What are DAOs?
DAO stands for decentralized autonomous organization. They are also sometimes referred to as DACs or decentralized autonomous corporations. Both organizational structures are forms of investor-directed venture capital funds and charities that operate as non-centralized and non-hierarchical crowdfunding platforms controlled by the community members instead of a traditional executive and management structure.
What is the Principal-Agent Dilemma?
The principal-agent problem is a conflict in priorities between a person or group and the representative authorized to act on their behalf. An agent may operate in a way that is contrary to the best interests of the principal. This typically occurs when the agent acts solely in his/her interests and is most often represented in moral hazard factors.
Examples of Principal-Agent Problem
The most common examples of the principal-agent problem:
Shareholders (principal) vs. management (agent)
Voters (principal) vs. politicians (agent)
Financial institutions (principal) vs. rating agencies (agent)
Charity stakeholders/recipients of funds (principal) vs. charity executive (agent) vs
*** principals can include non-persons i.e., rainforest trees
What is a smart contract?
A smart contract is a self-executing computer program on a blockchain that runs a predetermined command when specific conditions are met. The contract is a collection of code (its function) and data (its state) connected to a specific address on the blockchain. A smart contract acts as a digital vending machine with logic programmed into it. X input = Y output function. Vending machines remove the need for a vendor employee - smart contracts can replace various intermediaries' roles in traditional structures.
What is a stablecoin?
A stablecoin is a digital currency or asset pegged to a "stable" reserve asset like the U.S. dollar, real estate, or gold. Stablecoins are designed to reduce volatility relative to unpegged cryptocurrencies like Bitcoin and Ethereum. Stablecoins primary functions are to:
Trade or save assets
Transfer funds cheaply and quickly
Send funds cross-border and internationally
What are the four main types of stablecoins?
1:1 reserved-based on the U.S. dollar or other fiat currency
Collateralized by another crypto, i.e., bitcoin
Back by a commodity, i.e., gold
Modified by a smart contract algorithm to maintain equilibrium
What is a governance token?
Governance tokens are cryptocurrencies that represent voting and decision-making power on a blockchain project. These tokens allow the community to propose changes to the protocol and network. The proposed protocol changes are written in code and implemented automatically if the stakeholder threshold is reached in the voting process. Maker (MKR) is one of the most popular governance tokens and allows its holders to vote on decisions about the decentralized finance (DeFi) protocol that the decentralized stablecoin DAI runs on.
What is a cryptocurrency and DAO software stack?
A software stack is a group of independent programs or components that collaborate to make an application work or accomplish a common goal in a way that ensures additional software outside of the stack is not required. It refers to any set of applications that can work as a set hierarchy. The lower levels typically interface with hardware while the upper levels perform more user-specific and facing services and applications.
What is token-based membership?
Token-based membership DAOs are usually fully permissionless. Anyone can join and use the token without restrictions and trade permissionlessly on a decentralized exchange, i.e., Uniswap or SushiSwap. Other variations are earned by providing a resource, support, or some further 'proof of contribution,' i.e., providing liquidity to a pool or staking coins to improve network resiliency and security.
MakerDAO is among the most popular examples today of a token-based membership.
What is share-based membership?
Share-based membership DAOs are more permissioned but often remain relatively open. Prospective members can submit proposals to join the DAO by performing value in the form of tokens or 'proof of contribution.' Shares represent direct voting power and ownership in the protocol and/or DAO. Members can exit at any time with their proportionate share of the treasury. Share-based DAOs are ideal for human-centric organizations like charities, worker collectives, and non-profits.
MolochDAO is among the most popular examples today of a token-based membership
What are the disadvantages and common criticisms of DAOs?
The anonymous and pseudonymous nature of DAOs opens up the possibility of using the vehicle for illegal purposes or evading regulations. Decision-making driven by consensus can lead to undesirable outcomes if the DAOs voting protocols encourage and incentivize 'lowest-common denominator' practices. DAOs can present significant legal and regulatory problems primarily surrounding jurisdiction concerns and enforcement. Its outcomes are sometimes path-dependent that can suffer from collusion, vote-buying, or become monopolies or oligopolies over time
What are the most significant risks associated with engaging with a DAO?
