SFM Labs - Understanding DAOs: Explanation and examples.
This Twitter Space took place on 21.02.22 - 2 PM EST 7 PM GMT 8 PM CEST
A quick disclaimer upfront: All information given in this presentation is researched and intended to be educational and illustrative to the specific topic as always. Every owner has to do their due diligence, as the owner's decisions and responsibility about any investment lie with themselves.
What is a DAO?
A DAO, or decentralized autonomous organization, is a program running on a blockchain. Its purpose is to give like-minded people a stage to work together and interact within an organization. You can become a part of a DAO by buying and holding cryptocurrency. This not only allows you to get information and an up-to-date status but also to vote - because that's what a DAO is about, the joint decision-making of a community of interest. The weight of the respective vote can be weighted here, either firmly per holder or based on the quantity, which has the holder. This is called a "token-based membership" and it is usually granted by providing liquidity.
How does a DAO work?
A DAO is structured like a company but executed differently.
A DAO has a very flat hierarchy, as there is no direct leader. Each member has a say, which is necessary when decisions or changes need to be made. While there is someone in each DAO who discloses the direction of the goal, the decision of where a DAO is trending is made by everyone.
The rules and regulations are recorded and executed there using smart contracts. The contract also holes the group's treasury, which means that - as it is defined - the money cannot be spent without the approval of the organization.
Decisions, such as voting or realization of implementations and maintenance of new rules, are decided on and then set by the DAO stakeholders so that they are firmly anchored and noted for everyone to see. The basic rules are defined once, specifications and extensions are discussed and worked out until a basic concept of a DAO for the desired interest is in place. There is no need for a third party to check the decision or extra service to check the truthfulness, since these have been predetermined by the contracts on the occasion of the decision given in each case, and the decision thus arises uniformly and linearly in the area of the vote. The DAO uses internal capital to ensure everything runs according to the planned incentives of the actors inside the organization.
Once everything is prepared in terms of rule sets, the DAO generally enters a phase of funding. Everyone inside the DAO who wishes to participate can enter it and fund the process. While it normally does not change anything in the holder's state, there may be advantages that a holder who participates in the funding may receive, such as extended voting rights or increased voting rights, but which must be determined and voted on beforehand, as these additional states must also be accepted by everyone. Voting itself or participating in votes or funds can also bring rewards such as more tokens, provided the DAO specializes in a share of votes and the resulting increased currency itself.
What is the aim of a DAO?
DAOs are organizations that can be used for hobbies, interests, associations, or even projecting,. The goal is to form a group that follows the same path by combining interests, providing liquidity, and aligning intentions. It is always first and foremost about the community of interests, not about profit.
Crowdfunding, for example, is one of the more popular DAOs. The financing of projects is already available through other platforms on the Internet such as GoFundMe, Startnext, and Crowdcircus, but here a DAO forms several advantages:
1. Controlled process with fixed rules that are unchangeable
2. Decentralized and anonymous participation, so that no personal information in any form must be provided
3. It is live - the progress is visible at any second and can be tracked in real-time
This model can also be applied to hobbies, such as sports clubs or fan clubs. Here, for example, funds can be raised to finance special advertising for a soccer club in a stadium that the holders themselves can provide, have a say in, and ultimately see.
However, decisions can also be made without funds, such as which songs are sung in the stadiums or which choreography is to be practiced on the desired match day. For this purpose, simple voting can be started, which is available for any length and with any options for all participants of the DAO and whose outcome everyone can influence.
Platforms to participate or create a DAO
There are a variety of platforms that offer the easy creation of a DAO.
Three of the many platforms:
Aragon allows you to easily create global DAOs. You can use existing templates and create them on the platform itself. To do this, you can use the Minime token from Aragon itself, as well as an ERC20 token.
Daohaus is a DAO explorer, meaning you can explore existing DAOs or create some yourself. This involves connecting a wallet to the platform, where DAOs can then be created or used. Ethereum or Polygon are offered here as blockchain for the creation of DAOs.
Tally is probably the most unspectacular-looking platform as it consists of a scroller website. However, the appearance should not distract from the fact that they use here is also done via a wallet with wallet connect and you can select or create the appropriate DAO within seconds in one of the specified networks. The advantage: Due to the very simple design, a DAO can also be created here with an ERC20 - Token or ERC721 - Token (which is an ERC-NFT-Token) by filling in a form in a few seconds without much effort.
Benefits and risks
The advantage of a DAO is that like-minded people meet in a DAO who have the same goal and intention and are therefore more willing to invest.
The common pursuit of interests with the associated anonymity helps here to speak freely and light-heartedly about facts, to discuss, and to decide in a community. Many people would like to show a share in projects or make a social commitment, but do not want to appear in public. A DAO offers a suitable opportunity for this because it allows holders to develop openly and freely without any "information constraints" and to pursue their beloved hobby or even a profession in which they would otherwise not be able to participate.
However, the disadvantage here lies in the design of a DAO. Similar to cryptocurrencies, the risk here is that there are DAOs that, due to the complexity and elaboration of the organizations, can use voting and regulations to force participants to invest and thus generate liquidity through higher participation or conditions that are not used for projecting. In addition, there is also the risk that voting can be manipulated in certain cases. The rules of the DAO are fixed, but also - if a DAO is regulated based on holding power - the power of voting can be manipulated, in which members who own more can influence provisions largely in the form of a cartel. This is because, through collusion, individual, specifically important ratios can then be decided in such a way that the few who own the most benefit the most.
As in smart contracts for cryptocurrencies, the principle applies here as well: Inform yourself beforehand and research the project well before participating to avoid possible traps.
The future of DAOs
DAOs are an opportunity for the development of thoughts and ideas within a community of interest, which provides another alternative to the existing organization on the Internet for the future.
As with NFTs, there are various approaches and areas in which DAOs can be integrated or used. The most important thing here, however, is that the purpose of DAOs is not lost.
Freedom of opinion and the implementation of desired ideas with others who follow the same mindset is precious. Bringing this in connection with money or investments enables undreamt-of possibilities to implement projects and wishes, but also to cause problems and to enrich oneself. Finally, the development of DAOs must follow the principle of meaningfulness.
Because without meaning, a DAO is worth nothing and cannot develop, because the idea drives the action, not the action the idea.
Credit: Gandalf - SafeMoon Educator