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On-Chain Rulesets Enable Greater Decentralization | State of the DAOs
You're reading State of the DAOs, the high-signal low-noise newsletter for understanding DAOs.
gm and welcome to State of the DAOs!
Trust and legitimacy are two important features of DAO governance. Right now, most DAOs execute governance decisions by relying on the social layer, trusting that multis-sig signers will implement governance decisions made by the community. Smart contracts are designed to function like real world legal agreements by automatically enforcing agreed-upon rules, but right now most of the data we need to make decisions isn’t onchain and accessible to those smart contracts.
This week, Hart Lambur shows us how UMA’s Optimistic Oracle is solving this problem by bringing real world data onchain. The Optimistic Oracle gives DAOs the ability to create onchain rulesets that are enforced by smart contracts, increasing trust and legitimacy in DAOs, while paving the way towards truly decentralized decision making.
Next, we take a look at the organization behind the Impact DAO study interviews that we have been featuring the past few months. ImpactDAOs is a decentralized, collaborative, and open-source project that has been conducting an intensive and systematic study of the leading ImpactDAOs. Soon they will be publishing their findings in a book, supplemented with articles, interview summaries, and podcasts with the DAO builders themselves. The release of their book marks the start of a larger initiative to continue providing information, wisdom, and insights for new web3 participants who want to get involved in the rapidly evolving work of Impact DAOs.
Finally, we share the TL;DR on some of the best DAO ecosystem takes and thought pieces, making it easy for you to cut through the noise and learn everything you need to know about the current state of the DAOs.
On-Chain Rulesets Enable Greater Decentralization
By Hart Lambur
DAOs offer a new and accessible form of coordination on a global scale. Yet, many still consider the DAO construct intrinsically inefficient, “broken and need(ing) fixing”. One of the reasons coordination failures take place is that it is easier to default to trusting human consensus rather than blockchain consensus.
We saw how human consensus failed when the vote to reimburse Fei Protocol users was vetoed by the protocol’s founders. Months before, the Solend community voted on a proposal that invalidated a previously agreed upon proposal.
These examples reveal that groups may not necessarily be able to trust that agreed upon outcomes will be honored. There is also no guaranteed recourse or dispute process. When groups cannot trust the system they subscribe to, it leads to instability and degradation of those systems.
For DAOs to be seen as legitimate alternatives to conventional organizations, we need better systems in place to minimize trust in humans in favor of code. An on-chain ruleset will be a key enabler that embeds enforcement and recourse into code. With this, investors and DAO members will no longer need to fear their votes being vetoed by a multi-sig, and builders can lean into a truly decentralized decision-making process.
Entities can move more of the "business logic" of their organizations on-chain, and this could play a role in reducing our reliance on traditional legal agreements and the courts.
To understand why we need DAOs, it is useful to consider their predecessor, traditional organizations. Organizations such as a company, an institution, or an association are entities comprising one or more people and having a particular purpose.
Organizational contracts, decentralized or otherwise, are enforced by forms of technology. In the case of traditional organizations, they are enforced by legal recourse, a “technology” that is 2,000 years old. These organizations identify within specific legal jurisdictions and require bureaucratic processes such as drafting and passing new legislation. By contrast, DAO are governed by blockchain technology and economic incentives, a 10-year-old technology. DAOs operate globally and are permissionless. Additionally, they operate through smart contracts that are essentially digital “if-then” statements between parties that can be created by anyone.
Traditional organizations still have their purpose today. However, in an increasingly globalized and digitized world, overcoming hurdles in traditional legal systems are necessary. These include high costs of setup and the lack of standardization and access across global jurisdictions. Legal entities today also depend on the ultimate threat of coerced enforcement, whereas DAOs have the potential to succeed through the power of pure mathematics and economic incentives.
We are already seeing ways in which DAOs have the potential to alter the future of work, through being a vehicle for entrepreneurship in the digital space, or changing the VC landscape by introducing new forms of fundraising.
