Decentralized Autonomous Organization for a Social Platform
Imagine an organizational structure that reduced costs and increased fairness. One that addresses the weaknesses of other traditional organizational structures, decreases the reliance on middlemen in a business, and has the single focus to protect the organization itself.
Now imagine a group of people scattered across the globe who have never met, guiding that organization in establishing rules and making decisions, autonomously, on the operation of an organization instead of unaligned stakeholder interests. This is a DAO.
What is a DAO?
A decentralized autonomous organization (DAO) is an entity run by a set of rules embedded into code and automated through the use of smart contracts. DAOs are typically built in open-source environments and are fully autonomous and transparent. With no central leadership or control, the decisions are made by a community. The community will typically own a specific token that will be used to vote on proposals and influence how the organization operates.
There are no employees or executives in a DAO but they do have built-in blockchain-based treasuries, governed by the community, that can be audited.
The use of open-source technologies allows for the code itself to be audited by the community or anyone else with interest.
How does it work?
Typically a DAO launch includes the creation of smart contracts by a developer or group of developers. Any changes to the smart contracts are possible but only through the successful vote by the governance system.
Once the smart contracts are in place, the DAO must set up governance and funding. Typically tokens are used to raise funds and distribute voting rights. When deployed on the blockchain, the community will vote on all matters related to the organization.
Benefits of the DAO Structure
As with any new technology, there are several pros and cons to using a DAO. The benefits of using a DAO are in line with many of the benefits of decentralized technology. The trust lies in the code and not in people. That being said one does have to trust the code and to address that DAOs are typically open-source and do have the ability to be tested and audited.
All community proposals and votes are transparent, recorded to a blockchain, and verifiable. Any disputes that may arise are settled through the voting system, following pre-written rules outlined in the smart contract.
Another positive of operating a DAO is the pool of potential innovators. With so many members from all walks of life, who can propose and vote on matters affecting the organization, novel ideas can improve the organization in ways not yet considered. The DAO gives the business the ability to test the value of these ideas within a community of stakeholders who have a common interest in the DAO’s success.
Finally, although regulatory uncertainty still exists, DAOs allow stakeholders to pool funds sharing in the risks and profits for a specific investment.
Challenges Facing DAOs
Decentralized autonomous organizations aren’t perfect and have been met with some criticism. In an opinion piece at Coindesk Bailey Reutzel argues that DAOs are nothing more than “income-based reputation” and equates DAOs to the “current political system that many find appalling as the income gap widens”. He contends that those with more money and more tokens get more votes. He goes on to point out areas of conflicts of interest. For instance, creators of projects can themselves purchase governance tokens and elevate their own proposals or elevate the price of the token over its utility. He argues that putting a problem on a blockchain or into a decentralized system doesn’t necessarily provide a solution.
Regardless of if one agrees or not, DAOs do have some issues in the current environment.
The organizational method is still ironing out the kinks. Most incentive designs are lacking and they are still met with technical limitations.
Even after the infamous The DAO hack, security concerns persist as flaws in smart contracts can be hard to fix. Any changes to smart contracts need to be voted on by the stakeholders. Logistically it is difficult to get everyone online for system critical votes in the event of a security hole leaving the system vulnerable.
Like in crypto, regulatory uncertainty persists but things are heading in the right direction with legislators providing more clarity. Wyoming lawmakers recently welcomed the approval of Bill 38. Effective July 1st of this year Wyoming recognized DAOs as an LLC. Wyoming Senator, Chris Rothfuss (D-Laramie) told Coindesk, “A lot of our work in Wyoming on blockchain and fintech governance has been focused on providing legal clarity where ambiguity exists before the court needs to decisively weigh in.”
Despite Wyoming’s advancements in DAO regulations, laws vary across jurisdictions which can complicate any legal issues that may arise.
Other complaints of DAOs include barriers to voting for non-crypto stakeholders who are uncomfortable in the ecosystem and ill-informed token-holders casting votes.
Who is using a DAO Structure?
Most consider Bitcoin to be the first fully functional DAO. Bitcoin has all the natural markers for a DAO. It has programmed rules, functions autonomously, and is coordinated through a consensus protocols. Now, more advanced DAOs running atop Ethereum are gaining more popularity.
A decentralized autonomous organization is prime for a variety of use cases. Venture capitalists, charitable organizations, stablecoins, and decentralized finance (DeFi) are some areas where a DAO is in use or possible.
Long-time decentralization advocate Eric Vorhees recently transitioned Shapeshift from being a corporate entity with investors, an exec team, and an HR department to operating as a DAO. The reason, he said in a tweet thread in August, was simple. “Centralization has become a liability against the realization of our vision.” That vision includes an “immutable, borderless financial system that can only occur upon open, decentralized protocols.”
The new Shapeshift DAO has no CEO or employees. No board or shareholders. Not even an office. Instead, they have a “pure technology in the service of users: an open-source, non-custodial, cross-chain crypto interface for all mankind.”
Other DAOs include and by no means are limited to:
- MakerDAO - Creator of the DAI stablecoin
- Rarible - An NFT platform
- Uniswap - A decentralized exchange
- Aave - Open source DeFi protocol
- Aragon - a DAO that provides tools to create other DAO(s).
- Den.Social - Social platform and content marketplace
DAO Day at the Wyoming Blockchain Stampede
Last week Joe Roets, Founder and Architect of Dragonchain, was invited to participate in DAO Day at the Wyoming Blockchain Stampede. One may be wondering why Dragonchain was asked to talk about DAOs. Dragonchain doesn’t even operate as a DAO. But, Dragonchain spin-off Den.social’s governance board operates as a DAO.
