DAO Examples: Goals, Governance, and Soulbound Tokens

An overview of several DAO examples and a novel concept which may supercharge our efforts to achieve more decentralized, democratic processes.

Introduction to DAOs

Decentralized Autonomous Organizations, or DAOs, have become an integral part of Web3 as networks aim to give people a chance to participate in their organization’s governance process. DAOs run on blockchains, where decisions are made collectively by the token holders through a decentralized voting process. DAOs enable their members to collaborate in a decentralized manner by using governance tokens, submitting proposals, voting, and implementing network policy. 

In fact, DAOs are playing a crucial role in shaping the DeFi landscape. In this article, we will cover some prominent DAO examples, discussing their goals and governance processes before catching you up on some recent events. We will also introduce the concept of soulbound tokens and how they could be used to significantly improve the integrity of DAO governance. First, let’s look at some of the most well known DAOs and how they’re currently doing.

Maker DAO

Maker DAO is the decentralized governance structure responsible for overseeing and making decisions regarding the MakerDAO Protocol. MKR token holders have voting rights in the DAO, which allows them to participate in decision-making processes and influence protocol parameters, such as the stability fee, collateralization ratio, and supported collateral types. 

The more MKR tokens one holds, the more voting power they possess. The DAO also oversees the issuance of a decentralized stablecoin called DAI, and is pegged to the US dollar. This facilitates fiat-to-crypto transactions and decentralized money markets. To be clear, MKR performs as both the governance and utility token for the Maker DAO protocol, while DAI is simply a stablecoin issued by Maker DAO.

Maker DAO is rather active, and frequently passes proposals which make adjustments to the protocol or allocate resources where they’re needed. For instance, a recently-passed proposal raised the Governance Security Module Pause Delay from 16 to 48 hours, old MKR vesting streams were pulled, DAI tokens were allocated to recognized delegates and ecosystem actors, and parameters were changed for the Emergency Shutdown Module.

Lido DAO

Lido DAO governs the Lido Protocol, a liquid staking solution for Ethereum 2.0. Instead of locking up staked ETH into smart contracts, with an indefinite unlock date awaiting a long-awaited upgrade, users on Lido enjoy liquidity regarding their staked ETH tokens. This is the basis for the Lido Protocol. Lido stakers receive stETH, a tokenized representation of their staked ETH that can be used to arbitrage trade any peg deviations or leverage it in other ways.

DAO members are responsible for managing key aspects of Lido’s Protocol, with the LDO token being the ecosystem’s native governance token. Voters get to discuss and determine things like changes in policy regarding node operators, adjusting fees, and allocating treasury funds towards accelerator programs, marketing or the like. Token holders have voted on a number of proposals ranging from treasury diversification initiatives to the formation of rewards committees, and even the hiring of positions like Head of Marketing and Head of Legal Counsel.

Aave DAO

Aave Protocol allows users to lend, borrow, and earn interest on various crypto assets without intermediaries. The platform supports a wide range of assets and introduces features like flash loans, credit delegation, and staking. Aave’s flash loans allow users to borrow assets without collateral, as long as the loan is repaid within the same transaction. This innovative feature enables developers to create unique financial products and arbitrage opportunities in the DeFi ecosystem.

The AAVE token is the native governance and utility token. Besides governance, AAVE token has other utilities within the ecosystem, including staking in the Safety Module. AAVE stakers earn a proportional share of network transaction fees for themselves and help secure the platform via acting as a liquidity backstop during extreme volatility or crisis events. 

A recent proposal (#166) called Rescue Mission Phase 1 Long Executor passed with more than 99.9% of the vote. It would allow Aave developers to upgrade smart contracts that have been mistakenly sent tokens to a wrong or incompatible wallet address, allowing the contracts to return the lost tokens back to their original owners. Only one user voted against the proposal, using a single AAVE token to do so.

Uniswap DAO

Uniswap Protocol is an automated market maker that facilitates the trading of EVM-compatible tokens, providing users with permissionless and non-custodial P2P token swaps. It is also known as a decentralized exchange (DEX), with UNI as its utility token as well as the governance token for Uniswap DAO. The aim of this model is to promote a transparent, democratic, and community-driven approach to managing the DEX and its tokenomics.

Users can earn UNI from providing liquidity for different trading-pair liquidity pools. By depositing a pair of tokens into a liquidity pool smart contract, users allow for the efficient transfer of digital assets on the platform in exchange for a share in the transaction fees. This incentivizes users to contribute to the liquidity pools, improving the overall trading experience on Uniswap.

Uniswap DAO recently implemented a proposal to create an Accountability Committee for Licensure and Deployments to support the performance of licensure and partnership agreements between Uniswap DAO and external parties. 8,000 individual voters cast just under 74 million votes via an off-chain consensus process. It also aims to improve accountability within Uniswap’s DAO. Members on the Accountability Committee serve for terms of six months, with a maximum estimated budget of $82,500.

