What is a DAO? How to Build a DAO? (High Level)
Summary
TLDRThe video script explores Decentralized Autonomous Organizations (DAOs), explaining their governance through transparent blockchain rules and smart contracts. It delves into the DAO concept, including voting mechanisms and the challenges of trust and transparency. The Compound protocol serves as a case study for DAO operation, illustrating the proposal and voting lifecycle. The script also discusses architectural choices, trade-offs, and tools for building DAOs, emphasizing the importance of community engagement and the potential legal complexities of decentralized governance.
Takeaways
- đ Decentralized Autonomous Organizations (DAOs) are groups governed by transparent rules on a blockchain or smart contract, but the term is often overloaded and used differently by different people.
- đ The concept of DAOs solves the problem of trust, centrality, and transparency by giving power to the users through immutable and decentralized voting mechanisms.
- đ The term DAO was notably associated with 'The DAO' in 2016, which was the largest crowdfunded project at the time but also suffered a significant hack.
- đ ïž Compound is highlighted as a precedent-setting protocol for DAOs, being a borrowing and lending application entirely built on smart contracts.
- đłïž Governance in DAOs allows for proposals and voting on changes to the protocol, such as adding new tokens or adjusting parameters, with the voting process being a cornerstone of DAO operations.
- đ„ Voting mechanisms in DAOs are critical and can vary, including using ERC20 tokens, NFTs, or other methods to determine voting power and participation.
- đĄ The 'Skin in the Game' concept suggests that bad decisions by voters could result in the loss of their tokens, adding accountability to the voting process.
- đ€ Proof of personhood or participation is an interesting but challenging voting method, aiming to ensure one vote per person regardless of token holdings.
- đŠ On-chain voting involves direct interaction with smart contracts and is transparent but can be costly due to gas fees on the blockchain.
- đ Off-chain voting can reduce costs by using signed transactions stored off-chain, such as in IPFS, and then tallying votes through oracles like Chainlink.
- đ ïž Tools like Snapshot, Zodiac, Tally, and Gnosis Safe are available to facilitate DAO creation and voting processes, offering both no-code and code solutions.
Q & A
What is a DAO and why is the term considered overloaded?
-A DAO, or Decentralized Autonomous Organization, typically refers to a group governed by transparent rules on a blockchain or smart contract. The term is overloaded because it's used in various contexts: some consider Bitcoin a DAO due to miner decision-making power, others insist DAOs must use transparent smart contracts with ingrained rules, and some use DAO as a buzzword for any organization to gain attention.
What was the significance of the DAO in 2016?
-The DAO in 2016 was an implementation of a Decentralized Autonomous Organization that set a record for the largest crowdfunded project at the time. However, it was also notorious for being the victim of the largest hack in the crypto space during that period.
How does the concept of decentralized governance in a DAO solve traditional problems of trust and transparency?
-Decentralized governance in a DAO allows users to have voting power over the organization's decisions, with rules that are immutable, transparent, and decentralized. This approach eliminates the need for trust in a central authority and instead empowers users, making the decision-making process more open and accountable.
What is the Compound protocol and how does it relate to DAOs?
-The Compound protocol is a borrowing and lending application built on smart contracts. It uses a DAO for governance, allowing token holders to vote on proposals to make changes to the protocol, such as adding new tokens or adjusting interest rates, demonstrating a practical application of DAO principles.
What is the process for creating and executing a proposal in a DAO governed by the Compound protocol?
-A proposal in a DAO like Compound starts with a member creating a proposal transaction specifying the changes they want to make. After a delay, the proposal becomes active, and members can vote on it. If it passes, it enters a queued stage before being executed by a member calling the 'execute' function on the governance contract.
Why might a DAO need a voting mechanism?
-A DAO needs a voting mechanism to allow its participants to engage in decision-making processes, such as updating protocol rules or adding new features. This is essential for the protocol to evolve and adapt to changing needs or conditions.
What are some of the challenges with using ERC20 tokens for voting power in a DAO?
-Using ERC20 tokens for voting power can lead to an unfair distribution of influence, as those with more tokens effectively have more voting power. This could result in decisions that primarily benefit the wealthy rather than the broader community.
What is the 'skin in the game' concept in the context of DAO voting mechanisms?
-The 'skin in the game' concept means that if a decision leads to a negative outcome for the DAO, those who voted for it could face penalties, such as losing some of their tokens. This encourages voters to make decisions that are in the best interest of the DAO.
What is the potential issue with using proof of personhood or participation in DAO voting?
