Table of Content
Introduction
What is DAOs?
How does a DAOs operate?
Why DAOs
Problems with traditional investing
Solution that DAOs brings
DAOs uses cases and successful projects
DeFi
NFTs
Gaming and Entertainment
Investment opportunities and challenges
Conclusion
Key takeaways
DAOs is a powerful concept that enables Blockchain community to effortlessly vote and participating in governance activities based on smart contracts. The section alone has received enormous attention by the blockchain community and attracted billion of dollars investments recently. In this article, you will learn:
What a DAO is? How it works?
What are the benefits for providing a financial solution through DAOs?
Investment opportunities and how to participate one?
What are the future trends, challenges and issues that DAOs might have?
Introduction
In the last decade, blockchain revolution has made its way from being a press buzzword to become an inevitable technology movement of the new era. With Web 3 being a next-generation internet architecture that is being created by a diverse coalition of independent developers, NGOs and businesses that aims to transfer control from centralized internet enterprises over to ordinary internet users, countless projects has emerged from various segments like infrastructure, scaling solution, to decentralized media and gaming from the last 2 years. Among which arises the need for an organization to act as a collective to manage and represent a group of Web 3 natives. This has paved the way for a new breeds of Web 3 entity, with the so called name DAOs.
If you are a traditional investor who is interested in the emerging Web 3 space, you might have heard of DAOs, or decentralized autonomous organizations. DAOs are a new form of governance and funding for Web 3 projects, where the participants have direct control over the decisions and the resources of the organization, without intermediaries or centralized authorities.
1. What is a DAOs?
Decentralized Autonomous Organizations (DAOs) is a term first used in 2016 (TheDAO project) in the blockchain community, which refers to a collective of participants that agree upon staking some amount of their tokens in their wallet in exchange to become a part of a organization that move towards a specific goal.
A DAO, or decentralized autonomous organization, is a new type of entity that does not have a central authority or leader. Instead, it is governed by a group of members who use blockchain technology and smart contracts to make decisions and manage funds. DAOs are often created for cryptocurrency projects or social causes that require collective action and trust.
How does a DAOs operate
In a DAOs there is a Treasury where participants stake an amount of their tokens, exchange for a voting power in the way that treasury is spent based on an agreed Governance decision making protocols.
DAOs are enabled by smart contracts, which are self-executing agreements that run on a blockchain, such as Ethereum. Smart contracts allow for transparent and trustless coordination among the members of a DAO, who can vote on proposals, allocate funds, and manage the assets of the organization.
How a DAO operate? (Source: cointelegraph.com)
2. Why DAOs?
Traditionally, big institutional decisions on financial investments or strategic and political partnership deals were made by a small group of people with a lot of power. The concept of Decentralization with P2P architecture from Blockchain early stage development in the last decade was then introduced to provide a alternative to this problems. However, there was no authorized party or entity to make critical decisions such as what solution to invest in that can provide value for the Web 3 community, any development direction or which creators should be funded.
The concept of DAOs were introduced to solve all of the mentioned problems. Unlike traditional organizations, DAOs enable direct participation and decision-making by their members, eliminating the need for intermediaries. This decentralized structure not only enhances transparency but also fosters a sense of ownership and accountability among participants. DAOs possess many advantages over traditional forms of governance and funding, such as:
They are more democratic and inclusive, as anyone can join a DAO and have a say in its direction and vision.
They are more efficient and agile, as they can adapt to changing market conditions and user needs without bureaucratic delays or conflicts of interest.
They are more innovative and experimental, as they can support novel ideas and ventures that might not fit into the conventional criteria or expectations of traditional investors or regulators.
3. Big name in DAOs
Leading DAOS by Category (Source: Coinbase.com)
DAOs are not just a theoretical concept, but a practical reality. There are already hundreds of DAOs each of them has their own pre-determined goals and target customers that they are focusing on. However, based on the level of adoption, there are 3 types of DAOs that people talk about a lot based on their operating domains and sectors, such as:
DeFi (decentralized finance): DeFi has gained significant traction within the DAO ecosystem. DeFi protocols, built on blockchain networks, enable financial activities such as lending, borrowing, and trading without the need for intermediaries. The integration of DeFi and DAOs has opened up new avenues for investors to participate in the decentralized economy and earn passive income through staking and liquidity provision. Some successful projects under this categories can be named includes MakerDAO, which issues DAI, a stablecoin that maintains a 1:1 peg with the US dollar, backed by crypto assets or Uniswap, which provides a decentralized exchange for swapping any ERC-20 tokens without intermediaries or fees.
