DAOs
As mentioned before, DAOs are Decentralized Autonomous Organization. The idea is creating an internet-native business that's collectively owned and managed by its members. No CEO controlling flow of business, no CMO, no CFO, no centralized board of directors. Instead, business logic and execution are baked into smart contracts to ensure streamlined deployment.
DAOs execute certain rules recorded on smart contract and kept on blockchain. Smart contract is like an agreement that hold a DAO together between different parties. It is impossible to change the code without everybody knowing, since the smart contract is transparent. Hence, the only way to change an existing smart contract is via consensus: everyone agrees with the change.
We won't be talking about the difference between traditional hierarchical here. Visit the references link to find out more.
Though, one important point to talk about is: before blockchain, forming a formal group (i.e. companies) requires requesting for a license, which is not necessarily granted permission, to be formed. This process is time consuming, expensive, complex, and might result in restrictive rules once formed.
Hierarchical vs DAOs
| DAOs | Hierarchical | |
|---|---|---|
| Structure | Flat and democratized. | Hierarchical |
| Voting | Every single change in the system requires voting by the members | Whether a system requires voting or not depends on the structure and the rules defined by the system. |
| Intermediary | Votes are tallied and the outcome implemented without a trusted intermediary. | If the voting is allowed, they need to be tallied by an intermediary. |
| Automation | Governance-related issues are handled automatically in a decentralized manner. | Requires human and centralized handling. Hence they are vulnerable to manipulation. |
| Visibility | Fully public and transparent. | Private and mostly opaque. |
Membership models in DAO
There are two models:
- Token based.
- share-based.
Token-based
Most protocols have a governance token that can be traded in various centralized and decentralized exchanges. One can earn these tokens by participating in consensus algorithm or providing liquidity. Owning these tokens gives you access to voting rights within the protocol. The more you hold, the larger your voice is within the organization. Example: MakerDAO and MKR tokens.
Share-based
More permissioned. Potential members must submit proposals to join the DAO. A participant's share represents their direct voting power. They may exit any time with a proportionate share of the treasury. MolochDAO is an example. You can't buy governance token, and you need certain expertise and capital to join such DAO.
DAO Hack of Ethereum
If you check the market, you'll see Ethereum and Ethereum Classic. They used to be one family. Let's find out the story behind it.
Back in 2016, Ethereum DAO was created, and DAO token holders can propose various projects. If a proposal receives 20% vote or more, they will get the funds to get started.
The DAO also have "split mechanism", where if members aren't happy with the projects whitelisted, they could always split away from the main DAO and create their own "child DAO". This can happens for the minority. Minority no longer have to abide to the majority.
Then a significant code vulnerability was discovered by a hacker, and on 17th June 2016, about $50 million worth of ETH was stolen by the attacker. Most of the community decided to roll back on this incident via a hard fork; while the rest was against this move.
Those that hard fork are called the Ethereum Classic (ETC), while those that move forward are called Ethereum (ETH).
NEAR Protocol and Sputnik DAO
NEAR also have its own DAO, called the Sputnik DAO. Learn more about Sputnik DAO from the references page. We won't go into specific details here.
One important to list about Sputnik DAO is the inspirations it took from DAO's "first wave" of experimentation (i.e. Ethereum and other DAOs that exist before Sputnik).
- The way the community control governance doesn't scale with the number of people involved, perhaps due to lacking of interest from members in voting; or lack of unifying, driving factor.
- It's impossible to have completely happy DAO system. Hence, the minority could potentially fork or diverge from the group to follow a new DAO system.
- A community or organization needs leadership. Hence, there must be dedicated (hardcore) members who are responsible for coordination, and potentially moderation.
- Even if community is permissionless and pseudonymous, there should be some publicly known members creating the community's core.
- The more "product" focused a decentralized community is, the more focused the leadership must be.
- Pure stake-based weighting always fails because most stakeholders are not able to or don't want to be active participants.
References
- https://learnnear.club/what-are-daos-looking-into-sputnik-dao/