ApeCoin DAO

ApeCoin (APE) was initially designed for use within the Bored Ape Yacht Club NFT community, and now ApeCoin DAO offers decentralized governance for APE token and BAYC NFT holders. APE token holders get to vote on proposals for changes to APE tokenomics, community initiatives, events planning, and strategic decisions which will shape the future of the community. The BAYC NFT collection and its offshoots was created by Yuga Labs, and continues to be one of the most recognizable NFT brands to this day.

DAO voters have a say in a range of things from marketing ideas to business development strategies. A previous proposal to fund a bespoke news website called The Bored Ape Gazette was passed by APE voters in which a single writer and editor was allocated $7,000 a month to create written content with a focus on ApeCoin DAO news and other community initiatives.

More recently, over 84% of delegates voted against a proposal to introduce two new NFT collections: Multi-Link Ape Coin Armory Club and Ape Coin Pet Club. Currently, AIP-226 is being voted on by APE token holders, though it is not expected to pass. The proposal a decentralized IRL events committee to arrange in-person gatherings and onboarding newcomers into their community.

Key Challenges to Overcome for DAOs

While DAOs offer numerous advantages, such as decentralization, transparency, and community-driven governance, they also have some shortcomings. First, the legal status of DAOs is unclear in many jurisdictions, as they do not fit neatly into existing regulatory frameworks. This uncertainty may result in potential legal issues or limit the adoption of DAOs.

Second, vagaries in hierarchy, lack of transparency, and poor coordination can result in communication breakdowns, lack of accountability, and reduced efficiency. Token holders may become apathetic towards the governance process due to lack of interest or understanding, resulting in low voter turnout. This could lead to whales controlling the outcomes or proposals being dominated by oligarchies with the largest token holdings.

Even worse than a plutocracy in which whales dominate governance, one-token-one-vote DAOs might also be vulnerable to Sybil attacks in which the governance process is hijacked by controlling enough tokens to subvert the will of token holders in democratic processes. If enough votes can be purchased before a governance vote is held, just a few individuals can swing a vote and then dump their tokens in the aftermath. This is obviously unacceptable and therefore unsustainable.

Soulbound Tokens and Quadratic Voting

Soulbound (SB) tokens are an innovative concept aimed at addressing the governance shortcomings aside from regulatory uncertainty. The term “soulbound” signifies that the tokens are connected to the individual token holder’s identity, making them non-transferable and tied to the token holder’s reputation within the DAO. To ensure long-term commitment, SB tokens could be bonded to their holders for a specific duration in order to reduce opportunities for speculators to subvert the DAO and its members.

By incorporating mechanisms such as token bonding, reputation-based incentives, quadratic voting, and decentralized identity verification, SB tokens aim to create a more equitable and efficient governance system for DAOs. SB tokens would create better access for all DAO members, and better incentivize the participation by non-whale members since each human may only identify with one soulbound token. This more closely aligns the interests of all members within the organization and increases the stickiness of honest members in the long run.

As we know, DAO decisions are made collectively by the token holders via consensus, but if one token buys one vote, all of the whales stand to benefit greatly while also being in a position to influence the protocol to benefit themselves by their outsized voting power. SB tokens are designed to overcome these challenges and create a more just option for decentralized governance. They can also ensure that social networks aren’t overrun with bots and that interactions are carried out by genuine human beings.

SB tokens tackle this problem by implementing a quadratic voting system, where the cost of voting multiple times increases exponentially with each additional vote users want to cast. Ideally, such an arrangement discourages the concentration of voting power, and promotes better access for small groups to participate in the democratic process. It essentially helps protect the interests of smaller groups. 

SB tokens are also linked to the owner’s reputation or contributions to the DAO. This encourages token holders to actively participate in the governance process in order to boost their reputation. SB tokens also mitigate the risk of Sybil attack by a sort of KYC or decentralized ID-verification process. By linking unique identities to individual token holders, it makes the voting process inherently more robust, making it much more difficult to manipulate or subvert the governance process.

SB tokens clearly offer a novel approach to sustainability and accountability for DAOs, and they’re poised to help DAOs represent the financial interests and values of their token holders. By using soulbound tokens, DAOs can better create community-driven ecosystems which offer better incentives and greater fidelity with regards to representing the democratic wishes of non-whale DAO members. The future of DAOs will most likely rely on SB tokens or a variation of this concept.

References

1. Buterin, V. (2022, 26 Jan.). Soulbound. Vitalik.ca.
2. Buterin, V. (2022, 20 Sep.). DAOs are not corporations: where decentralization in autonomous organizations matters. Vitalik.ca.
3. Dimitri, N. (2022). Quadratic voting in blockchain governance. Information, 13, 305.
4. Malone, M. R. (2023, 24 Feb.). What is a DAO, or decentralized autonomous organization? University of Miami: News at the U.

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