Using DAO Frameworks To Facilitate Defi Governance
Decentralized finance (Defi) and blockchain technology have fueled the development of innovative governance models that can enhance decentralization and good governance. The decentralized governance of blockchains has been enabled through the integration of decentralized autonomous organizations (DAOs) into many blockchain projects. Despite the fact that these governance frameworks establish decentralized voting rights, their underlying infrastructures differ.
How Does A DAO Work?
Decentralized autonomous organizations (DAOs) are organizations that run entirely autonomously on the blockchain protocol in accordance with rules encoded through smart contracts. As DAOs are devoid of the need for human intervention or centralized coordination, they are often referred to as “trustless” systems. Generally, the DAO’s trustless decision-making framework is intended to make governance accessible to all, not just to a few. Specifically, DAO governing bodies oversee the allocation of protocol resources and guarantee the long-term viability of projects they support.
Despite the fact that not all blockchain projects utilize a DAO, the growth of decentralized finance (Defi) protocols has heightened the profile of blockchain governance, leading to increased investment. As of August last year, DAOs held over $9.3 billion USD in digital assets, according to DeepDAO. Even though certain DAOs operate independently, the vast majority of DAOs share the following characteristics:
- In many DAOs, tokenized voting rights are represented by blockchain-based tokens. This results in token holders having exclusive voting rights.
- DAOs function as self-enforcing entities by utilizing smart contracts, which automate organizational rules. With the use of smart contracts, financial intermediaries can be significantly reduced — or even eliminated — which may compromise decentralized decision-making.
- Automatization of autonomous processes: A single smart contract can only manage straightforward transactions. The DAO framework must define a complex set of smart contracts that facilitate multi-party interactions — without human intervention.
- Decentralized infrastructure: Although DAOs utilize decentralized governance, the network must also be based on a distributed infrastructure. Decentralization is necessary to ensure governance is not abused by those who possess significant computing power.
- Information transparency: Blockchain immutability assists DAOs in functioning to their full potential as mechanisms of decentralized governance. The immutability of protocols allows them to communicate about organizational processes and data in a transparent manner.
- Mechanism of trust: Smart contract conditions and other protocol mechanisms grant a certain degree of trust to DAOs. Therefore, a number of agreements among network stakeholders can be reached without involving third parties.
Tokenized DAOs For The Government
There are some DAOs that employ governance tokens, which are permissionless, mintable tokens that holders can trade on decentralized exchanges (DEXs). Some protocols, such as Proof-of-Work (PoW) consensus mechanisms, provide governance tokens when users provide market liquidity or participate in network security. No matter how governance tokens enter the market, they tend to grant holders the right to vote. These tokens may allow holders to participate in the decentralized governance of protocols or even the decentralized governance of the tokens themselves.
The Maker platform passes executive votes that guide protocol development using a DAO framework called MakerDAO. Executive votes can, for example, influence changes to protocol fees or even lead to an emergency shutdown. Due to MKR’s widespread availability on decentralized exchanges, anyone can invest in voting power. As a result, voting power is weighed, which means that those with the largest number of MKR are generally the most influential.
Aragon As A DAO Tooling Protocol
As a DAO tooling protocol for other platforms, Dragon also functions as a DAO in and of itself. Therefore, any ANT token holder may participate in the voting process. Projects such as Aave, Curve, and Pillar used the Aragon framework to coordinate their efforts. A number of collaborative asset management projects, such as the Bainbridge derivatives protocol, the dHedge Defi hedge fund, and the decentralized asset management platform PieDAO, utilize the Aragon framework as well.
DAOs Based On Shares
DAOs based on shares remain relatively accessible but less so than DAOs based on tokens. In order to join the DAO, participants must submit a proposal and deposit tokens, such as ether (ETH) or DAI. Share-based DAOs, on the other hand, issue one token representing direct voting power and ownership of the capital reserve, as opposed to governance-token DAOs. Despite the fact that share-based DAOs issue tokens, these tokens can generally be redeemed at any time for underlying capital. As compared with governance token protocols such as MakerDAO, which allows users to trade MKR for ETH on decentralized exchanges, MKR holders can generally not trade against a capital reserve.
The following novel concepts are introduced by share-based DAOs:
- The members of RageQuitting can redeem their shares for capital at any time.
- Following each vote, members are given a grace period during which they may RageQuit their shares, avoiding dilution of their shares.
- Potential members may make contributions in the form of tokens or work in exchange for a predetermined number of shares.
- Through the use of the unanimous agreement, guild members can forcefully remove bad actors.
The majority of share-based DAOs utilize the MolochDAO protocol, which focuses on funding Ethereum-based projects. Under this DAO framework, those seeking membership must submit a proposal that proves they possess the necessary expertise and capital to participate in decision-making. Further, on the MolochDAO platform, the group must trust these individuals to make judgments about Ethereum project grantees.
MetaCartel, a fork of Moloch, is one of the most well-known projects within the MolochDAO framework. Instead of focusing on Ethereum development, MetaCartel deploys funds to projects operating on the Ethereum application layer. Since its inception, MetaCartel has invested in notable projects such as Rarible, xDai, and Opium.
DAOs Tooling Protocols
DAO tooling protocols can provide developers with access to a library of modular components. This flexibility is particularly well-suited to Defi protocols that require scalability and highly complex blockchain governance solutions.
Most share-based DAOs use the MolochDAO protocol, which focuses on Ethereum-based projects. Those seeking DAO membership must submit a proposal that proves they have the expertise and capital to participate in decision-making. Moreover, on the MolochDAO platform, the group must trust the judgment of these individuals regarding Ethereum project grantees.
One of the most well-known projects within the MolochDAO framework is MetaCartel, a fork of Moloch. Instead of focusing on the development of Ethereum, MetaCartel deploys funds to projects that operate on the Ethereum application layer. MetaCartel has invested in notable projects such as Rarible, xDai, and Opium since its inception.
Tooling Protocols for DAOs
The DAO tooling protocol can provide developers with access to a library of modular components. This flexibility is particularly suitable for Defi protocols that require scalability and highly complex blockchain governance solutions.
We are building a modular, open-source software stack for DAO development with the DAOstack project. It provides governance protocols and user-friendly interfaces that streamline the creation and management of DAOs. With the launch of GenesisDAO, DAOstack has gained widespread adoption across a number of platforms. These include:
- GnosisDAO facilitates decentralized governance through futarchy or prediction markets. Anyone can join the Gnosis Forum to participate in this DAO.
- PRIME is the pool that governs Balancer liquidity pools.
- The Dxdao protocol facilitates the development of blockchain governance platforms such as the Omen prediction market and the Swampr automated market maker (AMM).
OpenLaw DAO Framework
On the LAO, Flamingo, and Tribute protocols, the OpenLaw DAO framework guides decentralized governance. This LAO is a for-profit limited liability company (LAO) that has previously invested in platforms such as Zerion, DeBank, and several other Defi initiatives. While the Flamingo DAO operates under a similar premise, the protocol is focused on emerging non-fungible token (NFT) investment opportunities. The Tribute DAO, like other open-source DAOs, aims to simplify application development through a modular design and utilize optimistic rollups (ORs) and Moloch security guarantees. The interchangeable structure allows teams to reduce costs, customize the user experience, and upgrade the DAO after it has been launched.