Decentralized Autonomous Organizations
From New Media Business Blog
Contents |
Introduction of DAOs
DAOs
A DAO is a Decentralized Autonomous Organization. It is an organization that is owned and controlled by its members. Decentralization refers to the absence of a central authority and gives power to the members who make decisions through a democratic voting process. DAO’s use blockchain and smart contracts to operate. All votes and activity through the DAO are posted on the blockchain network, making every action publicly viewable. DAOs make use of cryptocurrency like Ethereum or Bitcoin as their primary payment method. [1]
How do DAOs Work?
Step 1: A group of developers write smart contracts for their DAO and upload it on the blockchain network.
Step 2: Is known as the funding period where the pitching of ideas for the DAO happens. Here is when investors and members of DAO invest and buy tokens that grants voting power in the decision-making processes.
Step 3: The final step is to pitch ideas on how to spend the money and the operation of the DAO begins as per its defined rules. Members propose and vote on initiatives and the DAO evolves through this democratic process. [2]
Evolution of DAOs
The evolution of DAOs has been closely correlated with the development of blockchain technology. The emergence of Ethereum, with its smart contract functionality, set the stones for the practical implementation of DAOs.
The first major experiment for DAOs was called ‘The DAO’ launched in 2016 which raised over $150 million in crowdfunding. Due to its quick success, it was hit with a high-profile hacking incident that was caused due to a vulnerability in its smart contract leading to a loss of about $50 million. This further led to a hard fork in Ethereum and began raising concerns about the security and safety of DAOs.
In the years that followed this event, the concept of DAOs matured with improved security practices, more thorough contract auditing, and better governance rules. The new generation of DAOs including MakerDAO and Aragon demonstrated a range of use cases including decentralized finance (DeFi) and blockchain governance. The explosion of DeFi in 2020 further pushed the evolution of DAOs, as many DeFi projects are governed as a DAO, allowing token holders to vote on protocol changes and champion the decentralization aspect of it.
2021 Saw the diversification of DAOs into segments beyond finance including NFT, Content creation etc.
There continues to be positive momentum in DAOs as seen in the explosion from 700 DAOs in May 2021 to over 4,000 active DAOs in mid-2022. [3]
Web 3.0
Web 1.0
Web 1.0 is the name commonly given to the initial period of the internet. During the era of Web 1.0, the primary purpose of webpages was to deliver content and information in a one-way stream. Owners of the webpages would be able to provide information to their users, and the users would be able to view that information. To most extents, this is how web 1.0 functioned. Many experts define it as the ‘static’ or ‘read-only’ web, due to the limited interaction between users and the website. Many reasons contributed towards this, with the main three being technical limitations, user expectations, and mainstream design policies. As web browsers became more advanced, and the capabilities of web design grew, Web 1.0 became less and less prevalent, giving way to the next iteration of the World Wide Web.
Web 2.0
Web 2.0 is a term encompassing the design philosophy of websites that are interactive for end users. This includes but is not limited to user generated content, dynamic content, data integration, and web-based software. In comparison to web 1.0, the primary advantage of web 2.0 comes from being able to change the content of a web page without the user having to switch to a separate page. This can be done through dynamic design practices, using databases storing user data to provide specialized interactions for each user. Web 2.0 is the most commonplace web design strategy used today, and the majority of those reading this currently rely on web 2.0 applications for nearly everything they do online.
Web 3.0
Web 3.0 is a new design philosophy for the web, largely based on the concepts of decentralization and distributed ledger technology. Decentralization is the idea that no few groups owns the majority of content and it is instead owned by the users who create the data. It relies on the ability to create a powerful computing network where no one group or entity has significant power over any other in the network. This is in stark difference to how web 2.0 works, where most data is stored by large corporations such as Meta or Alphabet. Web 3.0 relies greatly on the development and implementation of a few key technologies, including the semantic web.
