What is a DAO? How to Build a DAO? (High Level)

Summary

The 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

• 😀 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.
• 🔒 The concept of DAOs solves the problem of trust, centrality, and transparency by giving power to the users through immutable and decentralized voting mechanisms.
• 🏛 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.
• 🛠️ Compound is highlighted as a precedent-setting protocol for DAOs, being a borrowing and lending application entirely built on smart contracts.
• 🗳️ 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.
• 👥 Voting mechanisms in DAOs are critical and can vary, including using ERC20 tokens, NFTs, or other methods to determine voting power and participation.
• 💡 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.
• 🤔 Proof of personhood or participation is an interesting but challenging voting method, aiming to ensure one vote per person regardless of token holdings.
• 🏦 On-chain voting involves direct interaction with smart contracts and is transparent but can be costly due to gas fees on the blockchain.
• 🌐 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.
• 🛠️ 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.