-The main issue with proof of personhood or participation is ensuring that one person cannot manipulate the system to have multiple votes. This requires a reliable method to verify that each vote corresponds to a unique individual, which is a challenge to implement in a decentralized system.
What are some of the tools and platforms available for building and managing a DAO?
-Tools like Aragon, Colony, and DAOhaus provide no-code solutions for building and managing DAOs. For more granular control, developers can use platforms like OpenZeppelin for smart contract development, Snapshot for off-chain voting, and Gnosis Safe for multi-sig wallet functionalities.
What are some of the legal considerations for DAOs?
-The legal status of DAOs is still somewhat ambiguous, as they do not fit neatly into traditional corporate structures. However, some jurisdictions, like Wyoming in the United States, have begun to legally recognize DAOs, offering a potential path for DAOs to operate within a legal framework.
Outlines
đ Understanding Decentralized Autonomous Organizations (DAOs)
This paragraph introduces the concept of DAOs, which are groups governed by transparent rules on a blockchain or smart contract. It discusses the varying interpretations of what constitutes a DAO, from Bitcoin miners' choices to the use of smart contracts with ingrained rules. The paragraph also references the 2016 DAO hack and emphasizes the importance of trust, centrality, and transparency in DAO governance. The author promises a deep dive into the Compound protocol, which serves as a precedent for DAOs, and hints at a future tutorial for developers interested in building DAOs.
đ ïž Exploring the Compound Protocol and DAO Governance Lifecycle
The second paragraph delves into the Compound protocol, a borrowing and lending application built on smart contracts. It explains the governance aspect, where users can propose changes like adding new tokens or adjusting interest rates. The paragraph outlines the process of creating, voting on, and executing proposals within the Compound governance system. It also touches on the importance of community discussion platforms like Discourse and snapshot voting tools for gauging community sentiment before official voting.
đłïž The Mechanics of Voting in DAOs and Architectural Considerations
This paragraph discusses the critical role of voting in DAOs and the various methods used to determine voting power. It contrasts using ERC20 tokens or NFTs, which may favor the wealthy, with alternative methods like 'skin in the game,' where bad decisions can lead to token loss, and 'proof of personhood' or 'participation,' which aims for one vote per person. The author also differentiates between on-chain and off-chain voting, highlighting the cost and transparency trade-offs, and mentions tools like Snapshot and Gnosis Safe that facilitate DAO governance.
đĄïž Legality and Tools for Building and Managing DAOs
The final paragraph addresses the legal and practical aspects of DAOs, questioning how they should be regulated and who is accountable for their actions. It mentions Wyoming's legal recognition of DAOs and suggests that building a DAO requires knowledge of various tools and platforms. The author lists no-code solutions like DAO Stack, Aragon, and DAO House, as well as more technical solutions like Snapshot and Tally. The paragraph concludes with a call to action for developers to build DAOs and a teaser for upcoming tutorial videos.
Mindmap
Keywords
đĄDAO (Decentralized Autonomous Organization)
đĄSmart Contracts
đĄVoting Mechanism
đĄGovernance
đĄCompound Protocol
đĄProposals
đĄOn-chain Voting
đĄOff-chain Voting
đĄQuadratic Voting
đĄSnapshot
đĄSkin in the Game
đĄProof of Personhood
đĄMulti-sig Wallet
đĄLegality
Highlights
DAOs, or Decentralized Autonomous Organizations, are groups governed by transparent rules on a blockchain or smart contract.
The term DAO is used in various ways, causing confusion and debate within the community.
The 2016 DAO hack highlighted the risks and challenges associated with DAOs.
DAOs aim to solve issues of trust, centrality, and transparency by giving users voting power.
The Compound protocol serves as a borrowing and lending application built on smart contracts, with governance as a key feature.
Governance proposals in DAOs can include adding new tokens or changing parameters, with a transparent voting process.
Proposals in DAOs are created and voted on by the community, with a minimum delay before execution.
The voting process in DAOs can be influenced by the use of ERC20 tokens or NFTs, which may favor wealthier participants.
Skin in the game is a voting mechanism where participants are held accountable for bad decisions, with token loss as a penalty.
Proof of personhood or participation is a proposed voting method to ensure fair representation, avoiding vote manipulation.
On-chain voting is straightforward but can be costly due to gas fees, impacting community participation.
Off-chain voting can reduce costs by using decentralized databases and oracles for vote tallying.
Snapshot is a popular tool for off-chain voting in DAOs, allowing for sentiment analysis and execution of votes.
Gnosis Safe is a multi-sig wallet that can be used in DAOs for voting, despite adding a centrality component.