A hybrid DAO is a unique model for a flexible decentralized governance system for a social media platform. Let’s take a look at Den, find out what the Den team learned while building an operational decentralized governance system, and what is in store for 2022.
Den is a social media platform and content marketplace run atop a hybrid blockchain. Every vote, post, reply, and edit is on-chain. Den was, originally, created to address issues seen across other social platforms and community forums such as identity attacks, FUD, and manipulation and uses incentives to motivate communities to produce and evaluate quality content.
Applying Behavioral Systems to a Social Platform
The platform’s foundational layer stems from the idea that one can motivate certain behaviors to produce desired outcomes. Den couples that idea with blockchain technology to more easily analyze and apply incentives across a diverse community.
Blockchain already has an innate ability to affect human behavior. Currently, most blockchains primarily focus on incentivizing behaviors through mining or staking. But behavior systems can be so much more than that.
When applying behavior systems with blockchain technology you can produce desired outcomes in complex systems by applying incentives and disincentives to affect different behaviors.
Den.social incentivizes the behavior of Denizens to create and evaluate quality content for the platform. These behaviors have a direct effect on one's voting power within the governance system. Dragonchain believes behavior systems are very powerful and, in time, will be an industry themselves.
Den’s Decentralized Governance System
The concept for Den was drafted in a 2018 white paper and outlined a governance model that addressed the principal-agent dilemma.
What is the Principal-Agent Dilemma?
The principal-agent dilemma is a conflict in priorities between a person or group (the principal) and those making decisions and acting on their behalf (the agent). In Den’s case, the Den business entity would be the agent and Denizens are the principals.
The dilemma arises when the agent acts in their own best interest and works in a way that’s not in line with the priorities and goals determined by the principals.
Den addresses this issue with a governance board consisting of equal parts the Den entity, content creators, and Lair owners.
Den’s Initial Governance Board
The first Den Governance Board commenced in January of 2021 and used Ethereum based staking to provide liquidity and an element of skin in the game. Anyone with a creator role was able to stake and lock tokens to receive Den Governance Tokens. These tokens represent ownership in the Den Governance Lair.
The Den Governance Lair is a dedicated Lair for open discussion and proposals to be brought before the board. All Denizens may participate in discussions and can even bring an issue for a vote. But, only those who hold the NFT based Den Governance Tokens are granted access and voting rights to vote on proposals brought before the board.
The board has had eleven initial votes to date. Those votes have led to economic and algorithmic changes to the platform. More recently, the Den entity has requested more input for development priorities and other arbitrary issues from the Den Governance board as well as the community.
There is always room for improvement.
The initial iteration of DenGov, as the community calls it, was a success and allowed for a balanced mix between all interested parties. However, there were a few aspects that proved to be barriers to the community at large.
When setting up the governance system the possibility of vote manipulation had to be addressed. Den used a DEX to establish liquidity for the Den economy and provide a way for the Den Governance Board to have some level of skin in the game. But as it turned out it was very expensive for the Den entity to set up the liquidity. More importantly, participating Denizens were unable to exit if desired as their Den Governance liquidity tokens were locked for the year.
Also, even though all votes were cast on an internal system, Denizens still had to have some level of web3 knowledge. As a result, there was lower participation than desired. And although the board did receive a reasonable amount of votes of which the community votes outweigh Den entity votes, in the end, the process was difficult.
Looking ahead to 2022
For 2022 the goal is accessibility. Den believes that the more Denizens, who have invested their time and creativity into the platform, that weigh in on issues affecting the platform, the better the outcome will be for the Den entity itself. These Denizens should be the ones to decide what happens next on the Den platform and they shouldn’t have to have web3 knowledge or have to interact with external chains to do so.
So, the new Governance system will be modeled after Den’s LOR Rewards Behavior System (farming)). Both systems bring in a behavioral component and are coupled with a time-based measure to determine one’s voting power.
The longer Denizens hold tokens and the more tokens they hold the more voting power they will yield.
Voting power is based on the amount of content and the economic reputation of a Denizen and is determined by:
- MTR balance and the length of time held.
- LOR balance and the length of time held.
- LOT balance and the length of time held.
Den still plans to allow people to gain votes with liquidity but unlike Den Governance 2021 those tokens will not be locked. One simply needs to hold those tokens, over time, in a wallet that is claimed in Den.
Den Governance 2022 will map directly to those providing the best participation, as governed by the algorithm itself, and it will include an element of skin in the game from liquidity providers and Denizens with good economic reputations within the system.
Individual Lair Governance
The capabilities of Den’s Governance system will be extended to individual Lair communities as well. Every community in Den already has token-based ownership in the form of an NFT called LOT. Each LOT gives special access rights within that specific Lair.
Lair Governance votes are determined by the number of LOT and how long they are held and will allow access rights for the following functions within the Lair:
- Lair branding - selecting the banner and avatar
- Access configuration - setting reputation requirements for Lair subscribers to vote, post, and reply.
- Culture decisions - community guidelines, initiatives, promotions, and marketing.
Governance as a Service
Businesses can also implement this governance model. Any business can join Den.social and open their own branded Lair community. Ownership can be distributed and grant access to community members who provide the best participation within the business’s Lair. The business’s most trusted community will be instrumental in crafting the message and promoting the brand. The Den Governance structure is built right into the Lair so businesses don’t have to set up an entirely new system.
Contact us today to discuss how your business can implement its own governance system, quickly, without the need for added infrastructures.