How Coinbase views DAO: types, defects, outlook

Original Author | Justin Mart, Connor Dempsey (Coinbase Ventures)

Original Title | “DAO: A Social Network That Can Reconnect the World”

The Internet is for communication, and DAO can be used for capital.

The emergence of the Internet and social networks has made it easier for like-minded people to communicate, regardless of geographic location. In the context of the rise of digital currency and finance, a new type of social network has now emerged that allows like-minded people not only to communicate, but also to coordinate around capital. Like social networks, these new networks are not restricted by geographic boundaries, while being able to attract large-scale participants.

Some thinkers believe that the DAO (Decentralized Autonomous Organization) can reshape the way humans organize and eventually surpass the size and scope of the world’s largest companies or even nation states.

In this article, we will explore the current DAO landscape and its future problems.

What is DAO?

DAO is the abbreviation of Decentralized Autonomous Organization, which represents the Web3 structure of an enterprise or organization. DAO allows people to focus resources on a common goal and share the value created when the goal is achieved.

Just as LLC (Limited Liability Company) has been the preferred organizational structure since the Industrial Revolution, so can the DAO of Web3. Enterprises are rooted in the traditional financial system and organized through legal contracts, while DAO runs on a public blockchain network like Ethereum, organized by tokens, and rules encoded in smart contracts.

DAOs are not restricted by geographic location, which allows them to be established quickly and attract talent from all over the world. This view was fully reflected in the recent Constitutional DAO, which raised more than $40 million from 17,000 contributors in less than a week. Unfortunately, the Constitutional DAO failed to purchase one of the originals of the U.S. Constitution .

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But DAO can do more than mobilize people from all over the world to bid for historical documents. They can change the way we organize any economic activity.

What can DAO do?

According to DeepDao’s data, there are now more than 180 DAOs managing assets of more than 10 billion U.S. dollars and attracting nearly 2 million members. The scope of DAO includes large DAOs that help manage encryption protocols, as well as small DAOs organized around investment, community, media, and philanthropy.

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Protocol DAO

In 2018, the rise of Ethereum smart contracts led to the explosive growth of many new encrypted assets and protocols. At that time, developers created protocols that allowed people to trade and borrow assets (such as Uniswap, Compound, and Aave). However, these agreements are designed to be decentralized, and how to manage the growth and evolution of the agreements has become a problem that needs to be faced at that time.

The emergence of the agreement DAO is not to leave every decision to the development team to decide, but as a way to allow users to have collective governance rights in the direction of future development. Generally, the agreement will issue governance tokens based on the user’s usage and contribution, and give users the corresponding voting rights. Any user can put forward a proposal to improve the protocol, and token holders can vote to decide whether the developer should advance the proposal. More tokens = more voting rights.

For example, Uniswap token holders are currently voting on which Layer 2 the protocol should be deployed on. In addition, token holders can also make suggestions and vote on anything from marketing plans to Uniswap’s $2 billion fund management method.

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As of December 20, the DAOs with the largest asset management scale are Uniswap, Lido, Radicle, Compound, Olympus and Aave.

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Investment / Collection DAO

The second major category is investing or collecting DAO. These DAOs allow members to pool their funds to invest in specific assets. They range from venture capital investments such as DeFi agreements or NFTs to increasingly ambitious goals such as the purchase of rare historical documents or even professional sports franchises.

Similar to other forms of crowdfunding in the crypto industry, DAO provides a fast and simple way of capital formation compared to the complicated laws associated with traditional venture capital funds. These DAOs are also more transparent than traditional venture capital funds, because members can audit all transactions on the chain.

PleasrDAO, MetaCartel Ventures, Flamingo, and Komerabi are all excellent examples of DAO pooling resources, making investment decisions together, and sharing benefits when these investments appreciate. Similarly, Syndicate is a tool for building functions that allows anyone to easily start their own investment DAO.

Social DAO

Social DAO aims to gather like-minded people in an online community to coordinate around tokens. An example is Friends With Benefits and its token FWB. To join this DAO, users must submit an application and send 75 FWB tokens (which can be understood as paying membership fees). After the application is approved, the user becomes a member of the organization and can enter a well-known developer, artist, and A community of creators and exclusive events.