Legal recognition of DAOs is possible in certain jurisdictions like Wyoming, offering a path for formal DAO establishment.
The future of DAOs involves exploring various voting mechanisms and tools to build and manage decentralized governance effectively.
Upcoming tutorials will guide developers through building DAOs from scratch, providing practical knowledge for implementation.
Transcripts
now dao's or decentralized autonomous
organizations is a bit of an overloaded
term but it typically describes any
group that is governed by a transparent
set of rules found on a blockchain or
smart contract and i say overloaded
because some people say bitcoin is down
because the miners could choose whether
or not to upgrade their software other
people think that daos must use
transparent smart contracts which have
the rules ingrained right into them and
then other people think dao is just a
buzzword so they just
slap the name really onto any
organization so that they can get some
clout and this makes for sad patrick
and this is not to be confused with the
dao which was an implementation of a dao
back in 2016 which set the record for
the largest hack at that time so there's
a lot of different ways to think about
it and the dow term is used in a lot of
different ways but in essence imagine if
all the users of google were given
voting power into what google should do
next and the rules of the voting was
immutable transparent and decentralized
this solves an age-old problem of trust
centrality and transparency and giving
the power to the users of different
protocols and applications instead of
everything happening behind closed doors
and this voting piece is a cornerstone
of how these operate this decentralized
governance if you will and it can be
summarized by company or organization
operated exclusively through code
and to really understand all this we're
going to look under the hood of the
protocol that's setting the precedent
for all other dows in compound then once
we look at compound we'll understand
what goes into building one of these and
all the trade-offs all the different
architectural choices mean for your
group and then in my next video i'm
gonna have a full code along tutorial
for developers looking to build one of
these themselves but be absolutely sure
to watch the rest of this video because
it's going to give you all the
architectural fundamentals so you can
make intelligent decisions when you get
to that section and be sure that you and
your dow friends smash the like and
subscribe button so we can keep giving
you the best engineer first content on
the planet when it comes to smart
contracts let's get into it
so here we have the compound protocol
it's a borrowing and lending application
that allows users to borrow and lend
their assets and everything about this
application is built in smart contracts
now oftentimes they're going to want to
do a lot of new things maybe they want
to add a new token to allow borrowing
and lending maybe they're going to want
to change
some of the apy parameters maybe they're
going to want to block certain coins
there's a lot of different things that
they might want to do so that's where
we're going to go ahead to
governance this is where you can find a
user interface for a list of all the
proposals and all the different ballots
that came to be so here's a list of some
of the governance proposals that this
protocol has actually been making to
improve and let's look at one of these
proposals that's currently actually in
process so if we click on the proposal
we can actually see everything about
this proposal who voted for who voted
against and the proposal history here
now the first thing to one of these
proposals is somebody has to actually
create the proposal in a proposed
transaction and we actually see that
proposed transaction
right here if we click on this
and we scroll down we can actually see
the exact parameters they used to make
this proposal let's go ahead and decode
the input data and we can see this is
exactly what this proposal looks like
the way that they're typically divided
is they have a list of addresses and a
list of functions to call on those
addresses and then obviously the
parameters to pass those addresses
so this proposal is saying hey i would
like to call support market on this
address
set reserve factor on this address here
the parameters we're going to pass
they're obviously encoded with bytes
and then here's the description string
of what this is doing and why we're
actually doing this the reason we have
to do this proposal governance process
is that these contracts likely have
access controls where only the owner of
these contracts can actually call these
two functions and the owner of these two
contracts is likely going to be this
governance down and values to zero just
means that we're not going to send any
eth along with these transactions once a
proposal has been created after a short
delay it becomes active and this is when
people can actually start voting on them
this delay between a proposal and an
active vote can be changed or modified
depending on your doubt then people have
some time to start voting on them and if
it passes which this one overwhelmingly
did it reaches succeeded if we click on
this transaction again
and we go to the compound governance
contract
and we scroll down to contract
right as proxy
we can actually see
the exact function that the people call
to vote namely cast by vote
cast vote by signature and cast vote
with reason we'll talk a little bit
about the exact differences between
these in our next video but these are
the functions that they're actually
calling
and if you go to the compound app
and we go over to vote
this is a user interface you can
actually vote through to make it easier
if you're not as tech savvy so you can
vote right through this
app.compound.finance
or you can just send the transaction
yourself
once all those votes happen
it reaches this queued stage
now what does cued mean
well before a proposal actually becomes
active there's a minimum delay between a
proposal passing and a proposal being
executed
so somebody has to call this queued
function and it only can be called if a
