Decentralized Autonomous Organizations (DAOs) have been a controversial topic in the blockchain and cryptocurrency world for some time now.
From their early days, as seen in the case of Slock.it, the German startup that created DAO, to the current iterations, DAOs have the potential to make or break the crypto and finance industry. decentralized (DeFi), and education will be a deciding factor.
Based on recent developments, a misunderstanding of the true nature of the technology behind most DeFi projects could be a contributing factor to the lack of regulatory clarity. A recent dialogue between MakerDAO delegates and Senator Elizabeth Warren proves that regulators do not have a solid understanding of the DeFi space or how DAOs work.
In the dialogues, not only did the senator show a lack of interest in the organization, but one of the delegates claimed that much of the time was spent convincing the anti-crypto senator that MakerDAO and the deceased 2016 The DAO are different entities.
U.S. Senator Warren, who is a vocal crypto-skeptic, also expressed concerns about the rapid growth of the stablecoins market, suggesting a ban on U.S. banks holding reserves that support stablecoins.
Could a lack of understanding of how DAOs, such as MakerDAO, work be a contributing factor to how regulators view the industry? In this article, we take a look at the different DAOs developed in the DeFi space and how they perform their function, and provide an introduction that will help you better understand.
So what is a DAO?
Simply put, a decentralized autonomous organization is a concept for a blockchain-specific entity built and owned collectively by its members. For governance, these entities will rely on the decision-making protocols built into smart contracts, as opposed to conventional organizations that use central leadership systems.
Since smart contracts are impersonal, the organization can be governed by a more horizontal structure with no entrenched hierarchy. DAO members may decide to have integrated treasuries with access restricted to approved members who meet pre-specified conditions.
Without a centralized governing body, members of a DAO can make proposals and collectively decide on proposals to be implemented through a voting system. Smart contracts can help throughout the voting process and automatically implement changes based on votes.
What makes DAO different?
Basically, a DAO is designed to solve the perpetual principal-agent dilemma.
This problem is a common challenge that occurs when an agent (a centralized entity or an individual) is caught in a situation where he must make decisions that satisfy the divergent goals, priorities and needs of the (main) group without compromising. their own interests. .
As this dilemma is prevalent among public and private entities across the world, DAOs aim to eliminate this challenge by replacing centralized hierarchical forms of decision making with a trustless system based on autonomous smart contracts.
Smart contracts can be programmed in such a way that the incentives of all group members are aligned in a codified format built into the blockchain.
With a properly executed DAO, all stakeholders in the organization will be able to participate in the governance and decision-making of the group.
How a DAO works
While the underlying mechanics of DAOs vary from platform to platform, the general formula is where a series of smart contracts are deployed. These smart contracts can be programmed to allow for future changes in the event that an incentive program is needed to help DAO grow and expand to new functionality.
A DAO can be created for virtually anything from a network of freelancers to charity and even political government. Smart contracts make or break DAO because they facilitate transparency and allow the organization to operate autonomously without intermediaries.
Once smart contracts are created, tested, and fully deployed, DAO needs funding to motivate members to manage and maintain the organization. Most DAOs will use a token that gives voting rights holders as well as rewards for their participation in the maintenance of the platform. With audited smart contracts and a defined funding process, the DAO can initiate and have its future controlled by members of the organization.
Real examples of CAD
There are various examples of DAO that exist today. Technically, Bitcoin can be considered a first version of a DAO, as its network grows through community agreements between its miners and its node operators. In addition, there is no central governance entity.
The Bitcoin network could be considered the first example of DAO. It is run by a network of participants (miners and node operators) who coordinate their activities for the benefit of the entire organization as well as their own interests. However, it lacks a complex governance mechanism, which has become a typical feature of all DAOs, and by today’s standards would not really be considered DAO.
The Dash cryptocurrency project could be considered the first real DAO attempt. It is the first known DAO, at least by current standards, because its governance mechanism allows stakeholders to vote on how cash is used.
Dash was first launched in 2015 and operates on a network consisting of a set of 5,000 master nodes located around the world. However, the Dash blockchain started as a Bitcoin fork, but has since evolved into a privacy-centric cryptocurrency.
The DAO, a decentralized autonomous organization that has now disappeared on Ethereum, has been designed operate as a decentralized venture capital fund for decentralized applications (DApp). The DAO was developed as an open source platform by Slock.it, a startup based in Germany. When it launched, The DAO managed to fund 12.7 million Ether (ETH) worth around $ 150 million at the time.
The idea was for DApp developers to present their ideas to the community and receive funding if approved. Although DAO has been one of the most funded crypto projects to date, hackers have been able to feat an error in its smart contract less than three months after its launch. It is important to note that the error or bug in the smart contract was not on the Ethereum blockchain but on the application developed by Slock.it and deployed on the Ethereum network.
Following the incident, the Ethereum community opted for a hard fork to compensate for the attack, while dissenting voices maintained the old chain which is now Ethereum Classic.
Similar to The DAO, MakerDAO is a decentralized organization built on the Ethereum blockchain.
According to the Maker Foundation, Dai’s stable value makes it a useful digital asset for issuing loans and hedging against crypto volatility. However, Dai is different from other stablecoins because its value is only weakly tied to the US dollar. This means that there is no centralized entity with dollar reserves that backs up Dai tokens. Dai uses collateral in the form of Ethereum-based assets locked into smart contracts on the MakerDAO platform.
With each Dai token generated, the value of Ethereum-based assets locked in smart contracts must exceed that of the Dai issued to borrowers. This allows anyone to lock in more volatile assets and receive Dai, which is a more stable asset.
Uniswap is one of the last successful DAOs in the DeFi space. After the successful launch of its decentralized automated market making protocol in 2018, the team decided to launch a governance token that would transform Uniswap into a decentralized community. ruled by its users. Now Uniswap users are not only able to provide liquidity to the decentralized exchange, but also submit governance proposals to the platform.
Risks of DAOs
DAOs are a new organizational structure challenging traditional organizations, thus attracting many regulatory, operational and legal challenges.
For example, since a DAO may have its members spread across different jurisdictions, the legal issues of dealing with cross-border contractual agreements and relationships can be quite a challenge. Additionally, since DAOs are governed using smart contracts, building consensus among DAO stakeholders can take a long time.
In addition, malicious actors can exploit possible flaws in the smart contract code to compromise the security and functionality of DAO, as was the case with DAO in 2016.
The journey ahead
While the principles behind a DAO are designed to enable ideal and completely decentralized organizational structures, the underlying technology on which DAOs are built is anything but perfect. At present, existing DAOs still rely on a certain degree of centralization for effective decision-making, especially in the early stages of DAO development.
But despite DAO’s nascent stage of development, the concept represents a governance structure that changes the world and can bring fairness and transparency to multiple sectors.
When properly executed, DAOs can also introduce decentralized forms of regulation and legal compliance, thus advancing the ethics of decentralization in several areas of society.