DAO

A Decentralized Autonomous Organization, or DAO for short, is a system that allows many parties to jointly control an entity.

What is a DAO?

Let’s first clarify what decentralized means in this context. First, an application can run on a decentralized platform. This means that the platform itself is controlled by many different parties and, in particular, that even if some of these parties fail or turn malicious, the application will still keep running successfully. The IC is such a platform as it is run by many nodes that are owned by independent node providers. Therefore, applications that run on the IC are called decentralized applications or dapps.

A second kind of decentralized denotes who is in control of changing a dapp, or a smart contract more generally. In general, dapps running on the IC or smart contracts on other decentralized platforms can still be controlled by a single, central entity and thus still be under centralized control. As motivated below, it is often beneficial if a dapp is also under decentralized control. This means that no single party can decide how the dapp is evolved. Instead, the dapp can only be changed according to decisions that many parties jointly make. This decentralized control of a dapp is what a DAO achieves.

Motivation: why a DAO?

The following discusses the main motivations for DAOs from the point of view of two main actors on the IC: the dapp developers, who build dapps on the IC, and the end-users, who interact with and invest in dapps.

Dapp users

Dapps on the IC are realized as a set of canister smart contracts. Canisters define a controller specifying which principals can modify them. Most dapp canisters are either controlled by some developers or have no controller at all. Both situations are undesirable for a dapp’s users. In the case where a dapp is controlled by a centralized group of developers, users of the dapp must trust these developers not to stop the application and not to modify the application in an undesirable way, e.g., that favors the developers. In the case where the canister has no controller, it cannot be upgraded at all. This not only prevents evolving the dapp regarding new requirements but might also be a problem when it is necessary to fix security bugs.

DAOs provide a third option, namely to hand over the control over a dapp to a community that can jointly decide how to evolve a dapp in an open governance system, i.e., to decentralize a dapp’s control. This protects users as the control is now in the hand of a community rather than in the hand of a few parties. Moreover, dapp users can join the open governance themselves and thereby directly impact how the dapp is evolved.

Dapp developers

Decentralizing a dapp’s control is not only an advantage for the dapp’s users but can also be an advantage for the dapp’s developers. After all, it is in the developer’s interest to build the features users want.

Apart from this, another motivation for dapp developers to adopt a DAO such as the SNS is that it allows to tokenize the dapp which can help to get initial funding and initial adoption.

For a dapp that has an assigned SNS, everyone can purchase SNS tokens and participate in SNS governance. Thereby, anyone in the world can contribute to the funding of the project. This is fundamental for developers as this allows the SNS to decide to spend some of these funds, for example to pay for the dapp’s cycles or to pay developers.

The SNS can also decide to use different tokenomics models to create new incentive systems. For example, the SNS can decide to introduce voting rewards to motivate active governance participation. Moreover, rewards can be given to early adopters of the dapp and active users, which will help attract users. Furthermore, those who then possess SNS tokens are motivated to help increase the value of the tokens by attracting even more users. Therefore, such incentive systems can have positive network effects that are critical for the success of some dapps.

Dapp investors

Apart from active dapp users and dapp developers a third user group are those who would like to invest in a dapp. As already mentioned above, investors too profit both from the tokenization and decentralization that a DAO such as the SNS can provide. First, tokenization allows investors to get SNS tokens and invest in a dapp. The fact that tokens can then be staked in neurons and thus allow for governance participation, ensures that investors can contribute to the decisions on how the dapp will be evolved. Voting rewards might further incentivize investors to participate in governance. Finally, the positive network effects that tokenomics can have are of course also in the interest of the investors whose tokens have an increased value if the project is successful.