The Rise of DAOs

Over the past year, we’ve begun to see increased traction surrounding distributed autonomous organizations – better known as DAOs. You can think of DAOs as a collective of like-minded individuals focused on solving a common goal. These communities leverage smart contracts to pool funds and issue new shares with a lack of hierarchy (i.e. no leaders). This system ensures no funds are being spent without the group’s consensus, presenting a new paradigm for social coordination, unlike anything we’ve seen to date.

In this week’s Token Tuesdays, we’ll be taking a look at the history of DAOs along with their recent growth in the past year. It’s important to recognize that as it currently stands, virtually all DAOs are being built on Ethereum – largely due to the decentralized nature of the underlying protocol. For DAOs to function as intended, decentralization becomes a crucial component for ensuring on-chain proposals will remain truthful in the long term.

The DAO Framework

Let’s start by looking at the standard process across virtually all DAOs in existence. Generally speaking, they work as follows:

  1. Conceive – Establish the DAO’s mission & parameters 📜

  2. Create – Deploy a contract account responsible for the creation of shares 🖨

  3. Contribute – Contribute funds (commonly WETH or DAI) to mint new shares 💰

  4. Propose – Make an offering to the DAO in exchange for funding 📝

  5. Vote – Use shares to vote on new proposals. Majority generally rules 🙋🏻‍♂️🙅🏻‍♂️

  6. Distribute – Use shares and/or bank funds to fund passed proposals 🔏

  7. Review – Stay in contact with fund recipients for progress & feedback 🔍

When it comes to differentiation, there are DAOs such as Maker which don’t “fund” proposals, but rather use shares (MKR tokens) to dictate proposals through governance polls. This is different from a DAO like MetaCartel in which proposals directly request funding in the form of shares.

To kick things off, let’s dive into the first real attempt at a community-wide DAO, The DAO, which launched back in 2016.

DAO Origins

While the notion of a distributed community sharing funds and ideas is not necessarily novel, the concept of an autonomous account being responsible for the handling and distribution of those funds and ideas certainly is.

Back in April of 2016, the DAO was launched with the mission to provide a new decentralized business model for organizing both commercial and non-profit enterprises. The idea was for anyone to be able to pitch ideas to the community in exchange for funding. DAO token holders would vote on the proposals and receive rewards if the projects turned a profit. Notable outlets such as TechCrunch called it:

“A paradigm shift in the very idea of economic organization. … It offers complete transparency, total shareholder control, unprecedented flexibility, and autonomous governance”

The DAO went on to host the biggest blockchain crowdsale to date. At its peak, 14% of all ether in existence was held in the DAO contract – a crazy notion relative to something like DeFi today which holds ~2% of all Ether in circulation. DAO tokens were freely traded on secondary exchanges like Poloniex and Kraken as everything was looking good and functioning well.

The DAO Hack

In early June, just 3 months after it’s launch, community members started vocalizing vulnerabilities surrounding recursive calls. Almost immediately after, a hacker exploiting the issues in questions as fixes were undergoing voting.

Without going into too much detail, the attacker was able to “ask” the DAO contract to give ETH back multiple times before the smart contract could update its balance. Here’s a great explainer for anyone interested in going deeper into what happened.

Upon the attack being triggered, ⅓ of the DAO funds (roughly 4% of all Ether in circulation) was siphoned and held in escrow. One of the more fascinating aspects regarding the hack was that multiple sources cited that more funds could have been taken but for some reason the attack stopping at about a third of the way there.

In the next few weeks, the community rallied together to figure out a mechanism for retrieving the stolen funds. In July of 2016, Ethereum forked and returned the stolen funds back to the original owners. This is what created Ethereum Classic as we know it today.

Upon the hack being reversed, DAO tokens became redeemable for ETH (1 ETH = 100DAO) signaling when the DAO started losing traction. By September, many exchanges were delisting DAO tokens and in the coming summer, the SEC stepped in and labeled DAO tokens a security – effectively marking it game over.

What Did We Learn?

In the wake of the meltdown, it’s easy to reflect on a few crucial aspects that led to the new design of DAOs today. First and foremost, The DAO contract was too complex – a direct reason for why vulnerabilities were able to occur.

With a super-DAO, it was much harder to reach consensus as there were so many different parties with different incentives. Parlay this with a difficult process for withdrawing funds and the notion of having shares being transferable and you effectively had a good idea with poor execution. Seeing as there were clear legal issues with the unregulated distribution of for-profit “shares” we began to enter a phase of what I like to call PTSDAO (early 2017).