Semantic web
The semantic web is where in an ideal scenario, all data is machine readable. A computer will be able to interpret metadata relating to any object in the web, and using that metadata, provide useful information for web users. Instead of having segmentation between different data sources relating to one topic, it would be able to use the metadata to relate different sources together, connecting related data together. This can be implemented through querying standardized metadata formats, where data is available and designed in a universally agreed upon format. [5]
Blockchain
Blockchain is a new technology which allows for the storage of data, which is immutable, transparent, and designed using distributed ledger technology (DLT). It is a type of database that allows for the writing and viewing of data, but not the updating or deletion of it. This data is almost always in the form of transactions, recording the transfer of assets from one entity to another. Using DLT, blockchain is established among a network of node computers, each able to store and verify blockchain transactions. Blockchain achieves immutability through a series of writing, connecting, and securing the data. Every time a transaction occurs, it is written to what is known as a ‘block’. A block is where the data is stored within the chain and contains a finite number of records as well as a unique identifier known as a hash. Once each block is full of transaction data, it then undergoes hashing, and stores the generated hash code inside the next block on the chain. This prevents the changing of any data in the previous block, as any new hash generated will not agree with the hash stored in the next block on any of the network’s nodes.
Hashing
Hashing is a cryptographic function where data is translated into a representative string of metadata and then turned into a unique hash identifier which is representative of that data, and only that data. The core aspect of hashing is the idea of a one-way function. This allows the input data to be turned into a fixed length hash string with minimal computing power, but using the hash to identify the input data requires computing power which can take thousands of years to compute. If input data is publicly available, the hash can be altered by introducing additional inputs, which would be stored with the hash in a secure location. For blockchain, a constant number known as a ‘nonce’ is used to obscure the hash produced from the data, as well as a handful of other inputs. This number can be determined through strong computing power. This is where the concept of ‘mining’ comes from, as determining the nonce is what allows the next block to store the hash data. This nonce would be stored in the next block as well so that all factors input into the hash are known. In blockchain technology, the hash is the key aspect of being able to identify and verify if a block of data has been changed. If any node in the network has attempted to alter the ledger in any way, the hash produced by that edited ledger will no longer match the hash stored in the sequential block. [6]
DLT
Distributed Ledger Technology is used as the basic structure for blockchain technologies. It provides security in data storage as well as decentralization. The database, known as a ledger, stores information in an immutable format. It functions using a network of computers known as ‘nodes’ which store all ledger changes on every node. If a record of data is changed on any node, it can then be verified by viewing every single other node to see if it matches. If it doesn’t then it gets overwritten with the correct data and is fixed. This provides security across DLT by reducing the capabilities of cyber-attacks.
Proof of Work Vs Proof of Stake
Proof of work is a method in which blocks on the blockchain are validated. The core concept is based on determining the nonce of a hash, to be able to reproduce the hash before a block is added to the chain. When the hash is created, the nonce is not diverged to the nodes on a network. In order to determine the nonce, nodes can try different nonce values and compare them to the target hash. If the value of the hash is greater than the target, then nodes can increase the nonce by 1 and try again. Eventually, a single node will find the correct nonce and be able to reproduce the hash. This allows the block to be added to the chain and whichever node determines the nonce receives a form of reward, generally as a token or coin. The node that finds the nonce must prove that they worked sequentially towards the correct value, instead of randomly guessing it to maintain the security of the network. This causes a lot of computing effort to be required, which can have an environmental impact due to power consumption. In proof of stake, the goal is like proof of work where the main goal is to validate blocks in the chain. However instead of using large amounts of computational power to determine a nonce, the validators of the block are selected by their stake in the network. This can be determined through financial investment in the network, either through infrastructure or tokens. There is no nonce to determine and the blocks are secure through investment required to become a validator. This is chosen as an energy efficient alternative to proof of work due to the lesser computational power. [7] [8]
Smart Contracts
Smart contracts are functions built onto the blockchain which are used to automate processes. To function, smart contracts require inputs, preconditions, actions to take, postconditions, and outputs. They are built by determining a list of requirements to be true for an action to be taken. After the action is taken, there needs to be an outcome of the smart contract. The creators of the smart contract will be who determines what all these requirements and actions are, as well as where it will output to. The key value of a smart contract is that once its terms are decided upon and set in stone, they will automatically run anytime their conditions are met.
