Decentralised Autonomous Organizations (DAOs): Governance in Web3

Ever since the Bitcoin whitepaper was first released back in 2008, decentralisation, especially decentralising finance, has been the goal of many individuals, institutions and organisations. 

Today, some of those organisations have transitioned into becoming Decentralised Autonomous Organisations or DAOs.

DAOs are only possible thanks to the technological innovations of web3.  

What is web3? Well, that sort of depends on who you ask, but most definitions agree that it is the next iteration of the web and utilises blockchain and cryptocurrency technology to enable decentralised finance – and other – possibilities.

Think less “sign in with Facebook” and more “connect wallet”. This has massive implications for trust, privacy, data storage and more. Web3 has matured over time, first incorporating currencies, Smart Contracts and blockchains and then evolving to include dApps (those are decentralised apps that run on blockchains or are enabled by blockchains) and NFTs, and more recently innovations such as metaverse. 

In a nutshell, the idea behind decentralisation is that community-governance is possible, through on-chain voting mechanisms and more, in which individuals or organisations that help to foster and grow blockchains – often through mining or “staking” the native currency – receive voting rights and privileges. 

This is beneficial in some respects over centralisation because it benefits the interests of the many and not the few and that only in this version of the web can true ownership of assets be achieved. 

Web 1: Read access.

Web 2: Read & Write access.

Web 3: Read, Write & Own access.

Web 4: ???

Decentralised finance (DeFi) removes powerful, centralised financial institutions like banks or governments from the ability to transact by using blockchain technology to create a peer-to-peer network.

This enables the lending, borrowing, and trading of assets without the need for a third party.

Defi has enjoyed explosive growth year on year, with the total value of assets locked into its protocols reaching over $100 million in 2020 and users steadily increasing as individuals seek to take more direct ownership of their assets:

Because all transactions are recorded on a distributed ledger called a blockchain, it offers a far greater degree of transparency over traditional or centralised finance (CeFi).

Data breaches and other cybersecurity issues like hacks are still possible, but less likely with DeFi as less data is stored. That is not to say it is without risk: crypto assets are infamously volatile, and hacks can and do happen. 

Featuring prominently on many web3 project roadmaps is the stated aspiration to become a DAO, typically moving governance from a foundation of development-related staff such as coders or project team members directly to the community. 

DAOs feature a clear lack of centralised power within their hierarchies and combine the votes of DAO members – normally holders of a governance token – with smart contract technology for on-chain decision making. 

DASH, a prominent cryptocurrency, is managed in this way. 

DAOs take on an important metaphysical and philosophical role in the space, practising what they preach and affecting some of the largest web3 projects with their decision-making, and proving the value of web3 as a concept and alternative to traditional financial models. 

Some of the largest projects in the space are currently managed by DAOs and this number will only increase with time. 

There are numerous benefits to DAOs, but they are not without challenges.

Here’s an exhaustive list of some examples. 

Benefits:

– Automation of decision-making and therefore increase to speed 

– Lack of problems arising from poor individual leaders

– Global and fully remote access 

– Access for all (who purchase tokens) 

– Scalability in both directions 

Challenges:

– As a newer form of management, could be considered “unproven”

– Inexperienced people can end up with a lot of voting power 

– The industry is semi-regulated at best

– Inaccessible to crypto-novices and lack of education around them

That last point is really important and one of the reasons the Kinesis Pro blog will be publishing lots of easy-to-understand content about all things web3! 

Dash – the Dash DAO is one of the earliest, with forum posts outlining how the group would run the popular cryptocurrency dating back to pre-2016. This DAO uses miner rewards to distribute monetary incentives to three groups of decision-makers: miners, masternode operators and other people performing important jobs. 

By holding back 10% of block rewards, Dash can finance activity without relying on external sources of funding like government initiatives or other grants. 

MakerDAO – Created in 2014 on the Ethereum blockchain, this DAO controls $DAI, a popular decentralised stablecoin that is pegged to the US dollar with the $MKR governance token. It has grown to become an ecosystem of over 400 apps and services and describes DAI as “The World’s First Unbiased Currency”. 

Uniswap – a more recent development, the developers that ran the popular exchange of the same name released their governance token in late 2020, and implemented a structure of self-sustainable community governance via the voting or delegating of voting to token holders.

Other well known DAOs include AaveDAO, Compound, Sushiswap and Curve. 

As blockchain technology matures and continues to prove its value and concept over time, it is likely that new types of governance will emerge that further hasten their mainstream appeal and adoption, especially if the ongoing sociopolitical and financial environment continues to be one of challenge for the average individual. 

This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not digital asset or cryptocurrency trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis.