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Revolutionizing Governance: Exploring the Potential of Decentralized Autonomous Organizations
A Decentralized Autonomous Organization (DAO) is a collectively owned blockchain-governed organization without central leadership. DAOs aim to automate aspects of management such as decision-making and transaction processing. According to CNBC, a US news television channel, a DAO is described as an internet community that shares a bank account. DAOs leverage smart contracts to operate on the blockchain. With blockchain-based rules which are specified in the smart contract, how the organization Is run and how funds are spent can be specified and designed and specified.
It is essential to distinguish a DAO from “the DAO” which was the first DAO created in April of 2016 by a team of developers using open-source code by Christoph Jentsch but failed when hackers carted away with around $50 million of the DAO’s assets due to vulnerabilities in its code base.
The backbone of DAOs is smart contracts. The rules and regulations of the DAO are already written in the smart contract and through consensus-based mechanisms such as voting, rules, and regulations governing a DAO can be modified. This makes decisions agreed upon which are stored on the blockchain visible, tamper-proof, verifiable, and publicly auditable. Any member or potential member can fully understand and determine how a protocol is meant to function. DAOs essentially help in eliminating hierarchical structure and building decentralized governance.
A token is a digital asset on a blockchain. Tokenomics describes the economy of a token system on a blockchain. DAOs usually make use of governance tokens to delegate power to community members. Owning a governance token is similar to owning equities in a start-up firm. The more successful the firm, the more the reward.
The supply-side token system is an intricate aspect of tokenomics in a DAO. To emphasize decentralization, strong signals can be sent by allocating a significant amount of the tokens to the DAO treasury (The store of tokens available to the DAO and not distributed) and ensuring that the amount of tokens allocated to the community is greater than that given to the initial supporters of the DAO.
The token utility is also very important. This involves defining concisely what a DAO token will be used for. Governance is one of the most common tokens utilities of a DAO token. This gives users a say in the day-to-day running of the organization by voting. Users can also vote on proposed changes in the DAO. Voting power is distributed over separate independent entities and not a single entity can decide by themselves how the DAO evolves. To reward long-term thinking and commitment, the staking option is usually employed. Staking the DAO token brings extra rewards.
Uniswap protocol is an automated market maker that facilitates the trading of EVM-compatible tokens and helps in providing users with a non-custodian peer-to-peer swap. Uniswap is the most popular decentralized exchange and now doubles as the biggest DAO today with a market capitalization of over 36 billion dollars.
Uniswap DAO recently implemented a proposal to create an accountability committee for licensure and deployments to support licensure and partnership agreements between Uniswap DAO and external parties. About 8,000 individual voters cast about 74 million votes via an off-chain consensus process to achieve this.
$UNI is the governance token for Uniswap DAO. Uniswap airdropped its $UNI token to everyone who used its platform in 2020. $UNI has evolved to be used for anonymous exchange and trading in virtual tokens. They shared one billion $UNI tokens among the community, development team, investors, and advisors.
The percentage of total supply distributed is:
Aave protocol is the leading decentralized crypto lender on the Ethereum blockchain. Aave Protocol allows users to lend, borrow, and earn interest on various crypto assets without intermediaries with features like flash loans, staking, and credit delegation. Developed on the Ethereum blockchain, Aave provides support for Ether, stablecoins, and ERC-20 tokens.
A recent proposal was made that allowed Aave developers to upgrade smart contracts, allowing tokens that have been sent to wrong and incompatible wallet addresses to be retrieved and returned to their original owners preventing permanent loss of funds. This proposal received overwhelming acceptance, with only one user voting against the proposal using a single $Aave.
$AAVE is the native governance and utility token of Aave DAO. It allows privileges for managing and developing the Aave ecosystem. Aave governance token holders enjoy voting privileges and can stake their $Aave and collectively manage risks and rewards. The users also have the right to vote and attain governance within the organization by staking their tokens.
Bit DAO has the biggest DeFi treasury in the world with 1.1 billion investments in liquid assets of which 691 million dollars is in ETH, USDC, X-SUSHI, and the rest in the protocol-owned BIT. This formed a major factor in Bit DAO’s early success. Bit DAO also focuses on creating tools that can enable the use of the DAO treasury for activities such as lending, borrowing, staking, and a host of other financial activities.
