Crypto DAOs and the groundswell
What can the ultimate financing structure readily unleash?
The year is 2022. The world as we know it looks quite familiar; people still work, everyone still needs food, water, and shelter, and time is marked by milestones shared on social media. Throughout the world governments still function as enforcement entities and the battle to take on corruption has spread like wildfire to every corner of the globe. The COVID-19 pandemic shocked and strained international dealings as patchwork rules were enforced and chaotic pre-existing conditions were further strained by supply chain chokeholds and reversions to conservative measures. Nonetheless, we also saw an outpouring of individual camaraderie and support for frontline defenders who put their lives on the line to try and protect the vulnerable. While business-as-usual continued for some, many more were displaced and forced into nearly unlivable conditions. It is safe to say that the global disruption will change the course of events permanently from this point forward.
While chaos is not the goal of human progress and is often a very distressing state to be in for long periods of time, it historically can present an opportunity to shift priorities in more positive and beneficial directions. Chaos is the catalyst of evolution both for life and the human condition. It has a tendency to shake up incumbent methods and fast track technological breakthroughs. So for a technology that embodies disruption, idealism, controversy, and the unknown, like cryptocurrency, this may in fact be one of those critical moments. Many companies and community entities that were building on various blockchains before the pandemic have seen a surge in both interest and investment, as well as real applied use cases. One manifestation of this collective energy and intention is the DAO.
In essence, a DAO is a collective with no centralized leadership. Each member is responsible for both governance and maintenance, as well as future directions. This is more-or-less a formalization of cryptocurrency’s founding values towards egalitarian financial literacy, transparency, and access. The goal is to combat the ills of institutional bias and disenfranchisement when decision making power in traditional sectors, such as finance, become too centralized and opaque leading to societal scale negative consequences. DAOs first began to appear in the cryptocurrency space back in 2016, when the first official organization formed on Ethereum under the name “The DAO.” This attempt was not a success and was immediately subject to disputes and security concerns. However, the idea itself stuck and is now gaining traction as its foundational methods and uses are becoming more sophisticated, refined, and viable.
A crypto DAO in the modern era looks like something like this. A group of forward-thinking people will come together digitally and decide upon agreed principles and actions they want to embody. They will then formalize those actions through the creation of smart contracts on a chosen cryptocurrency blockchain (Ethereum, Bitcoin, etc.) and smart contract language that can execute those actions reliably. Then they will broadcast that this formalization has taken place and they will seek exterior support and funding through most often an initial token sale. The first buyers will probably be people in-the-know from similar professional networks who believe in that DAO’s specific mission and the strength of their team. From this point, the DAO can then deploy to their chosen blockchain once the threshold of reasonable confidence and viability has been reached. At that stage, post-deployment, the DAO moves away from its concentrated creators and initial movers and becomes a community-owned entity that in theory is self-sustaining and self-regulating in perpetuity. Their treasuries are considered a common good and accessible through approval of their members.
Sounds ambitious right? DAOs certainly are and they are one of the strongest tools in the collective crypto toolbox to generate tangible outcomes and longer-term security for their users. The inherent flexibility in their structure, adaptability to internal priority shifts, and speed with which they can form and execute collective goals is precisely what is fueling their momentum currently. DAOs can theoretically operate without having to endure the strain of typical bureaucratic pipelines and are more global and inclusive in nature. They aim to reward their members solely through qualifications of their internal systems, and not necessarily external factors outside of member’s control. The focused, blind, and efficient approach is an ideal model for targeted, precision actions that would benefit a membership incentivized collective.
That being said, DAOs and cryptocurrency itself do not exist in a vacuum. They still exist within a world of national borders and traditional fiat currencies. There are legitimate concerns about their operations across borders and that violations of rights or the loss of resources may be difficult to enforce and punish. Likewise, how DAOs might interact with other societal service providers, such as fiat banks and corporations to pursue their collective actions is also a murky area. Within the United States, crypto assets and their rapidly evolving varieties are still not clearly defined as commodities, money, property, or securities. The potential scenarios are both manifold and complex. Given the groundswell of crypto and DAOs in the last 12 months, some institutional response and adaption is now taking place. DAOs were recently included in the Wyoming Limited Liability Act on the US state level and are allowed to operate as both “member-managed” and “algorithmically-managed” entities. Likewise, third party providers such as Syndicate are seeking to tackle this exact issue by providing a legal management service targeted specifically at DAOs wanting to be established in the United States.
As Syndicate quotes on their website:
“Syndicate makes this easy. You can generate, send, and collect signed copies all via Syndicate’s web app. Also, this is all done in a web3-native way. It doesn’t use centralized servers — so nothing (e.g., documents, PII, data, etc.) is stored on a centralized server anywhere, providing users with maximum privacy, security, and control. Latham & Watkins, a leading global law firm, advised us on the creation of these standardized legal documents for Syndicate’s Web3 Investment Clubs.”
Having introduced the evolving concept of a DAO, you might be left wondering what it is that a DAO can tangibly do and why you might want to be involved in one in the first place. Many DAOs that are forming right now in the Fintech crypto space are aiming to target a niche pain-point that either traditional finance doesn’t readily offer a solution to, or they cannot offer the same solution to as efficiently. An example in this space is Arkadiko Protocol. What they offer is a system of self-repaying loans distributed in USDA (a crypto stablecoin based on the US Dollar) in return for investment in their community through the purchase of STX tokens. The STX tokens purchased are saved in Arkadiko’s vault as collateral against the loan you take out. Once in Arkadiko’s vault, those same STX tokens are then “stacked” within the Stacks ecosystem built on Bitcoin through Proof-of-Transfer and automatically start to pay themselves off in an overall process referred to as yield farming. Yield farming is similar to interest generating in traditional finance and is gaining popularity across the entire crypto space as a way to grow long-term assets and value for buy-in. The founders of Arkadiko utilized the Clarity smart contract language to create their internal system and then audited their contracts for security vulnerabilities afterwards. They envision their use of a prominent stablecoin and leveraging their system on a technology built on Bitcoin as security measures against future price fluctuations and cyberattacks. Thus, they intend this DAO to become a serious finance tool and bastion for community activity in the future.
As stated in the conclusion of their whitepaper:
“Arkadiko aims to become the engine of the decentralized finance (DeFi) movement on the Stacks blockchain. Arkadiko is unlocking the power of the blockchain to deliver on the promise of economic empowerment today.”
If you’d like to read more about crypto DAOs and what they could potentially do for your initiatives or your community, see the resources list provided below.