The Anatomy of a DAO–Understanding the inner workings of decentralized organization

1. The Anatomy of a DAO Understanding the Inner Workings of Decentralized Organizations By Ravi Chamria CEO & Co-Founder, Zeeve

2. What's Inside: Coined in the 1990s by the German computer scientist Werner Dilger, the term “DAO” was taken up two decades later by blockchain enthusiasts and developers, most notably… • Ethereum’s Vitalik Buterin, who began theorizing in 2014 about DAOs as entities featuring “automation at the centre, humans at the edges” • In 2021, the total value locked in DAO treasuries increased by a factor of 40, from $380 million to $16 billion. • But, as we will explore, the story is larger than that…

3. What we discussed The idea of decentralization & emergence of DAOs • How DAOs work • Some Interesting DAO Initiatives • The advantages and disadvantages of DAOs • Key legal and regulatory issues that DAOs face •

4. Introduction to Decentralization Decentralization is commonly referred to as the shift of power (and decision-making) from a centralized entity (person, organization, or group) to a distributed network. • Decentralized networks attempt to lower the trust that users must place in one another and prevent them from exercising power or control over one another in ways that undermine network operation. • Decentralization impacts several aspects of society, from the structure and quality of governance to national wealth, economic development, and human well-being. •

5. Key Aspects of Decentralization Enhances data reconciliation Truthless Ecosystem Improved resource distribution Minimized system vulnerability

6. Key aspects of Decentralization Trustless ecosystem: No need to know or trust others in the network; each participant has a copy of the same data. • Enhanced data reconciliation: Decentralized data storage provides real-time, shared access to data, reducing the risk of data loss or inaccuracies. • Minimized system vulnerability: Decentralization can decrease the risk of failures due to single points of weakness, like resource depletion or corruption. • Improved resource distribution: Decentralization can optimize resource allocation for better performance, consistency, and reduced risk of catastrophic failure. •

7. With the growth of the decentralized aspect of the internet, there has been an increase in discussions about DAOs. Supporters argue it is the next step toward a decentralized future but what exactly is a DAOs?

8. Emergence of DAOs: •In Colonial times, there were “joint stock corporations,” then came our modern-day corporations, then “limited liability companies” (LLCs). Now there are DAOs—“decentralized autonomous organizations. •DAOs are a new kind of entity, regarded not as “companies” but as collections of individuals organized around the decentralization, autonomous functioning, transparency, and bottom-up principles that characterize the digital universe •The first functional organization calling itself a DAO, known simply as The DAO, was created in 2016 as a platform for collective investment in projects on the Ethereum blockchain. •After raising about $150 million in value in less than a month from more than 11,000 participants, a vulnerability in the DAO’s code was exploited, and The DAO was abandoned as part of a “hard fork” in the Ethereum network to restore the funds. •Significant interest in DAOs began in 2020 again, alongside surging interest in cryptos, NFTs, and DeFi

9. Decentralized Autonomous Organizations A DAO is a group of people who agree to follow a specific set of rules to achieve a shared goal, with rules encoded through smart contracts and decision-making driven by the community. Smart Contracts Key Components Smart contracts: Algorithms that execute when specific criteria are met, governing the organization's code. • Flattened hierarchy: No single individual owns or manages the entire enterprise, unlike traditional CEO roles. • Flattened Hierarchy Community Driven Community-driven: Decisions are made collectively by the community, fostering a decentralized approach to governance. •

10. DAO Use Cases & Types: DAO Use Cases ● Grant Funding – Grant Funds to projects building on Decentralized Technologies ● Investment – Makes investments into early-stage DApps ● Protocol Governance – Perform functions such as Voting, lending-borrowing, etc. ● Services: Service DAOs act as talent allocators. They create decentralized working groups for people to work for the open internet and get paid. ● Social Activity: Here people with a common interest join together to socialize and expand their network ● Collector: Makes investment and collects NFT assets ● Media Activity: Media DAOs also recognize the importance of viewers, listeners, and readers, allowing them to become part of the decision-making process.

11. DAO Use Cases & Types: DAO Types: Media DAO Bankless DAO Social DAOs Collector DAOs Protocol DAOs Service DAOs Investment DAO Grants DAO Examples: - - Moloch DAO GitCoin DAO Metacartel DAO Orange DaO Maker DAO Aave Uniswap ENS OG Club DAO Developer DAO Metrics DAO Flamengo DAO Whale DAO Bored-Ape-Yacht- Club SuperTeam DAO Yield-Guild-Games Mirror Audius