By organizing around tokens, members are motivated to create a valuable community that can share insights, hold gatherings, hold grand parties, etc. For example, as more and more people join the FWB community, the tokens will appreciate simultaneously, and the price of FWB ranges from $10 to $75, so the required membership fees range from approximately $750 to $6,000.

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Some other social DAOs use NFT as a mechanism to unlock community access. For example, having the Bored Ape NFT can unlock access to Bored Ape Yacht Club’s Discord, events, airdrops, and derivatives. In this case, the perceived value of the community drives the value of the NFT.

At present, social DAOs are still in their infancy, and it takes time to verify which models are effective and which are not. But the rapid rise of these communities shows that they represent a powerful new form of social organization.

Service DAO

Service DAO looks like an online talent agency that brings people from all over the world together to build products and services. Customers can provide bonuses for specific tasks. Once the task is completed, before rewarding individual contributors, they also need to pay a portion of the fee to the DAO’s fund library. Contributors usually also receive DAO governance tokens.

Most of the early service DAOs, such as DxDAO and Raid Guild, focused on pooling talents to build a complete ecosystem. Their clients include encryption projects or agreements that require software development, graphic design, and marketing.

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Serving the DAO can reshape the way people work, allow global talents to work according to their own time, and obtain the governance rights of the DAO. Although the early service DAO focused on the encryption industry, we can imagine a scenario. When Uber is replaced by UberDAO in the future, UberDAO will pair drivers with passengers, and at the same time give drivers the right to govern the DAO (although DAO is still integrated in the traditional industry. It takes a long time).

Media DAO

Media DAO aims to reshape the way content creators, consumers and the media interact. These DAOs no longer rely on advertising-based revenue models, but instead use token incentives to reward creators and consumers.

The idea of ​​decentralized media can be traced back to the “Let’s Talk Bitcoin” podcast in 2013, but we use the popular project BanklessDAO in 2021 as an example. Bankless is a media focused on Ethereum, often producing podcasts and newsletters. Recently, the Bankless team airdropped BANK tokens to readers. In addition, readers can also contribute in Bankless, such as by creating articles, research, graphic design, article translation, marketing services, and voting on key decisions to earn more BANK.

When many people believe that the current media model based on advertising revenue has been broken, the Media DAO provides a compelling alternative to readjust the interests of readers, creators, and the media.

Funding/Charity DAO

Funding/charitable DAO, similar to investment DAO, members will pool funds and deploy them to various goals. The only difference is that the funding/charity DAO invests without expecting a financial return.

Gitcoin is the pioneer of this model, providing funding for some key open source infrastructure projects, otherwise it may be difficult for these projects to obtain development funds. Similarly, large agreements such as Uniswap, Compound, and Aave have specific DAO functions that allow community members to vote on how to allocate funds to pay developers’ fees to promote the long-term development of the agreement.

Charitable DAOs are slowly emerging now, aiming to reimagine how to make charitable donations. For example, Dream DAO issues NFTs to raise funds, and then allows NFT holders to vote on how to allocate these funds to targets (such as funding citizen leaders).

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Problems facing DAO

The increasingly diverse DAO can become the organizational structure of Web3, reshaping the way we govern, invest, work, create, and donate. At the same time, we also expect to see huge changes in the category, quantity, and quality of DAOs in the future.

But DAO still has a long way to go. Considering that the main task of the DAO is to change the lessons learned from corporate governance over hundreds of years, the difficulty is obvious. Today, we have seen 4 major flaws of DAO:

  • Lack of legal/regulatory clarity
  • Lack of effective coordination mechanism
  • Lack of infrastructure
  • Smart contracts, fragmentation and sustainability risks

Lack of legal/regulatory clarity

Traditional companies have specific office locations, and their operating rights are granted by the government and the city. Correspondingly, the government will also formulate laws and regulations that companies within its jurisdiction must comply with. Since DAOs have no physical locations and do not operate like companies, they cannot be fully integrated into the existing regulatory framework.

