What is a DAO?
Overview
A Decentralized Autonomous Organization, or DAO, is a new type of organizational model commonly used by crypto projects to promote transparency and distribute decision making power to all stakeholders. Overall, DAOs seek to solve the Principal-Agent problem where a centralized organization isn’t properly motivated to act in the best interests of the party it serves.
While all DAOs aim to align an organization’s interests with the popular interests of the community it serves, there are many different types of DAOs that vary in their purposes, levels of complexity, and degrees of decentralization. Many blockchain projects like Umee operate as large DAOs in an effort to decentralize large-scale decision-making processes, while smaller DAOs or SubDAOs may be formed to oversee a sector within a larger organization and better serve the community’s specific needs. For example, many large DAOs choose to form smaller “Grants DAOs” which consist of a small number of community members who are responsible for soliciting, reviewing, and assigning allocations for various grants proposals - a task that would be difficult for a DAO with thousands of members to achieve.
DAOs often issue governance tokens in order to enable the decentralized governance of the organization. Usually a specific amount of governance tokens must be deposited in order to submit a governance proposal, and all governance token holders are able to vote on the proposal (1 token typically equals 1 vote). Governance tokens are usually distributed between all stakeholders in an attempt to properly balance the decision making powers and to help align their interests by incentivizing them all to bring more value to the protocol.
Who Are the Major Stakeholders?
Users
Similarly to how a networking platform no one adopts is obsolete, or a software no one uses has no value, a blockchain or application that no one interacts with is problematic. Users are the most important ingredient for every blockchain and product because they are ultimately the customers who need to be served. A network effect occurs as more users interact with a blockchain and the applications built on top of it, and both the blockchain and applications become more valuable for all users.
Contributors
Contributors play a key role in the birth and growth of a network since users generally gravitate towards the best products that serve their needs. For example, developers are needed to launch a new blockchain, create the actual products that users demand, and fine tune them to provide a superior experience in order to attract more users. Educators are needed to help assist and onboard new users. Liquidity providers are needed in order for a DeFi project to serve its users. There are countless ways to contribute, and DAOs often attract and retain talented contributors by giving them a say in the direction of a project.
Validators/Infrastructure Providers
Since validators are responsible for actually running and securing a network, it’s incredibly important that they remain properly aligned with other stakeholders. Validators need to operate their nodes properly and perform upgrades as requested by stakeholders in order for a blockchain to function as intended. Running a validator node usually requires time, skill, and operational costs, so it’s important for validators to have a place at the table.
Off-Chain vs On-Chain Governance
Off-chain governance simply means that a DAO’s governance decisions cannot be automatically enforced on a blockchain. When a DAO uses off-chain governance the votes are used to signal sentiment, but there is no guarantee that the results of the vote will be respected. Off-chain governance is best used for non-technical proposals that cannot be executed on-chain anyways, or for DAOs with fewer members and niche purposes that need to make smaller decisions frequently.
On-chain governance means that a DAO’s governance decisions can be automatically enforced through self-executing code once a proposal has been passed. It’s important for highly decentralized DAOs to use on-chain governance in order to guarantee that the DAO’s decisions are respected no matter what. On-chain governance is useful for making controversial decisions that may impact stakeholders differently, like changes to a protocol that may significantly affect those who run it, build on it, or use it.
Is Umee a DAO?
The Umee blockchain itself is a DAO that uses an on-chain governance process and is governed by UMEE token stakers. Everyone who stakes UMEE tokens is able to participate in protocol governance to help make important decisions to determine the future of the network. Additionally, Umee’s governance has worked to form a Validator DAO which oversees quarterly delegations to validators from the community pool, and a Community DAO which incentivizes and rewards community contributors for their work.
Umee governance determines things like:
- Which assets are listed on Umee;
- How liquidity mining incentives should be distributed;
- How Umee’s community and ecosystem pools are used;
- The formation and funding of SubDAOs and other community initiatives;
- All technical parameters related to the Umee blockchain and UMEE token.
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