However, DAOs as a revolutionary model of governance will truly take off only if there are clear and reliable ways for rules to be made and enforced on chain. Unlike traditional courts of law in the physical world, there is no standard recourse or backstop to ensure that decisions made in DAOs will be enforced, except through traditional legal agreements. The legitimacy of DAOs needs to match the operational potential of decentralized governance if they are to truly scale globally and be sustainable.
DAOs Need More Trustware
One particular area of concern is being able to trust that rules or decisions made will be acted upon. With proper systems in place, smart contracts should be able to function as systems that automatically enforce agreed-upon rules.
To attempt to address this, we borrow from our friends at Metropolis the idea of shifting from socialware to trustware. Their analysis reveals that most governance in DAOs currently takes place at the social layer. For example, many DAOs use a combination of Snapshot and multi-signature wallets. While token holders execute their votes on Snapshot, there is a reliance on coordination between multisig signers to execute these decisions — a form of socialware.
The problem with socialware is that human coordination is prone to mistakes, lapses of judgement, inattention, and ignorance. Even if rules are perfectly crafted or decisions authoritatively made, they are only as good as their enforcement. Trustware involves bringing rules on chain that were defined on the social layer. This is so they can be enforced based on certain conditions through reliance on smart contracts rather than human coordination. This smart contract reliance creates a setup whereby DAO contributors “cannot lie, cheat, steal, or manipulate by breaking or bending the rules”.
Designing On-Chain Rulesets
There are two main components of an on-chain ruleset: DAO tools for “rules to be written” and oracles for “rules to be enforced”.
First, we need DAO tools that enable the creation of bespoke rules. The ideal would be to allow any DAO contributor, technical or otherwise, to draft “laws” or “rules” in plain language. This would open up possibilities for anyone to participate in governance. These rules could be as simple as giving individual contributors a budget or outlining an investment strategy that anyone can then execute. UMA Protocol is working on one such tool that is undergoing a period of testing.
With rules that have been written down, an oracle can be used to enforce them. The most common oracles today provide price data that decentralized finance processes require. However, we need more than price data in DAOs. We need real-world or “human” data, like “was contract XYZ fulfilled?”; “did 1xABC complete this task?”; “does this expense match our expense policy?”
One such oracle capable of translating real-world data to blockchains is UMA’s Optimistic Oracle (OO). With the bespoke rules in hand, the OO can be asked if certain transactions are aligned with the rules. It would automatically approve the transaction if it aligns, which is what makes the OO “optimistic.” If transactions don’t follow the rules, they are disputed and the OO is invoked to determine or verify data.
Let’s consider an example. A DAO publishes a rule that a grant will be paid if an integration with Aave is completed. If the OO verifies that the data submitted by a requestor confirms that the Aave integration is complete, then the grant should be automatically disbursed to the requestor. UMA’s OO also has a dispute resolution mechanism in place to disincentivize wrongdoing, and it only takes one honest person to dispute an error.
Take another instance: a DAO publishes a rule that an excess of 70% of votes would lead to the reimbursement of hack victims. If a vote above 70% is completed, the reimbursement will be automatically paid out after the vote (i.e. the decision cannot be vetoed afterward).
Facilitating the Next Evolution of DAOs
There is potential for DAOs to become entities that are embraced on an even greater and more global scale than they are today. A major component of that growth is having systems in place where decisions and rules coordinated in DAOs are enforceable. This means there needs to be more reliance on code, and less on human consensus. By embedding human decisions and designs into code, DAOs will truly be able to compete with the legal recourse available today in traditional organizations.
About the author: Hart Lambur is Co-Founder of Risk Labs, the foundation and team behind the UMA, Across and Outcome.Finance. Prior to this, Hart served as the Chief Executive Officer of Openfolio, a personal finance tracking platform he co-founded in 2013. He also worked for Goldman Sachs, where he provided liquidity in US Treasuries for a diverse range of clients, including central banks, money managers, and hedge funds.
