aim to bring more equity and equality to the DAO members.
Here’s an example of a DAO election process:
What are the defining characteristics of DAOs?
DAOs are characterized by information transparency, token incentives, open source code, community autonomy, ownership of the organization by the participants, freedom, openness, and a shared mission that isn’t limited to financial incentives (e.g., climate change).
Code as law
Blockchain technology ensures the decentralized operation of the program, and the program rules restrict the organization’s members. This constraint allows DAOs to form organizations in a trust-minimized model, where users can participate in organizations anonymously and across borders.
Economic alignment
The identity boundary between participant and owner disappears, and DAO participants are generally also token holders. In addition to the rewards received for building the project, participants can also share in the economic benefits of the organization’s development; this alignment of benefits further strengthens organizational consensus.
Transparency
DAOs aim for transparency, and most projects run on open source code so that any user can access information about the organization. Compared to companies, DAOs do not set information thresholds, which provide the most significant incentive for competition within the organization.
Any participant with solid capabilities and community support will quickly reach a key position to lead the business, and the utility of capabilities and reputation will be maximized.
Efficiency
The flow of resources between DAOs is more efficient and frequent than that of companies, and the communication of information between industries is intense, which greatly accelerates innovation and resource allocation, making blockchain one of the fastest-growing industries.
More importantly, users can enter and exit at any time, participants with the same goal can enter the organization, and those who are not satisfied with the organization’s route can leave at any time, making the organization reach consensus faster.
Decentralization
DAOs do not need a tight organizational structure but a decentralized way to make decisions. Unlike a corporation, DAO decisions are made collectively, not by the CEO or senior management, and rules are changed and enforced in a single step. In practice, members with one or a predetermined number of DAO native tokens can propose changes to the smart contract, propose initiatives, invest in ideas, etc. and vote on them, depending on the specific DAO, thus driving the DAO’s growth and development.
References
Wang, S., Ding, W., Li, J., Yuan, Y., Ouyang, L., & Wang, F. (2019).
Decentralized Autonomous Organizations: Concept, Model, and Applications. IEEE Transactions on Computational Social Systems, 6, 870–878.《去中心化自治组织:发展现状、分析框架与未来趋势》2019
《区块链 元宇宙(六):元宇宙的运行之“DAO”》国盛证券 2021
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