What is DAO governance?
Satoshi Nakamoto, the creator of Bitcoin (BTC), wrote the BTC white paper more than a decade ago, proposing a decentralised, peer-to-peer (P2P) system. Despite its origins as a peer-to-peer cash system, the new technology now allows users to transact while retaining data integrity and security.
The introduction of blockchain has raised worries about new governance models involving several parties. Decentralized autonomous organisations, or DAOs, were first referred to as decentralised autonomous businesses (DACs) in 2013, with cryptocurrencies functioning as shares in a DAC whose rules are specified by source code.
In theory, DAOs do not represent a single application but rather a corporation with an unusual physical structure. The idea is that it functions completely autonomously, with humans (as users) having a say in specific procedures. DAOs, unlike conditional transactional algorithms, are not constructed and maintained for profit by businesses because the users “own” them.
Decentralized governance methods include ConstitutionDAO, Ethereum Name Service DAO, Friends With Benefits DAO, and JuiceboxDAO, which will be discussed further in this article. The purpose of this article is to describe the importance of DAOs in decentralised governance, how DAO treasury management works, and different DAO models for governance decentralisation.
How does a DAO work?
Smart contracts are used to build the DAO’s rules, which are determined by a core team of community members. These smart contracts establish the foundation for the DAO’s activities. They are visible, verifiable, and publicly auditable, allowing any prospective member to fully understand how the protocol will operate at all times.
Following that, a DAO treasury is supported by issuing tokens, which grant token holders the right to vote on project governance issues. After the investment round is completed, a DAO is deployed. It is critical to note that smart contract code cannot be changed unless a consensus is obtained through member voting.
DAO governance models
DAO governance models vary, as detailed in the sections below.
ConstitutionDAO
ConstitutionDAO is a decentralised autonomous organisation (DAO) in which users can pool their resources to make purchases and share ownership of assets using cryptocurrencies such as Bitcoin (BTC) and Ether (ETH).
A core group of people spearheaded the endeavor, convincing many people to buy a copy of the United States Constitution. During the week-long process, there was a lot of discussion on Discord, but nothing was put to the vote.
The DAO came extremely close to meeting its objective. The relic fetched $43.2 million. Sotheby’s finally limited the DAO’s bid to $43 million to account for taxes and the costs of safeguarding, insuring, and relocating the Constitution. Everyone who donated after the auction received a full refund from the DAO. Those that refused refunds were given PEOPLE governance tokens in exchange for their donations.
Ethereum Name Service DAO
The epic airdrop and request for delegates launched off Ethereum Name Service (ENS) DAO’s governance decentralisation. An ENS token is provided for each registered Ethereum domain. Because some individuals received many tokens, this airdrop received a lot of attention on social media.
The clear majority of proposals begin in the forum or on Discord. They are then placed to a vote on Discord. The Constitution of the DAO was the first proposal to be voted on. This Constitution served to govern the proposed decisions and provide parameters for them.
This governance model, however, is complicated and slow. A quorum of only 1% is required for the proposals to go to implementation. By voting standards, this is a relatively low number, meaning that only a few delegates can truly move proposals forward.
The recommendations are divided into four workstreams of the DAO, which include governance discussions and improvements in meta governance, community proposals, boosting ENS adoption and establishing a dynamic ecology with the ENS Ecosystem, and suggestions for public welfare.
Each group has five stewards who serve as the organization’s operators. They are responsible for the following duties:
- managing administrative duties involved running a working group
- Creating working group goals for the term, as well as a clear road plan for achieving those goals, which should be published in the ENS governance forum within the first 30 days of the term.
- Keeping a description that summarises the working group’s focus and objectives.
- requesting DAO funding for a working group
- Approving and making funding available to working group sub-groups, workstreams, or contributors.
The future of DAOs
Decentralized finance adds value by making it easier to validate quantifiable economic decisions. It has been shown to be successful because an automated trust mechanism for simple or complicated transactions offers straightforward criteria for quantifying the benefit of the choice.
Keep in mind that the legal status of this type of business entity is often unknown and may vary depending on the jurisdiction. The Securities and Exchange Commission of the United States concluded in 2017 that DAOs could be regarded as an illegal offers of unregistered securities.
Despite this, Wyoming became the first U.S. state in 2021 to recognise DAOs as legal companies, with CryptoFed DAO being the first business company to do so. A DAO can operate as a corporation without legal status, often legally known as a general partnership.
Although this collaboration strategy may be legal, any known participants or individuals at the interface between a DAO and traditional (regulated) financial institutions may be subject to regulatory action if they violate multiple laws.