Moving Ahead

Following a wild year rampant with rogue ICOs, the lack of a coordinated body to effectively vote and fund projects led to a misguided and fragmented community. It wasn’t until recently that we started taking a step back and focusing on the things blockchain was truly good for. In practice, blockchains enable:

  • Cost-effective social coordination

  • Immutable ledgers that provide a state of truth

  • Collaboration on a global scale 

  • Innovation and distributed governance

With these concepts in mind, we started to see the next wave of DAOs – highlighted by projects like Maker DAO, Aragon DAO and DAOstack just to name a few.

More recently, we’ve started to see one project – Moloch DAO start to take lead when it comes to providing a mendable framework for everyone to build off of.

Moloch DAO Rises

Launched as a side project at last year’s ETH Denver, Moloch was the first attempt at a Minimum Viable DAO. It wasn’t sexy, but it worked. It followed almost all the core tenants of the original DAO with one major change – Rage Quitting.

As you may recall from above, one of the biggest issues with the DAO was how difficult it was to redeem your funds from the bank. In the event that the DAO funded a proposal you didn’t agree with – your shares were diluted and there wasn’t much recourse.

With Moloch, the idea of a “grace period” was introduced – allowing people who didn’t agree with the outcome of a proposal a set amount of time to withdraw their shares before they were diluted.

As for the mission, Moloch was hyper-focused. Their target was funding ETH 2.0 development and seeing as it was entirely grant based, there was no legal issues due to a lack of profit expectations.

Lastly, shares were non-transferrable, more closely aligning the views and coordination of the DAO as a whole.

Within the first few months of deployment, Moloch collected over $1M of funding, including 1k ETH grants from Vitalik Buterin, Joe Lubin, Consensys and the Ethereum Foundation. You can actively monitor the amount of capital in Moloch here.

Moloch Forks

What we quickly began to see was the creation of new DAOs like MetaCartel which utilized the Moloch framework. These “forks” allowed for new communities to have different focuses while using the same processes (tribute size, voting period, grace period, proposal processing, etc.) to reach their common goal.

In the past few months, MetaCartel has quickly ascended the ranks with over 70+ unique members pooling six figures for the development of various Ethereum applications. 

We’ve seen tools like Daohaus and PokeMol make it easy for people to quickly launch a DAO in under 5 minutes.

All in all, we’ve seen 40+ unique Moloch forks with a total of over 200+ unique members. While these numbers are by no means staggering, it’s showing promising signs of traction. Funding is being dispersed to talented teams, effectively allowing the community to continue experimenting in order to find solutions that work.

What’s the Point?

Now that we’re caught up to speed, we can start touching on why the rise of DAOs is so important. First and foremost, DAOs are marking a new way for community members (both technical and non-technical) to find a unique niche that they gel with. Whether you’re a writer or a full-stack developer, DAO communities have spawned communication channels focused on the empowerment of the ecosystem as a whole.

DAOs also open the doors for users to capture value outside of tangible USD profit. In the case of Moloch and MetaCartel, share value is aggregated in terms of insights and feedback. Capital becomes social, and unique members all have an equal say in what they believe should be funded.

We’ve begun to see companies such as Stake Capital play around with a DAO model for profit-sharing and the creation of communities like Marketing DAO focused on larger marketing efforts for Ethereum.

A common goal across the board is that DAOs today are focusing on community first, profits second. Coming from the lense where everyone is eager to make a quick buck, DAOs have allowed us to build communities from the ground up – closely aligning incentives on how to build a killer product.

Looking Ahead

For our more dedicated reader’s you’ll know that we’re keen to recognize blockchain-based opportunities of all shapes and sizes. In the coming months, we believe that the evolution of DAOs will start spawning exciting for-profit opportunities, unlike anything we’ve seen in the space to date.

With the advent of revenue-generating DAOs marking new opportunities to partake in early-stage product development and equity financing, it’s likely that these new paradigms will seriously challenge the notion of how consumers engage with the companies they love.

Over the coming months, we’ll be keeping a close eye on the evolution of DAO shares and DAO-type models. While this post is largely story-oriented, you can think of this as us setting a foundation for future DAO reporting.

Until then, if you or your business are interested in learning more about the DAO model, give us a shout!

We look forward to hearing from you!

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