19. DAO Cryptos

Sunday 27th February 2022

A Decentralized Autonomous Organization (DAO) is like "an Internet-based community with a shared bank account".

A Decentralized Autonomous Organization (DAO) is like "an Internet-based community with a shared bank account". You can think of it as a mutual fund where instead of a central manager, the participants decide on the investment and other decisions.

DAOs exist only on a blockchain and their rules are coded in "smart contracts". Since DAOs run on public blockchains, anyone can check and verify all the financial transactions made by the DAO. Members of a DAO don't have to trust each other - they have to trust the code.

My favorite DAOs are:

  1. Aave
  2. Compound
  3. Decred
  4. Maker
  5. Uniswap

The DAO hack

DAOs did not start off too well. The first-ever DAO was "hacked" and ultimately led to the original Ethereum network splitting into two.

Surprised? Let's go back to 2016.

The first DAO raised about $150 million worth of ether (ETH) through a token sale. But a hacker exploited a bug in the "smart contract" and siphoned out all the money!

Now, logically nothing should have been done about this. Blockchains are "immutable" and "censorship-resistant", right? But a "hard fork" was implemented. This rolled back Ethereum's history to before the hack.

This reallocated the hacked ETH to a different "smart contract" and allowed investors to withdraw their funds. The 'purists' hated this and that's what led to Ethereum splitting into 2 blockchains: Ethereum and Ethereum Classic. 

1. Aave

Governance Token: AAVE
Max supply: 16 million

The Aave protocol enables the lending and borrowing of crypto. Lenders deposit digital assets into liquidity pools. Borrowers put up crypto collateral and take "flash loans" using the liquidity pools.

As a token, it gives holders discounted fees and also serves as a governance token by giving holders a vote in the protocol's development.

Users can participate in the project's governance process by holding AAVE tokens and /or stkAAVE (staked AAVE).

2. Compound

Governance Token: COMP
Max supply: 10 million

Compound is a Decentralised Finance (DeFi) lending protocol that enables depositors to earn interest on their cryptos. It also enables borrowers to take secured loans by depositing collateral.

The protocol distributes 2,312 COMP daily as rewards to active lenders and borrowers. In essence, users tend to accrue COMP tokens as they participate in the lending and borrowing economy of the Compound ecosystem.

Anyone can autonomously create proposals by locking 100 COMP in an address. The proposal can relate to changes in:

  • The assets' collateral factor
  • Interest rate models
  • Addition or removal of markets
  • Other parameters used by the Compound protocol

A proposal is considered for voting if the proposer’s address is delegated 65,000 COMP. After a 3-day voting process, proposals with at least 400,000 positive votes are queued for 2 days before being implemented.

3. Decred

Governance Token: DCR
Max supply: 21 million

Decred is a blockchain that uses a hybrid consensus mechanism. To vote, users "timelock" their DCR to purchase tickets which can be used both for on-chain and off-chain voting.

For on-chain voting, the protocol randomly selects 5 tickets to review the latest block created by the miners. A block is finalized if at least 3 of the 5 tickets vote that the block is valid. After the voting, the DCR is unlocked and returned along with the reward.

Off-chain voting is done on the Politeia platform. This can relate to spending the platform’s treasury funds and changes to the constitutions and policies. The records, proposals, and activities are periodically anchored to the Decred blockchain.

4. MakerDAO

Governance Token: MKR
Max supply: Unlimited

MakerDAO is a decentralized organization while Maker Protocol is a software platform, that allows users to issue and manage the DAI stablecoin. Maker (MKR) is the governance token of the MakerDAO and Maker Protocol.

MKR is minted & burnt depending on the debt status of MakerDAO. If the financial resources of the protocol cannot cover its debt, new tokens are minted. If there is a surplus, tokens are burned.

To vote on proposals users need to own MKR, or have it delegated to themselves. Then you need to create a voting contract and lock MKR tokens in it.

5. Uniswap

Governance Token: UNI
Max supply: 1 billion

Uniswap is a very popular decentralized trading protocol for Ethereum tokens. It is an automated market maker and UNI is its governance token.

UNI holders collectively control:

  • Uniswap governance
  • UNI community treasury
  • The protocol fee switch
  • Uniswap.eth ENS name
  • Uniswap Default List (tokens.uniswap.eth)
  • SOCKS liquidity tokens

Future DAO Index

A crypto index is a mathematical method for tracking the performance of a group of crypto assets. Sophisticated investors use Indexes to make better decisions.

The FUTURE DAO Index is a market capitalization index based on:
1. Aave (AAVE)
2. Compound (COMP)
3. Curve DAO Token (CRV)
4. Dash (DASH)
5. Decred (DCR)
6. Maker (MKR)
7. SushiSwap (SUSHI)
8. Uniswap (UNI)

The base date of the FUTURE DAO Index is Thursday, 24th February 2022.