vote passes and it says okay that
proposal id has been queued and we're
going to execute it
soon now if we go to a different
proposal like this one for example we
can see it has been executed we can see
somebody called this executed function
and they executed proposal 82. so this
is going to be a full example of the
life cycle of a proposal going through
this process now there are a couple that
even failed a whole bunch of people
voted against this and if you scroll
down you can see it was created it was
active and the majority of people voted
against so that's where it stops now
oftentimes just putting one of these
proposals through isn't enough to really
garner some votes for it you generally
want a forum or some type of discussion
place to talk about these proposals and
why you like them or don't like them
oftentimes a discourse is one of the
main places that people are going to
argue for why something is good or why
something is bad so people can vote on
these changes and again snapshot might
be one of these tools that you use to
figure out if your community even wants
something before it even goes to vote
you could join one of these and with
your tokens actually vote on things
without them being executed just to get
the sentiment or like i said before you
could build your protocol in a way that
snapshot actually helps you with the
voting process all right now you've seen
the protocol that has been influencing
all the other dowels on how to vote now
you know
now that we know what a dell looks like
let's talk about the architecture and
tools that go into building one of these
and additionally the trade-offs that
they have and the first thing to talk
about here is going to be the voting
mechanism now voting and decentralized
governance is critical to these dows
because sometimes they do need to update
and change to keep with the times not
all protocols need to have a dow but
those that do need to have a doubt need
a way for participants to engage this is
one of the most important questions to
ask and to tell your communities how do
i participate how do i engage in this
doubt how do i help make decisions and
you'll find this is a bit of a tricky
problem to solve now an easy approach to
this problem is going to be using an
erc20 or an nft token as voting power
similar to what we saw with compound use
the comp token to vote for different
proposals seems simple enough right boom
problem solved hooray now this actually
might be the right approach for certain
dows but it also runs the risk of
actually being less fair because when
you tokenize the voting power you're
essentially auctioning off this voting
power to whoever's got the deepest
pockets whoever has the most money gets
to pick the changes so if it's only the
rich people who get the vote then it's
highly likely that all the changes in
the protocol are going to benefit
the rich which doesn't really seem like
that great of an improvement over our
current world nfts are interesting
because they have this non-fungible
component but yet even they still run
into this issue additionally if you buy
a whole bunch of votes you make a bad
decision and then sell all your votes
you as an individual don't really get
punished you just punish the group as a
whole but you being malicious you can
get away with pretty scot-free now again
this voting mechanism is going to be
correct for some groups but for other
groups
maybe not it really just depends on what
your dow and community setup is going to
look like now the next one we're going
to talk about is skin in the game now
vitalik has actually written a lot about
this and i highly recommend you read his
article link in the description to see
that the skin in the game method means
that whenever you make a decision your
vote is recorded and if that decision
leads to a bad outcome your tokens
are axed do you get punished for making
evil or bad decisions for your dow and
your protocol i like this mentality
because even if you buy a ton of tokens
and decide to be ill with it you can be
held accountable for your bad decisions
now the hardest part about this though
is going to be how do we decide as a
community what is a bad outcome how do
we actually punish these people and
that's easy because the answer
is i'm not sure now the third method of
this voting mechanism is probably one of
the most interesting ones but also the
hardest ones to implement and this is
proof of personhood or participation
imagine that all users of the compound
protocol were given a single vote simply
because they used the protocol and even
if they had a thousand wallets that used
the protocol one human being means one
vote this would be amazing and a far
more fair implementation where votes
couldn't actually just be bought the
issue however comes in something known
as civil resistance how can we be sure
that it's one vote equals one
participant and not one participant
pretending to be thousands of different
people so they get more votes this
method hasn't really been solved yet but
i'm willing to bet some very clever
engineer will do some amazing chain link
integration because proof of personhood
is basically just off chain data that
can be delivered on chain and that's
exactly where chain link shines now as
you can see all these methods and even
more that you probably think of aren't
that far-fetched and we actually see
these exact same methods happening in
the real world proof of personhood or
proof of participation might just be the
exact same as kind of the regular
government voting that we see every day
in the united states at least one person
gets to vote for one president you can't
go around making a whole bunch of fake
people and voting for president but in
companies the erc20 voting standard kind
of applies the more shares of a company
you have maybe the more voting power you
have in that company so we can draw
parallels between the real world and how
voting and governance is going to work
in our smart contracts and in fact you
should draw parallels and look for
inspiration from the web 2 space now
when it comes to implementation of the
voting i put them into two categories on
on-chain voting and off-chain voting
on-chain voting is exactly what we saw