12. Some interesting DAO Initiatives: Metaverse DAO: Offers a novel Farm-as-a-Service model. Earn crypto rewards from various blockchain networks while holding just one native token. • Aave is a DeFi system that allows you to borrow or lend cryptocurrency in return for digital asset collateral. • Blockster is a cryptocurrency-based media network that focuses on user-generated content. The platform features its token (BXR), the foundation for all advertising on content sites. • Aragon: A platform specializing in open-source tools for developing and implementing DAOs. Tools for making governance more accessible are included. • Gitcoin DAO: Provided more than $40 million in funding via hackathons, grants, & crowdfunding. Rewards grants via quadratic funding. Support by weighing the number of contributors more than the amount funded. •

13. Launching DAO Create smart contracts: Developers establish the DAO's foundation with thoroughly tested smart contracts. • After launching, they can only amend the rules specified by these contracts through the governance system. Acquire funding & implement governance: Decide on funding methods, such as token sales, and establish the governance system. • Launch on the blockchain: Once set up, the DAO goes live on the blockchain, and stakeholders make decisions collectively. • The Four-step launch of a DAO project Operations Starts: Proposals are made and members can vote on them. • The founders of the organization —individuals who developed the smart contracts — no longer have any influence over the project more than the other stakeholders.

14. Govering a DAO is a complex, dynamic process. To aid this effort, DAOs use a variety of voting processes, tools and governance procedures

15. Voting Processes Token-based quorum voting: Requires a certain number or percentage of tokens to participate for a proposal to be submitted and passed. Ex: Uniswap, Compound Delegation: Allows token holders to outsource decision-making and voting rights to trusted individuals or groups. Councils/Committees: Trusted token-holder representatives act as a quasi-board of directors, often elected via a decentralized process. Continuous approval voting: Allows new proposals to be submitted as long as they surpass the voting weight of the last successful proposal. Optimistic governance: Assumes proposals pass unless there is a strong objection, reducing the number of proposals token holders need to vote on. Quadratic voting: Counts votes based on their square root, reducing the influence of large token holders and promoting fairness. Ex: GitCoin DAO NFT-based voting: Moves towards a one-person, one-vote model by using non-fungible tokens to represent voting rights, mitigating the risk of plutocracy. Optimism is experimenting with this. • • • • • • •

16. Managing DAO: The treasury DAOs have built-in treasuries that store the funds of the organization. • DAO members can gain access to the treasury only after receiving the approval of other members. • Multisigwallets are often used for DAO treasury management. • A Multisig wallet (also a multi-signature wallet) is a wallet that requires a predetermined number of signatures to validate transactions • Unlocking a crypto multisignature wallet A well-known solution for a multi-signature wallet is Gnosis Safe. • Apart from a multi-sig wallet, there are also a range of tools required, to manage all DAO activities effectively. •

17. Managing DAOs:

18. Traditional Organizations Multilayer coordination and enforcement layers of management processes One legal entity Employment contracts salaries acts as incentive Top-Down Management ● ● ● Vs Decentralized Autonomous organisations Smart contracts are used instead of legal employment instead of legal employment contracts and governance is done via machine consensus rather than governance rukes No central legal entity Smart contracts ● ● ●

19. Key Issues for the Future of a DAO Practical Challenges Technical Risks Lower Voter Engagement Decision-making is hindered by low voter turnout (e.g., Uniswap) Vulnerabilities can lead to catastrophic losses (e.g., Badger DAO hack) Pseudonymity & Accountibility issues Power Concentration Information asymmetries and potential misuse Centralization of power undermines decentralization goals

20. Legal Challenges: Do DAOs fit within existing corporate structures, or are new legal recognitions necessary? Legal Structure Properties Corporations - Separation of ownership and operation - Centralized governance and equity shareholder requirements LLCs (Limited Liability Companies) - Flexibility in structure - Beneficial-ownership disclosure challenges Partnerships - Inflexible and inconsistent with DAO operations - Unlimited liability and lack of flexibility Foundations - Private or public charities for public interest - Varying requirements and regulations Associations - Broad classification for common objectives - Dependence on jurisdiction and regulations Trusts - Acting on behalf of beneficiaries - Recognition and tax dynamics vary by country

21. Key Issues for the Future of a DAO Legal and Regulatory Challenges Taxes and registration Legal Status Do DAOs fit within existing corporate structures, or are new legal recognitions necessary? How should DAOs handle taxation and registration requirements? Securities regulation Talent management The classification of DAO tokens and compliance with relevant regulations Addressing the challenges of retaining, recruiting, and compensating members.

22. Wrapping Up: Over the last few years, the biggest decentralized autonomous organizations have come to control enormous amounts of value: a total of more than $9 billion sits in DeFi DAO treasuries. • But It remains to be seen where DAOs will ultimately have the greatest impact. • DAOs have potential in decentralized applications, coordinating human networks, and addressing ESG challenges. • DAOs may be seen as new corporate forms, specialized implementations of traditional ones, or challenges to the notion of corporations. • The long-term importance of DAOs depends on their effectiveness in solving organizational and governance problems. •

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