The State & Landscape Of DAOs

 

It’s no stretch to say that Decentralised Autonomous Organisations (DAOs) are one of the most anticipated applications of blockchain technology. After all, this is the first time in history we have had the means to coordinate in a trustless and anonymous way to make collective decisions for a certain cause.

 

Before going on further, it’s necessary to state my definition of a DAO first: to me, a DAO is an organization that is run by people coordinating with each other via a trustless protocol, to make collective decisions for a certain cause.

 

Eventually, a DAO could be completely human-less, with a series of smart contracts interacting in a trustless fashion.

For example, a DAO could exist to process your insurance claim for a late flight.

 

The logic of the DAO could go like:

 

IF (Airplane) == “On Time” {THEN Do Nothing}

 

ELSE {THEN Reminsurment}

 

No humans involved, just code. No indecision, just efficiency.

 

That’s the potential promise of DAOs.

 

With that, let’s jump straight into what I believe to be the first DAO ever:

 

Bitcoin — The Original DAO

 

Yes, that’s right.

 

Bitcoin was the first DAO ever, at least in my definition. Essentially, its an organisation run by miners and full nodes, coordinating with each other via the Bitcoin protocol, to make collective decisions on what transactions are included and what their order is in the main chain of the Bitcoin blockchain. The cause for this organisation is simple: to secure the Bitcoin network and facilitate transactions on it.

 

The decisions to be made by the “Bitcoin DAO” are on the relatively low level of the blockchain infrastructure, on the blocks and transactions of the blockchain itself. We could then say that most other blockchains, like Ethereum or Zcash, are essentially DAOs as well. I

 

The incentives for participating in the “Bitcoin DAO” are mainly the mining rewards. If a miner behaves correctly and diligently produces valid blocks, it gets mining rewards for participating and contributing to the “Bitcoin DAO”. In my opinion, the incentives for participating in a DAO is key to its success. Rationally, participants would only actively contribute to a DAO if they are adequately incentivised to do so. Bitcoin has demonstrated how this simple concept has worked out so well. It’s worth to note that the incentives for contributing to the “Bitcoin DAO” are immediate. No delay, instant gratification.

Bitcoin has a high level of decentralisation. The protocol itself is fully decentralised. It can operate as long as there are participants in the network. In practice, however, we can’t say that it’s fully decentralised. At the time of writing, the top 4 mining pools have more than 50% of the hash rate, which means they could collude and perform a 51% attack to stop specific transactions or reverse their own transactions to double spend. There is also centralisation in the way new upgrades to the Bitcoin protocol are controlled by a few parties.

 

It might already be obvious to some, but it’s very hard to achieve a 100% decentralisation level in practice. Even if the power to create blocks is somehow made highly decentralised, or if protocol upgrades are done via a highly decentralised voting mechanism, security vulnerabilities in the major clients/operating systems, among other things, could still seriously harm the network. As with all other things, reality can never be as perfect as in theory, since assumptions don’t hold.

 

Regardless, Bitcoin is still one of the most beautiful things that have happened to humankind. Since the days we all lived in tribes coordinating based on familial trust, humankind has come up with so many concepts and built so many complex systems to try to coordinate among ourselves. However, Bitcoin has given birth to an entirely new way of coordinating among ourselves, where the rules are written and enforced by immutable logic. Bitcoin was the father/mother of all DAOs.

 

MakerDAO — The Administrative DAO

 

Launched on the Ethereum Mainnet on 17th Dec 2017, MakerDAO was created as a DAO to administer the running of its stable coin, Dai, whose value is stable relative to the US Dollar. Dais are generated by locking in some Ethers (or other assets in the future) into Collateralised Debt Positions (CDPs). More details about how Dai works can be read here. In short, the stability of Dai is maintained by a number of feedback mechanisms, implemented as a system of smart contracts on the blockchain.

 

The decisions to be made in MakerDAO are basically to adjust the configurations of the whole system and to trigger emergency shutdowns when necessary. The configurations to be decided on include parameters of the CDP types, what CDP types to add, as well as the set of Oracles for the Collateral Types’ price feeds, among others. The aforementioned emergency shutdown is a global settlement of the whole system, which should be triggered when there is a black swan event that threatens the proper functioning of the whole system.