⛏️ Dig into Introducing UMA’s Optimistic Oracle
Impact DAO Study
Impact DAOs Research + Book project is a decentralized, collaborative and open source project. The goal of the project is to publish a book on Impact DAOs that provides information, wisdom, and insights for new web3 entrants. The project covered ten DAOs in total, conducting three in-depth conversations per DAO. To learn more about the project visit the Gitcoin grant page. If you’d like to follow their work they’ll be regularly sharing their learnings and DAO builder interviews on ImpactDAO Media. You can also follow the hashtag @ImpactDAOs on Twitter.
Impact DAOs: A Hitchhiker’s Guide
This week we are flipping the camera 180 degrees to study ImpactDAOs, the organization behind the founder interviews on which this past series of interviews has been based.
ImpactDAOs began as an attempt to document the current state of play, by looking at a selection of up-and-running, successful examples of impact projects that are governed by a DAO.
In this article, we look at the origins, goals, and learnings of the ImpactDAOs group.
Deepa Chaudhary began in the social entrepreneur world, a realm inhabited by traditional non-profits using traditional methods to raise and deploy funds for worthy causes.
Her “green-pill” moment took place last year when the founders of Polygon kicked off a crypto-based fundraising campaign for those suffering from the effects of Covid-19 in India. This campaign saw Vitalik Buterin donate an astonishing $1bn in a single day.
What struck Deepa was not only the scale of the response but also the speed. Standard, off-chain approaches are typically mired in bureaucracy and fundraising usually takes weeks if not months.
After digging deeper into the space by writing a series of articles on Substack (CryptoGood), she realized that there was a pressing need for a more systematic review of the Impact DAO medium.
There were already numerous articles and resources (of sorts) on the subject of DAOs and how to build them. The exam question was what - if anything - would be gained by adding to this mountain of helpful advice.
While the available info was voluminous, it was also unstructured and varying in quality - hence overwhelming as well as potentially misleading.
Deepa conceived the idea of an intensive, systematic study of leading Impact DAOs. The study’s findings would be published in a book, supplemented with articles, interview summaries, and podcast talks with DAO builders themselves.
A future DAO founder - or an existing one - could use the resulting body of work for inspiration or instructional purposes.
But the greater goal was to open the door to those outside the web3 space.
The DAO structure can potentially improve how regular social impact organizations operate. Since the word ‘crypto’ has acquired unfortunate connotations that alienate many non-web3-natives, reframing web3 in DAO terms, rather than crypto terms, is important to appeal to non-believers.
With the new, expanded vision clearly too big for one person to handle, the question was how to proceed.
Luckily, the answer was close at hand: set up a DAO.
With some help from Kevin Owocki, Deepa was able to throw up a bat signal on Twitter, and attracted potential contributors.
A simple application form was enough to filter for attitude and motivation, and within a short while, a team of folks from across the web3, social impact, and media worlds was in place, and the project kicked off on Zoom.
To be persuasive and engaging, as well as informative, the book was to be story-based, rather than based on abstract principles. Hence, the first task was to select a group of mature DAOs to use as case studies.
This took the team about a month to conclude, with the final twelve falling into three groups:
Enablers: (e.g. Gitcoin) Meta-DAOs that enable other DAOs to accomplish impact-based goals.
Social Impact: (e.g. Impact Market) Focusing on empowering individuals through financial and educational assistance initiatives.
Climate: (e.g. Regen Network) Championing on-chain alternatives to achieve climate-based goals.
Progress & Learnings
The book is finally on the verge of publication, and can be accessed at the project website. In the course of getting here, the team has experienced DAO life first hand. Deepa has kept a journal of findings that can be accessed on the CryptoGood Substack. These insights include:
DAOs do need a leader at the start. But to survive, all team members must become leaders.
On Discord, try to keep the noise low and signal high. For minor collabs with teammates open a DM channel or start a thread.
Money is a great enabler but also brings new dynamics into play. Try to minimize the toxicity that money can bring.
For a deeper dive, listen to this interview with Deepa and Sardius (Justin) on the Crypto Altruism podcast.