with compound there's a smart contract
on chain you're a voter you call some
function called vote with your meta mask
your ledger or whatever
send a transaction and boom you voted
congrats you can wear your little
sticker now call that function and you
send a transaction
you send a transaction hmm
what do transactions use that are kind
of annoying and kind of costly uh
oh that's right gas imagine you have 10
000 people in your community and it
costs 100 to vote per person you're now
costing your community one million
dollars anytime you want to change
anything this is obviously insane and
not very sustainable for your community
the pro here is that the architecture is
really easy everything's gonna be
transparent everything's gonna be on
chain and that's really good but yes the
con is that you're going to break the
bank account for a lot of people
potentially now there are a lot of
variations of this to help solve some of
these problems especially the gas
problem one of the ones that i'm
incredibly excited for is this one
called governor c where they use some
random sampling to do some quadratic
voting to help reduce costs while
increasing civil resistance you want to
learn more about that one too be sure to
read about it in the description so on
chain voting is the simplest one here
but let's talk about
off chain voting
how could you possibly vote off chain in
a decentralized context relax relax you
can vote off chain and still have it be
100 decentralized you can actually sign
a transaction and sign a vote without
actually sending to a blockchain and
therefore without actually spending any
gas instead what you can do is send that
signed transaction to a decentralized
database like ipfs count up all the
votes in ipfs and then when time comes
deliver the result of that data through
something like an oracle like chain link
to the blockchain all in a single
transaction alternatively what you could
do is you could replay all these signed
transactions in a single transaction to
save gas this can reduce the voting
costs by up to 99
right now this is an implementation and
one of the most popular ways to do this
is through snapshot and i'm just dying
for someone to make a chain link
integration because it's going to be so
much safer more secure and better and
blah blah blah dying for it this is your
call to action go build this thing this
option voting mechanism obviously saves
a ton of gas to the community and can be
a more efficient way to store these
transactions anyways however it needs to
be implemented very carefully if you run
your entire dow through a centralized
oracle you are essentially reintroducing
a centralized intermediary and ruining
the decentrality of your application so
don't do that and if you made it to this
point of the video give yourself a
little pat on the back you're doing
fantastic learning is fantastic like i
said i have a video coming out after
this one it's going to show you end to
end how to build one of these from
scratch let's learn about some of the
tools that you can use to help get you
up to speed quicker now there are a
number of no code solutions that can go
into building one of these dows dow
stack aragon
just kidding this is aragon colony and
dao house are all alternatives that can
actually help you with the op side of
running a dow and building a doubt
however if you want more granular
control and you don't want to have to
pay any fees associated with these
protocols you might want to do it from
scratch now let's talk about some of the
more cody solutions that you can use
snapshot is one of the most popular
tools out there for both getting the
sentiment of a dow and actually
performing that execution users can vote
through this protocol with their actual
tokens those transactions get stored in
ipfs but none of it actually gets
executed unless the dow chooses to so
this can be a great way to get a feel
for what your tao wants to do and
optionally and you can send the
transactions and execute the votes as
well i highly recommend checking out
zodiac which is a suite of database
tools for you to implement into your
dials as well tally is another one of
these uis that allow people to see and
actually vote and interact with these
smart contracts through user interface
for those of you who don't know about
gnosis safe you absolutely should nosa
safe is a multi-sig wallet and the
reason that i put this on the list even
though it's adds kind of this centrality
component is that most dows in the
beginning are probably going to start
with some type of centrality it's much
easier to be fast when you don't have
thousands of people to wait for a vote
and in the beginning any protocol is
going to be centralized to some degree
anyways using a multi-sig where voting
happens through only a few key members
can be good in the beginning for your
doubts and often emergencies as well but
just keep in mind when you add one of
these you are adding this level of
centrality and then of course opens up
and contracts we love open zipping
contracts these are the contracts that
we're going to be basing our dow code
along on all right so that's all the
tools that's the architecture one more
thing before i let you go legality the
future of daos is interesting for all
these reasons we just talked about but
especially on a legal front does it make
sense for a dow to live by the same
regulation as another company how would
you even force a dow to do something
you'd have to force them to all vote a
certain way if the government tells you
to
it's it's a little gray it's hard to
nail down who to even keep accountable
for these daos in the united states at
least you can actually form your own dow
and have it legally recognized in the
state of wyoming this is something i
want to do so we'll just have to see
what happens there
at this point you have been injected
with all the dow knowledge you need to
succeed and thrive with this new amazing
technology and these new amazing
concepts and it's time to build baby be
sure to watch my next video where we're
going to take you step by step in
building these in my code along
tutorials
[Music]
you
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