 

The main incentive for the participants in MakerDAO — the MKR token holders — to participate in its governance process is the appreciation in value of the MKR token when the Dai Stablecoin System functions well and grows over time. In the Dai Stablecoin System, the CDP creators will have to pay a Stability Fees (or Dai Savings Rate when Multi-Collateral Dai is out) in MKR, which would be burned, indirectly increasing the value of MKR. Admittedly, this incentive mechanism is more of a long term process, which does not incentivise participation as much as how Bitcoin’s instant gratification does. Furthermore, there is a free-riding problem, whereby the lazy MKR token holders can still enjoy the full benefits of the appreciation in MKR value without having to spend any time or efforts in the governance process. This problem is prevalent in most DAOs.

 

On the flip side, there is a case for not having to incentivise voting that much. After all, having fewer informed and caring voters might be better than having more but less informed voters. This is another whole debate which is outside the scope of this article.

 

MakerDAO is fairly decentralised. In theory, all decisions in MakerDAO are done purely via MKR voting. However, MKR’s distribution is not the most decentralised. Moreover, it is hard to configure such a complex system purely via decentralised decision making. Many of the configuration changes, like the Stability Fees adjustments, need to be researched on and proposed by the Maker Foundation. It might be too crazy if everyone can freely choose all config values and the result would be the weighted averages.

 

That brings us to an opinion that has been raised by Vitalik, among others: fully decentralised, tightly coupled on-chain governance is overrated. The current human coordination mechanisms have evolved, via our cultures, through hundreds of thousands of years. Compared to that, the new way for decentralised human coordination via blockchain technology and DAOs is not even a new-born. Even though DAOs and decentralised voting are exciting breakthroughs, I think it might be too early to just rely on them 100% right away. A combination of on-chain voting, informal off-chain consensus and the core development team’s inputs might be more ideal, at least for now.

 

Polkadot — The meta-protocol DAO

 

As with Bitcoin, most blockchains are already DAOs, making decisions on the blocks and transactions level. However, the blockchain protocol mostly stays the same. If the protocol was to be changed, it will be via off-chain and the traditional methods of human coordination (for example, via opinion leaders debating and gaining support from the community).

 

Polkadot takes it to another level, by moving the protocol upgrade mechanisms on-chain. This means that the stakeholders in Polkadot can decide on hard-forks via on-chain voting, which could smoothly evolve Polkadot to anything possible with a protocol upgrade. Hence, Polkadot could be said to be a meta-protocol — a protocol for changing its own protocol.

 

Decisions in Polkadot are made via referenda, which could be submitted publicly or by the “council”. The council consists of a number of seats that are continuously added or removed via an election process. The council can propose referenda as well as stopping malicious or dangerous referenda. Ultimately, a referendum must pass a stake-based vote before its proposed changes are executed.

 

The incentive for the stakeholders to participate in the “Polkadot DAO”, or the governance process of Polkadot, is the appreciation of their stakes (the Dot tokens) due to a successful Polkadot network.

 

Polkadot clearly has a high level of decentralisation. Well, even the hard-forks are decided by an on-chain vote. Admittedly, the initial selection of the council might not be completely decentralised, which is necessary as many might agree. However, the mechanism of rotating the council’s seats should diffuse these bits of centralisation over time, at least in theory.

Polkadot would be one of the most notable, if not the most notable blockchain that is implementing on-chain governance for protocol upgrades.

 

It would be fun to see what Polkadot would upgrade to.

 

Final Remarks

 

With the launch of Polkadot, MolochDAO, DigixDAO, GenesisDAO, DxDAO, WBTC DAO, and PolkaDAO, among others, 2019 could be said to be the year of the DAOs. It’s great to see a variety of different concepts among these newcomers to the world of DAOs. In practice, some of these concepts might work, some might not. Regardless, it will be exciting to witness the early experimentations on the new ways of human coordination through DAOs. Let’s buckle up, it’s gonna be a fun ride. For all you know, we might be catching a glimpse of what human organisations will evolve to in the future.