The next chapter
The aim of the book is to help Impact DAOs evolve.
Evolution in Web3 is so fast, that a static book is unlikely to have lasting relevance. Over the course of the project, it became clear that publishing the book is the start, not the end, of the process.
To reflect the ever-changing nature of the space, the team has plans to publish a regular magazine documenting the ongoing development of the form, as new Impact DAOs mature and experiment with new ideas.
Be sure to check out the book, and stay tuned for the next chapter!
DAOs at a Glance
Hand-picked articles to understand the current state of the DAO ecosystem
In DeFi, it is possible to create a free version of a protocol. Although an open-source protocol has immense value as a public good, its ability to capture that value is limited in the long run. As with most technologies, increased competition reduces profits, and having open-source code makes it too easy to fork projects rather than paying to use them.
Protocols cannot and will not accrue value in the long run, adding a fee to a protocol isn’t providing anything in return for its users. However, people are willing to pay for support, continuous development of new features, and convenience. By providing a high quality frontend interface for protocols, protocols may be able to demand payment for its use because an ongoing value is created.
Organizations that use blockchain are usually more efficient in transferring value than organizations using traditional financial rails. Traditional financial rails are typically slower and more expensive due to bureaucracy and institutional debt.
Transactions on the blockchain are usually recorded in the exact sequence in which they occur. This creates a public ledger of events and allows humans to coordinate with complete consensus. It enables every party to have access to the same information and solves the issue of permissionless creation and deployment, creating a decentralized network that transfers value across in the globe in seconds without having to rely on trusted middlemen.
Big tech corporations have developed into strong organizations that rule unilaterally: making decisions independently from users input.
Web3 can help to circumvent this issue by granting users a platform with significant authority to set or change the rules. By doing this, Web3 provides an alternative to the accidental monarchs of the modern era - the Web 2 tech giants. Web3’s underlying technology can enable communities to govern themselves, diminishing the power of centralized organizations to control the user experience.
The potential of web3 resides in its fundamental principles of decentralization and the fact that it supports quick experiments in governance. As we learn from these experiments, we will build an increasingly effective decentralized network where all stakeholders in the ecosystem collectively rule.
🔥 and 🧊 insights from across the DAO ecosystem
Author: Owen Fernau
🔑 Insights: JokeDAO continues to mess around with innovative ways to drive governance participation.
Governance is a fundamental aspect of DAOs. Sean McCaffery (co-founder of JokeDAO) believes governance must be made fun to get people to actively participate.
JokeDAO came up with an avenue for members to decide on the best course of action and also solicit ideas through contests. In this piece, Owen walks us through how JokeDAO contests can help improve different aspects of decision-making.
With JokeDAO, communities could reach a consensus or members could drop ideas on what they’d like to see, rather than having a few core members drop yes-no votes to other members.
Author: Gaia Dadabit
🔑 Insights: Compensation is broken in DAOs and we need a map to guide contributors who are new to the space. In this article, Gaia lays out three key primitives for mapping out compensation:
The relationship between the DAO and the individuals starting their DAO journey.
How value is accounted for within the DAO.
The form in which organizations return value to contributors, whether that is through tangible compensation, or intangible benefits like reputation, education, or community belonging.
Author: Emily Furlong
🔑 Insights: Competition and cooperation are natural human instincts, they simply reflect in different situations and are influenced by different conditions. However, web3 brings about a beautiful blend of these concepts to form Coopetition. Three elements that influence coopetition in web3 are:
Technology: The technology web3 employs makes it easier for people to cooperate as it is transparent and open to all. People can see what exists and it becomes easier to build upon rather than starting all over.
Culture: The mutual trust seen amongst individuals in web3 can be attributed to a positive culture. Working together to achieve a common goal with members from different DAOs helps us build trust and cooperate better.
Business models: Using web3 technology, a business model with a positive sum ecosystem can be created, where cooperation is welcomed and thrives.
🔑 Insights: In the fight for increased voter participation, which communities win? NFT-based or token-based?
