How DAO Frameworks Can Facilitate DeFi Governance

What Is a DAO?

A decentralized autonomous organization (DAO) is an organization that runs on a blockchain protocol fully and autonomously in accordance with rules encoded via smart contracts. By circumventing the need for human intervention or centralized coordination, DAOs are often referred to as “trustless” systems. A DAO’s trustless decision-making frameworks are generally intended to help make governance accessible to everyone, rather than a select few. More specifically, DAO governing bodies oversee the allocation of protocol resources and ensure the long-term viability of the projects they support.

While not every blockchain project utilizes a DAO, the growth of decentralized finance (DeFi) protocols has heightened the profile of blockchain governance, driving further investment. According to DeepDAO, DAOs oversaw more than $9.3 billion USD in digital assets as of August 2021. Although some DAOs operate as independent protocols, the vast majority of DAOs share the following characteristics:

1. Tokenization: Many DAOs utilize blockchain-based tokens to represent voting rights. As a result, only token holders can participate in network governance.

2. Self-enforcement: DAOs utilize smart contracts that automate organizational rules. These smart contracts can greatly reduce — or even eliminate — the need for intermediaries that might compromise decentralized decision-making.

3. Autonomous automatization: A single smart contract is only capable of handling simple transactions. DAO frameworks must define a complex set of smart contracts that enable multi-party interactions — without human involvement.

4. Decentralized infrastructure: Although DAOs utilize decentralized governance, the underlying network must also exist on distributed infrastructure. Without adequate decentralization, governance can be exploited by those with significant enough computing power.

5. Transparent data: Blockchain immutability helps DAOs function successfully as decentralized governance mechanisms. Immutability helps protocols to communicate about organizational processes and data in a transparent manner.

6. Trust mechanism: Smart contract conditions and other protocol mechanisms codify a certain degree of trust into DAOs. As a result, a variety of agreements between network stakeholders can occur without involving third parties.

Governance-Token DAOs

Some DAOs employ governance tokens, which are permissionless, mintable tokens that holders can trade on decentralized exchanges (DEXs). Other protocols issue governance tokens when users provide market liquidity or participate in network security — such as Proof-of-Work (PoW) consensus mechanisms. Regardless of how governance tokens enter circulation, they tend to provide holders with voting rights. In many cases, these tokens give holders the ability to partake in the decentralized governance of protocols or even in the governance of the tokens themselves.

MakerDAO

The Maker platform utilizes a DAO framework known as MakerDAO to pass executive votes that guide protocol development. For example, executive votes can guide changes to protocol fees or even trigger an emergency shutdown. The MKR token is widely available on decentralized exchanges, which means anyone can invest in voting power. It’s important to note that voting power is weighted, meaning those who hold the most MKR are generally the most influential.

Aragon

Aragon acts as a DAO tooling protocol for other platforms but also functions as a DAO itself. As such, any ANT token holder can participate in the voting process. Several notable projects like Aave, Curve, and Pillar utilize the Aragon framework to coordinate initiatives. In addition, many collaborative asset management projects like the BarnBridge derivatives protocol, the dHedge DeFi hedge fund, and the decentralized asset manager PieDAO also employ the Aragon framework.

Share-Based DAOs

Share-based DAOs remain relatively accessible but are less so than governance-token DAOs. Those seeking membership must submit a proposal to join the DAO and deposit value in the form of tokens — like ether (ETH) or DAI. In contrast to governance-token DAOs, share-based DAOs issue one token representing direct voting power and ownership of the capital reserve. Although share-based DAOs issue tokens, these tokens are generally redeemable for underlying capital at any time. In contrast, governance token protocols like MakerDAO allow users to exchange MKR for ETH on decentralized exchanges, but there is usually no capital reserve that MKR holders can trade against.

Share-based DAOs introduce the following novel concepts:

• RageQuitting: Members can redeem shares for capital at any time.

• Grace period: Members have a set period after each vote to RageQuit shares before new shares are issued, avoiding the dilution of shares.

• Tributes: Potential members deposit assets in the form of tokens or work in exchange for a predetermined number of shares.

• Guild kick: Through collective consensus, members can forcibly remove bad actors.

MolochDAO

The majority of share-based DAOs utilize the MolochDAO protocol, which focuses on funding Ethereum-based projects. Under this DAO framework, those seeking membership must submit a proposal that proves they possess the necessary expertise and capital to participate in decision-making. Further, on the MolochDAO platform, the group must trust these individuals to make judgments about Ethereum project grantees.

MetaCartel, a fork of Moloch, is one the most well-known projects within the MolochDAO framework. Instead of focusing on Ethereum development, MetaCartel deploys funds to projects operating on the Ethereum application layer. Since its inception, MetaCartel has invested in notable projects such as Rarible, xDai, and Opium.

DAOs Tooling Protocols

DAO tooling protocols can provide developers with access to a library of modular components. This flexibility is particularly well-suited to DeFi protocols that require scalability and highly complex blockchain governance solutions.

DAOstack

The DAOstack project is building an open-source, modular software stack for DAO development. This library consists of governance protocols and user-friendly interfaces that streamline the creation and management of DAOs. Since launching the experimental GenesisDAO, DAOstack has seen widespread adoption across several platforms. For example:

• The GnosisDAO is a collective that uses “futarchy” or prediction markets to facilitate decentralized governance. Anyone can participate in this DAO by joining the Gnosis Forum.

• The PrimeDAO PRIME pool governs Balancer liquidity pools.

• The Dxdao protocol facilitates blockchain governance platforms like the Omen prediction market and the Swampr automated market maker (AMM).

OpenLaw

The OpenLaw DAO framework guides decentralized governance on the LAO, Flamingo, and Tribute protocols. The LAO is a limited liability for-profit DAO that has previously invested in platforms like Zerion, DeBank, and several other DeFi projects. Although the Flamingo DAO operates under a similar premise, the protocol focuses on emerging non-fungible token (NFT) investment opportunities. Like other open-source DAOs, the Tribute DAO aims to simplify development through modular design while leveraging optimistic rollups (ORs) and Moloch security guarantees. This interchangeable structure allows teams to lower costs, customize the user experience, and upgrade the DAO after launch.