NFTs (non-fungible tokens): NFTs have also emerged as a powerful force within the DAO ecosystem. NFTs, or non-fungible tokens, are unique digital assets that can represent anything from art and music to virtual land and gaming items. The combination of NFTs and DAOs has enabled new forms of collective ownership, governance, and creativity in the web3 space. Some successful projects under this category include Loot, which is a collection of randomly generated NFTs that can be used as the basis for an open-ended fantasy game, Bored Ape Yacht Club, which is a community of NFT collectors who own digital apes with various traits and access to exclusive benefits, and MetaCartel Ventures, which is a DAO that invests in early-stage web3 projects and distributes NFTs to its members as proof of participation.
Gaming and entertainment: Another area where DAOs are making an impact is gaming. Gaming DAOs are communities of gamers who collaborate on creating, playing, and monetizing games on the blockchain. Gaming DAOs can leverage the advantages of web3 technologies such as transparency, immutability, interoperability, and composability to create more engaging and rewarding gaming experiences. Some successful projects under this category include Axie Infinity, which is a game where players breed, battle, and trade cute creatures called Axies, Reta Wars, which is a game where players join factions and fight for control over a virtual world, and The Sandbox, which is a game where players create and explore user-generated 3D worlds.
4. Investment Opportunities
2022 DAOs development by categories (by @steventey)
One theory that has gained traction in recent years is that DAOs can offer individuals a visual representation of freedom from hierarchical control. By eliminating intermediaries and replacing them with smart contracts on the blockchain, power is distributed among all participants in a fair and equitable manner. This decentralization empowers individuals to take ownership of their investments and actively participate in decision-making processes within the organization. It creates a sense of autonomy where everyone's voice matters, rather than being subject to the whims of a few central authorities.
Investment DAOs, in particular, hold great promise for disrupting traditional venture capital models. They allow anyone with internet access to invest directly in startups without the need for intermediaries like banks or angel investors. This opens up opportunities for early-stage companies that may have struggled to secure funding through conventional means. Additionally, investment DAOs provide greater transparency throughout the investment process, enabling investors to track how their funds are used and ensuring accountability within the organization.
Another way that one might invest in DAOs is through participating in LSDs or Liquid Staking Derivatives. Investors can think of these as a combination of DAOs and DeFi protocols that enables participants to stake an amount of assets to enhance the protocol in return for a dividend (up to 90% APY). Also, these LSDs will issue a 1:1 rate version of the staked token for the investors, which they can then used to participate in the solutions provided by the DeFi space like borrowing, lending, swapping or yield farming. This can help investors avoid the abundancy of traditional staking option, in which their tokens will be frozen for a period of time with no utility.
But, any coin has a tail and a head
Despite these exciting advancements, challenges remain as DAO technology continues to evolve. One key obstacle is regulatory uncertainty surrounding cryptocurrencies and blockchain-based organizations. Despite all the development and support from the community, governments around the world are grappling with how to classify and regulate these new forms of financial instruments effectively to prevent them from bad actors that might compromise these advancements for illegals activities.
Another challenge lies in the decentralized attribute. Because all of the decisions within DAOs were processed by smart contracts, the process might take a while in order to be approved and expected results can be delayed. Also, as democratic is a factor that DAOs prioritize, there will be circumstances where critical decisions that require a deep understanding and knowledge of certain domain such as technical development or risky investment deals were voted by participants who might not be qualified to comprehend
These challenges requires a deep level considerations and carefully-crafted operating protocols to be made by qualified and well-trusted individuals who are very experienced and transparent about their intention with the DAOs direction in order to make sure the decision making process will happen seamlessly, while no centralized power will be established and bad decisions will be mitigate to the lowest level.
5. Conclusion
As you can see, DAOs are revolutionizing the way Web 3 projects are governed and funded, creating new opportunities and challenges for traditional investors. We hope this blog post has given you some insights into what DAOs are and why they matter for the future of Web 3. If you want to learn more about DAOs and how to get involved in them check out more articles at https://www.homerun.club