Use cases of DAOs
DAOs have witnessed a surge in popularity, offering diverse use cases that revolutionize traditional organizational structures. While DAOs come in various forms, certain categories have gained prominence in recent years. In this report, we will explore some key examples where DAOs have proven highly useful, empowering communities and individuals in the realms of crowdfunding, investment, governance, NFT-based investing, and social interactions. [10] [11]
Crowdfunding DAOs:
DAOs have emerged as vital players in the crowdfunding space, facilitating the development of communities on crowdfunding platforms. When a project requires financial backing, DAO communities crowdsource contributions from their members. Investors receive DAO tokens, granting them the ability to actively participate in decision-making and propose ideas. Furthermore, investors have the potential to achieve significant returns on their investment if the token's value rises due to the success of the funded project. A notable example of this use case is the constitutional DAO, which raised an impressive $47 million in an attempt to buy a copy of the United States Constitution, showing the power of how DAOs can effectively pool user resources for shared causes.[12]
Investment DAOs:
Investment DAOs are dedicated to raising funds for investments in decentralized applications (DApps). Participants pool their resources and democratically vote on which projects should receive funding. In return, members gain ownership in funded companies and share in the resulting profits. This decentralization makes DAOs highly suitable for managing DApp projects, such as stablecoins, investment funds, DEXes, and meme-buying cartels, which often manage substantial capital. An example of this use case is MetaCartel Ventures, a fully autonomous and decentralized organization planning investments within the Ethereum ecosystem. [13]
Governance DAOs:
Governance DAOs leverage the issuance of governance tokens by decentralized applications to provide voting rights and influence over future community decisions. An example of this use case is MakerDAO, a well-known DAO-governed DeFi project, which governs the Maker protocol, and a stablecoin facilitating peer-to-peer lending and borrowing of cryptocurrencies. Holders of governance tokens in MakerDAO can modify the protocol's rules and contribute to community decisions. With over $6.5 billion invested in it, MakerDAO demonstrates the effectiveness of governance DAOs. [14]
NFT DAOs:
Another prominent use case of DAOs are NFT DAOs, which emphasize investing in Non-Fungible Tokens (NFTs). The DAO governance model allows collective ownership of NFTs, with several holders staking their tokens in these types of DAOs to cast votes and earn assets representing their share of the group's assets based on their investment. The HeadDAO is a popular example of a NFT DAO whose members trade and hold valuable blue-chip NFTs. [15]
Social DAOs:
Social DAOs foster a strong social element in their decentralized autonomous organizations. This function which is similar to private clubs in the real world, requiring the purchase of a certain number of DAO tokens for entry. Bored Ape Yacht Club NFTs exemplify a successful Social DAO, offering exclusive membership to individuals, and also including celebrities to generate popularity and community growth which is made possible by purchasing a BAYC NFT. [16]
Metaverse DAOs:
Lastly, Metaverse DAOs, are a virtual world where people interact and engage in various activities, emphasizes decentralization to give users greater control over their digital experiences. In this pursuit, DAOs have emerged as crucial tools in supporting decentralization within metaverse platforms. By incorporating DAOs, these virtual worlds empower their members to actively participate in decision-making processes, effectively democratizing the governance of the metaverse. Users are granted voting rights and a sense of ownership, enabling them to have a direct say in shaping the virtual environment they inhabit. Through this collaborative and inclusive approach, DAOs foster a stronger sense of community and engagement, reinforcing the principles of decentralization within the metaverse landscape. This specific use case incorporates factors from other use cases and an example of this is the DAO named Decentraland which is a 3d metaverse DAO where users control aspects of the virtual world. [17]
In conclusion, DAOs have demonstrated their adaptability and impact across various sectors, enabling decentralized crowdfunding, investment, governance, NFT-based investing, and social interactions. Their decentralized nature empowers communities and individuals alike, ushering in a new era of collaborative decision-making in the digital landscape.