NFT-based communities are concerned with participation in governance programs that are essentially involved with NFT projects.
Token-based communities are commonly employed for DeFi protocols with exception to a public product funding protocol, Gitcoin.
Token-based spaces attract more unique voters.
NFT communities bring in more participation as a percentage of holders.
Although token-based voting has more distinct voters, the overall participation numbers are very low in relation to the total percentage of supply.
Assessing the Tornado Cash DAO Vitals
By Austin Foss
In December 2020, the Tornado Cash (TC) project launched their governance and token contracts, taking the steps to turn the informal collaborative project into a DAO.
Nearly two years later, the Tornado Cash DAO is working to continue its operations in the aftermath of the US Treasury's OFAC sanctions.
The TC DAO was very fortunate that the essential infrastructure remained functional despite almost all of the sanctioned contracts being the various pools of funds. Nothing essential to the governance of the DAO was sanctioned. TORN, the DAO's governance token contract, is not on OFAC's Specially Designated Nationals (SDN) list, along with the primary governance contract, governance vault, gas compensation vault, and the Gnosis multi-sig safe.
Reportedly, the last proposal for Snapshot was that the Governance contract would be added as a signer to the multi-sig. Possibly due to personal liability, all human signers disbanded from the safe, leaving the governance contract as the sole signer. Now any interaction with the multi-sig can be only managed through governance procedures.
Only one asset of note is still held by the multi-sig, the tornadocash.eth NFT. This NFT formerly pointed users to the decentralized front-end shared over the IPFS network. When the less decentralized pieces of infrastructure, like the default RPC providers, failed and began causing problems with the old front-end, an updated version was created and is now shared under the similarly named tornadocashcommunity.eth ENS domain.
Although the governance contract can still process proposals by voting and there is a voting page on the front-end to view these proposals, both the former TC Discourse forum and Snapshot voting platform were taken down. A replacement Discourse forum has been set up and is accepting registrations, but isn't open for business. It could still be a while before full length governance discussions can resume.
Two important lines of communication also went down, both TC's Twitter account and their Discord server. Their original Twitter account wasn't banned, but has been radio silent since the day after the sanctions dropped. Since then a new official replacement account has been created @TornadoCashOrg.
After deleting the official TC server, Discord has been allowing a phishing scam to operate under the former name and with an identical invite link to the old server. As a replacement for their Discord communication platform TC started hosting their own Matrix home server. While their Discourse forum is still a work in progress, the Matrix chat server is operational. This is likely the best place to get support for any questions about TC until the forums are fully functional.
The TC GitHub account was taken down and later restored as a public archive, but development on any piece of the project would have to continue on another platform. Shortly after the Matrix server was set up, a replacement git server was established using a Gitea implementation. Development of the project can be monitored from there as well as source code for things like their command line interface.
TC's old domain, tornado.cash, does appear on the SDN list and has been replaced with the tornadocash.community domain and website. Links to all the aforementioned replacement infrastructure can be found there; with the exception of the new front-end as it is still under construction.
From the new front-end at tornadocashcommunity.eth you can see deposits are still being made, but a more in-depth status report of TC can be found on Dune Analytics. Although it could be expected that demand would go down from the start of the bear market in May, as the charts show, statistics after August 8th show a drop in unique users per week to levels lower than when TC first launched; with approximately forty unique users a week at the time of writing.
Total ETH deposited in the pool contracts fell by more than half, from more than 200,000 ETH to holding steady at just under 90,000 ETH. Total TORN locked in the governance contract for voting fell from more than 900,000 to 540,000, now held by twenty-five individuals.
While the usage statistics are not particularly encouraging this could be partly attributed to the old, more well known, front-end no longer being functional and the replacement not being widely advertised. Legal implications certainly also weigh heavily on an individual's decision whether or not to use TC as well.
TC is definitely not back to being fully functional as a DAO, but the contributors behind TC have done a phenomenal job holding the ship together. It is still too early to estimate when things like governance voting will have a clean user experience again, but the system repairs are continuing to develop one step at a time.
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