Bit DAO’s reputation stems from its unique and innovative capabilities. They support a broad range of projects including DeFi, NFTs, and gaming through liquidity bootstrapping and funding. $BIT is the governance token of Bit DAO. There is a total supply of 10 billion $Bit tokens. 3 billion tokens are locked in the Bit DAO treasury.
Token holders can vote on proposals such as
At the time of writing this article, one $Bit is $0.473401
This is another decentralized autonomous organization that focuses on allowing others to create their DAOs. Aragon is one of the oldest and most used DAO builders created by Luis Cuende and Jorge Izquierdo in 2017. Aragon focuses on empowering clients to connect in any location within a DAO infrastructure. As of today, Aragon has almost 1500 DAOs and about $350 million locked in each.
Every Aragon DAO has three pre-installed features:
Voting: used for token holders to raise issues, cast votes, and make resolutions.
$ANT is the DAO token of Aragon. $ANT gives users the right to vote, express their agreement or disagreement and decide on the future of any project they are interested in.
This helps users gain influence over the future of the ecosystem.
The introduction of DAOs has been one of the most prominent innovations in the crypto space in the last few years and DAOs are considered the next big step in the web3 evolution. With DAOs being created in their hundreds and a massive increase in developer education, more and more developers are considering DAOs as the best structure to operate due to the following reasons:
1. Democratization of decision-making processes
All members of the DAO can vote on issues about how the DAO is run and managed. This gives participants “skin in the game”. By using governance tokens to cast votes on matters of interest, governance tokens give holders the ability to affect the future of the DAO. This aims to create a flat, fair, and equal organization and helps to remove tendencies of autocracy. Voting most time is done by burning or spending tokens.
Each vote on the blockchain is public and in full display, voters are aware that their choices can be put under scrutiny, which makes the token holders more careful in making decisions. Thoughtful votes reduce the spamming of bad ideas.
2. Decentralization
DAOs aim as much as possible to be run by all token holders and not by a select few thereby promoting decentralization. Decentralized decision-making breeds inclusivity. In a publicly traded company, the CEO calls the shot together with the board of directors and consumers have little or no say. Like owning stock, participating in a DAO gives a sense of ownership and a voice in the decision-making process by using governance tokens. Any token holder can submit ideas and proposals for protocol changes and improvements.
3. Accountability
One of the most important and prominent traits of DAOs is accountability and transparency. Every member is aware that making new proposals and voting for or against them come with a cost and as such, implausible ideas are refined and proposals of little or no importance do not go unnoticed.
As DAOs are embedded in a blockchain, manipulation, discrimination, and errors are reduced and almost eliminated. As with other technological innovations, there exist some problems with DAOs that must be solved. Despite the many good things that DAOs represent, these discrepancies and technicalities need to be solved for mass adoption. They include:
i) High operational costs:
Decision-making in a DAO, operating a DAO, and maintaining a DAO cost a lot. DAOs function with cryptocurrencies, and each cryptocurrency transaction incurs gas fees. These fees must be paid regardless of the transaction’s success.
Over the years, there has been an increase in gas fees. In September 2019, gas went from $4.8 (0.0225ETH) to $74.9 (0.193ETH) in the second half of 2020. This culminated in an 8500% rise. This excessive cost will price out small players and result in a high operational cost for DAOs.
The majority of DAOs have yet to make their budget and expenses public but this is expected to change in the coming years with token holders taking a more active role and demanding more transparency. Maker DAO In 2022 published a total revenue of $37.75 million with annual expenses from 2022–2023 estimated to be about $34.09 million.
ii) Legal Hurdles
DAOs are not fully recognized as business entities in the legal sense. In the United States, only two states (Wyoming and Vermont) of the 50 recognize a DAO as a legal entity with limited liability. The legal questions about DAO ownership and liability persist.DAOs still face physical impediments in how they interact in the real world and how they can fit into the laws of countries.
An example was The DAO which claimed to be a crowdfunding contract however when the SEC began an investigation, they determined that although the DAO claimed to crowdfund; it did not meet the SEC’s requirements of a crowd-funder because The DAO is neither a broker-dealer nor a funding portal registered with SEC.
It is clear, however, that DAOs are here to stay, even though the movement is in its infancy and we must do more work to solidify its foundations and reach for the sky.
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