Advantages and Disadvantages of DAOs
Presently, as these entities are still an emerging technology, it is bound to significant scrutiny from all stakeholders involved in an organization in addition to the public. Operating on blockchain technology, DAOs hold the potential to reshape various business dynamics with both beneficial and detrimental implications, from economical to ethical impacts on an organization and its external business environment. We will highlight these potential advantages and disadvantages across distinct business aspects.
Advantages
Decentralization
One of the primary strengths of DAOs is their decentralization. Decision-making power is equally distributed among all members, reducing the risk of manipulation, censorship, or undue influence by a few individuals. With the absence of a general organizational hierarchy, this negates the need to form different internal departments which, in turn, eliminates discrepancies between human relationships and decision-making within different departments[18].
Robust security
As DAOs operate and rely on blockchain technology, data may be securely stored on the blockchain in which they cannot be altered or manipulated, providing a secure foundation for operations.
High transparency
Since these blockchains are public, this makes all recorded transactions and decisions transparent and accessible to participants. This transparency enhances trust among members as they can verify the organization's activities without relying on a central authority.
Great ease of accessibility
With their high ease of accessibility, DAOs allow anyone to participate and have a say in the organization's decisions regardless of their geographical location or background. This inclusivity fosters a diverse and global community of stakeholders.
Low operational expenses
As traditional organizations often have significant overhead expenses due to central management, bureaucracy, and intermediary costs, DAOs will naturally minimize these expenses by utilizing decentralized decision-making and smart contracts.
Highly autonomous
Once established, DAOs can function autonomously according to predefined smart contracts and protocols. This removes the need for constant human intervention and reduces the potential for human error.
Disadvantages
Prolonged decision making
Despite the decentralized organizational structure of DAOs, even when all participants are involved in decision-making, it also has the drawback of taking time to ask everyone, vote, and get results. This can be a significant disadvantage in a business environment where speed is required. Even "Bitcoin," which is said to be the first successful example of a DAO, takes three months to make a decision. Therefore, it will not be quick in the usual business sense [19]
Potential coding errors
When deploying smart contracts, human coding errors and mistakes can have severe consequences, and there may be no recourse to reverse transactions or recover lost funds.
Potentially invalid decisions
Not to mention, it is also unpredictable and difficult to prevent what kind of person or organization will participate in decision-making. Therefore, the validity of decisions made by the DAO can be contingent on its members. This becomes particularly relevant in scenarios with a limited number of participants, where attaining a majority through voting might prove challenging. Consequently, in cases of divided opinions, arriving at a decision can become problematic, potentially leading to a standstill in the project's progression.
Restricted scalability
With restricted scalability, DAOs, especially those operating on public blockchains, may face scalability issues due to network constraints and transaction output limitations. This can hinder their ability to accommodate a large number of participants and execute complex operations.
Lack of flexibility
As mentioned, smart contracts, once deployed, are also difficult to change or modify. This lack of flexibility may obstruct adaptation to changing circumstances or evolving business needs.
Unclear legal status
Lastly, in many jurisdictions, DAOs still lack or have unclear legal frameworks. This ambiguity can lead to challenges concerning liability, accountability, and regulatory compliance.