The biggest risks commonly associated with DAOs are usually technical vulnerabilities. These include voting manipulation, voting procedure, and cybersecurity issues. While the Ethereum main-chain has not been hacked, wallet and service providers stacked on top of the core protocol have been hacked and significant capital was lost The very nature of the DAO makes it extremely difficult to alter the construction and direction of the executed code if a bug or exploit occurs.
Who is liable for a DAO hack event and how do stakeholders remain accountable for the DAO initiatives?
Liability is on a case-by-case basis. Criminal and civil law can theoretically be pursued. Theft, fraud, tort law, and jurisdiction are all primary considerations. Legal and equitable remedies and solutions may be available, but there are no promises. In the United States and other Western countries, financial services law strongly regulates financial services software to prevent software exploits that affect consumer funds. Be sure to consult a lawyer qualified to provide legal advice in your specific jurisdiction.
Why are DAOs important and needed?
DAOs act as an effective way to work with like-minded individuals worldwide, no matter who you are or where you come from. All that is required is a smartphone and internet connection. Trust is hard to come by when dealing with people you share common interests and goals with but have not met in person and only interacted with online. It can be expensive and time-consuming to involve third parties to solve this problem. DAOs help bridge this gap by being fully transparent, publicly auditable, and hardcoded rule-based, allowing participants who have never met to collaborate efficiently.
How does a DAO operate?
In Three Main Phases
Smart contract creation
What are real use cases for DAOs?
How do I form a DAO?
Find or create an organization or community with aligned goals and interests
Establish funding goals
Choose (summon) a DAO base model and framework
Leverage the Daohaus tool
Review existing parameters
Launch your DAO
How does the DAO token price remain stable?
This process is achieved using algorithmic smart contracts and stablecoins to maintain and manage equilibrium and token supply. Algorithmic stablecoins do not use fiat or cryptocurrency as collateral. These types of stablecoins automatically reduce the number of tokens in circulation when the market spot price falls below the price of the asset or fiat currency it tracks. Suppose the price of the token exceeds the price of the asset or fiat currency it tracks. In that case, new tokens are automatically entered into the circulation to inflate and adjust the stablecoin value downward.
How does a DAO differ from an LLC?
A DAO is formally very similar to a traditional LLC. The primary difference involves establishing rules concerning how the DAO will operate at the time of formation (although this can be changed at any time) and the funding process during construction. Funding a DAO involves the creation of a token that represents and tracks investments for stakeholders. A DAO can provide all of the advantages of an LLC and a wide range of possibilities a traditional LLC is wholly incapable of providing stakeholders.
Does a DAO replace the need for a legal entity?
Does a DAO have to be a registered agent?
The law is very unclear outside of the State of Wyoming in the United States. According to Wyoming State law, DAO LLCs must maintain a registered agent in the state of Wyoming, must include DAO or LAO in the legal name, and the LLC's Articles of Organization must state that the LLC is a DAO "pursuant to W.S. 17-31-104 and must include the following text:
"The rights of members in a decentralized autonomous organization may differ materially from the rights of members in other limited liability companies. The Wyoming Decentralized Autonomous Organization Supplement, underlying smart contracts, articles of organization, an operating agreement, if applicable, of a decentralized autonomous organization may define, reduce or eliminate fiduciary duties and may restrict the transfer of ownership interests, withdrawal, or resignation from the decentralized autonomous organization, return of capital contributions and dissolution of the decentralized autonomous organization."
Future of DAO's...
The future is a DAO-centric world. Despite some horror stories online surrounding hacks and technical vulnerabilities, a DAO model is fully programmable. Like the Hydra in Greek mythology, with every problem DAO models have faced and will continue to face - the model's anti-fragility will become more resilient. The history and evolution of the Ethereum public blockchain is akin to the story of the Hydra in many ways.
The evolution of DAOs is an ongoing process. While the future appears unclear at times, there are 1,000s of brilliant individuals working to improve DAO ecosystems, and the promise of building the more beautiful world we all know is possible in our hearts and minds.