While protecting members from risks, the DAO must also resolve various difficult regulatory and legal issues. How to deal with DAO tokens and financial activities from a tax perspective? How should the income paid to members be reported?

In the United States, the DAO is currently facing the status of being treated as a limited liability company or general partnership in certain jurisdictions. Belonging to the former destroys the DAO’s ability to be governed by the rules in the smart contract, while belonging to the latter may make members bear the responsibility through the partnership.

The uncertainty of regulations makes it difficult for DAOs to interact with physical companies, which is a disadvantage. Although the State of Wyoming in the United States has promoted legislation that allows DAOs and traditional limited liability companies to operate on the same legal basis and allows them to be governed by their own smart contracts, this has been resisted by the United States Securities and Exchange Commission (SEC).

Although A16z and OpenLaw have put forward a clear legal framework for DAO, in the foreseeable future, DAO may have to continue to operate in a gray area.

All these uncertainties underscore the view that in the short term, DAO’s growth may be completely concentrated in the encryption industry-when DAO tries to leapfrog into traditional industries (such as UberDAO), the legal complexity will be magnified.

Lack of effective coordination mechanism

There is a reason why the company does not involve every employee in every decision, because this is a very inefficient way of working, and not everyone is qualified to participate in decision-making. The existence of a company hierarchy eliminates the need for a large number of qualified personnel to make difficult decisions together.

Many DAOs today exist under a rough governance structure, with 1 token = 1 vote. In a large DAO with thousands of token holders, this may lead to confusion in the decision-making process, and members with “ghosts” may also have excessive deviations in correct decisions. In order for the DAO to be truly effective, they must explore the governance structure in depth, such as changing to an authorization model, in which token holders can vote for qualified leaders and make key decisions in a transparent manner.

Therefore, in the short term, DAO governance is likely to remain chaotic until after trying many different models, finally find a truly effective governance model.

Lack of developed infrastructure

Just as companies enjoy a clear legal framework and efficient decision-making process, they also benefit from a highly developed operating infrastructure. However, DAO needs to build a similar infrastructure from scratch.

DAO tools for governance, reporting, fund management, and communication are still in their infancy. Fortunately, the field of DAO tools is deeply rooted in the hearts of the people, and there are currently hundreds of teams working on these deficiencies.

There are many excellent teams, which are not mentioned here, but in terms of governance tools, we are excited about Messari’s tool aggregator, which can monitor various DAOs and participate in governance through an interface.

Smart contracts, fragmentation and sustainability risks

It is difficult to discuss DAO without referring to “The DAO”. The DAO is the first DAO on Ethereum, but 40% of its funds were hacked and lost nearly 60 million U.S. dollars. As expressed by the recent USD 130 million vulnerability of BadgerDAO, the DAO treasury is still vulnerable to smart contract risks.

Some large blockchains also have a history of fragmentation caused by divisions within the community. The fork of Bitcoin and Bitcoin Cash was caused by a technical dispute over the block size. The fork between Ethereum and Ethereum Classic was caused by the disagreement on how to deal with the above-mentioned “The DAO” hacking incident. So we are likely to see a similar “split” in large DAOs in the future.

On the other hand, how sustainable is the DAO when the crypto winter comes? Will people continue to be excited about the DAO when the price of coins continues to fall, the funding base is shrinking, participation and the number of members are declining?

Reconnect the world with DAO

Although there are many obstacles to DAO, DAO represents a shift in organizational structure. If Web3 is to become the Internet collectively owned by users, then DAO will become an organizational structure that embodies governance rights.

In 2021, we have witnessed the rise of new DAO experiments and models. At the same time, the integrated tools for building DAO functions and the overall prospect of DAO are still the largest in the encryption industry.

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Picture: DAO invested by Coinbase

If this development trend continues, we may one day really see huge organizations, venture capital companies, media, and institutions not based on regulations, but on an open blockchain. Similarly, with the improvement of the encrypted user experience, DAO is likely to replace the limited liability company as the preferred form of organization in an increasingly digital world.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/how-coinbase-views-dao-types-defects-outlook/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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