Future Use Cases
Government
Leveraging the capabilities of smart contracts, government processes can be improved as currently there are many steps and checks that must be reached for anything to occur. A key issue for members of the public is government transparency. Through DAO's capability for transparency in transactions, the implementation of them in government allows for more insight into actions and choices made by our representatives. Another advantage would be through how government processes such as documentation and identity verification can be improved. Currently, government processes see lots of wasted time through paperwork processing and human verification. The implementation of DAO's would allow for less process time and errors in processing.
Trust funds
Looking at a financial application, DAO's could be introduced into trust funds soon. Firstly, it allows members of the trust fund to receive real-time updates of how their investments are being used as well as the effectiveness of their investments through the past. It also allows members of an investment team to pool their expertise, by voting on which investments to make. This takes on the current structure of financial DAOs and can be translated into a commonplace organization.
Potential Market Size
The DAO market is still in its relatively early stages, making it challenging to provide specific figures for the potential market size. The popularity and adoption of DAOs have been growing steadily, but projecting their future market size involves a considerable degree of uncertainty due to the rapidly evolving nature of blockchain technology and decentralized finance ecosystems.
With market size measured in Assets Under Management or AUM, we may still pull a few figures from DeepDAO, where we may see how the total AUM of the top 100 global DAOs amounted to $7 billion US dollars in 2021, growing to 11 billion in 2022, and finally currently valued at $20 billion [20]. Experts also predict that in a decade, by 2032, the market size is expected to reach $1 trillion in AUM [21].
Factors that may impact the market size of DAOs include the continued development of blockchain infrastructure, regulatory frameworks, and the level of mainstream adoption. Additionally, the success of existing DAO projects and the emergence of new and innovative use cases will play a significant role in determining the market's growth potential.
Authors
| Darien Rezaei | Krish Syal | Marshall Hudson | Rahul Jain |
|---|---|---|---|
| Beedie School of Business Simon Fraser University Burnaby, BC, Canada | Beedie School of Business Simon Fraser University Burnaby, BC, Canada | Beedie School of Business Simon Fraser University Burnaby, BC, Canada | Beedie School of Business Simon Fraser University Burnaby, BC, Canada |
References
- ↑ https://www.investopedia.com/tech/what-dao/
- ↑ https://consensys.net/blog/blockchain-explained/what-is-a-dao-and-how-do-they-work/
- ↑ https://blog.tally.xyz/the-evolution-of-daos-f2884d83faf1
- ↑ https://www.analyticsvidhya.com/blog/2022/06/whats-the-difference-between-web-2-0-and-web-3-0/
- ↑ https://www.youtube.com/watch?v=V6BR9DrmUQA
- ↑ https://learn.bybit.com/blockchain/what-is-hashing-in-blockchain/
- ↑ https://www.investopedia.com/terms/p/proof-work.asp
- ↑ https://www.investopedia.com/terms/p/proof-stake-pos.asp
- ↑ https://www.analyticssteps.com/blogs/everything-about-distributed-ledger-technology-dlt/
- ↑ https://www.growthchain.io/blog/dao-use-cases
- ↑ https://101blockchains.com/top-dao-use-cases-and-examples/
- ↑ https://www.growthchain.io/blog/dao-use-cases
- ↑ https://www.growthchain.io/blog/dao-use-cases
- ↑ https://www.growthchain.io/blog/dao-use-cases
- ↑ https://www.growthchain.io/blog/dao-use-cases
- ↑ https://www.growthchain.io/blog/dao-use-cases
- ↑ https://101blockchains.com/top-dao-use-cases-and-examples/
- ↑ https://relipa.global/blogs/pros-and-cons-of-dao
- ↑ https://relipa.global/blogs/pros-and-cons-of-dao
- ↑ https://blog.tally.xyz/the-evolution-of-daos-f2884d83faf1
- ↑ https://www.businessinsider.com/crypto-venture-fund-cofounder-dao-vc-assets-one-trillion-dollars-2022-4#:~:text=Imran%20Khan%2C%20co%2Dfounder%20of,to%20blockchain%20data%20provider%20DeepDAO.
