This Is How DAOs Are Taking A Greater Role in the DeFi and NFT Sectors
Decentralized autonomous organizations (DAOs) have been operating under the radar for a while now. Amid all the excitement over bull markets, DeFi and NFTs, DAOs have found themselves being neglected, despite the fact that they’re coming to play an increasing role within the crypto ecosystem.
From DeFi protocols such as Uniswap (UNI) and Maker (MKR) to NFT platforms such as YellowHeart and JennyDAO, decentralized autonomous organizations are turning up almost everywhere you look in crypto. And while they haven’t received much attention so far this year, new and emerging DAOs are managing to attract millions in investment, while DAOs themselves are becoming more complex in how they operate and manage themselves.
DAOs meet DeFi and NFTs
Despite the relative neglect, there’s little doubt that DAOs have become fairly central to much of crypto.
“Whilst DAOs may not have received attention as a standalone concept this year, they are built into the fabric of the crypto industry and considered vital in the decision-making process for projects and protocols,” said Philipp Pieper, the co-founder of DeFi platform Swarm Markets.
Pieper noted that DAOs have played a key role in the emergence of NFTs and the growth of DeFi, forming an integral part of other verticals rather than being a separate category.
“Level 1 protocols such as Ethereum (ETH) and Polkadot (DOT), both of which have received considerable attention this year, are practicing DAO organizations live in action,” he added.
Pieper is referring to such platforms as PolkaDAO, a decentralized autonomous organization that was launched by Polkadot in 2019 in order to distribute funding to new Polkadot-based projects. He’s also alluding to the LAO, which is a for-profit Ethereum-based platform launched in 2019, also to distribute funding.
But while these DAOs were launched a couple of years ago, the DAO space continues to grow, particularly in parallel with the expansion of DeFi and NFTs.
“Yes, it has emerged and grown substantially. Top examples are mostly exchange-based such as Uniswap, 1inch (1INCH) and Maker,” said Josh Katz, the founder of NFT marketplace YellowHeart.
Decentralized finance — and in particular decentralized funding — really is the biggest emerging area for the DAOs. Most recently, the Bybit-backed BitDAO raised USD 250m in funding in order to finance the development of its decentralized crypto investment fund.
“DAOs are complicated and often slow moving structures; they weren’t the most attractive things in this fast-paced fading bull market,” said Charles Watkins, a member of Curve’s core development team.
Watkins observes that there “seems to be a movement of DAOs being largely led by venture capitalists (VCs) as we’ve seen with large protocols and others driven by their team with token holders being generally happy being led by people who they can see as having the protocol’s best interests in mind.”
In addition to DAO-based VC funds, there are also a growing number of DAOs being set up in order to purchase NFTs. For example, JennyDAO launched earlier in the year and attracted USD 7m in funding in May, all with the purpose of purchasing crypto collectibles and fractionalizing their ownership.
Future growth and trends
While each DAO works a little differently from others, they generally function through holders of governance tokens voting on proposals for actions. So in the case of JennyDAO, for instance, stakeholders would vote on which NFTs to buy.
“DAOs embody some of the core benefits that come with operating on the blockchain, including co-ownership, co-governance, and more, generally speaking, models that are designed around participation and consensus. This time around, DAO best practices are evolving and aspects like tooling are getting better,” said Philipp Pieper.
Given the growth of DeFi (a sector which includes decentralized exchanges), it’s little surprise that people are becoming more willing to launch and use DAOs.
“They allow for transparent participation in vehicles that formerly were centralized. They also allow for pooling, staking and other mechanisms that work better with the use of blockchain,” said Josh Katz.
In terms of the near future, one trend we’re already seeing and will see more of is that DAOs will become more complex and multifunctional. At the same time, they’re also streamlining and simplifying their user experience.
“The application layer has become a lot easier and cheaper to operate and best practice procedures have been established, acting as a key driver for the success and use of DAOs. Examples include Aragon, which has improved its DAO stack, and Snapshot, which has created a cheaper and more inclusive way to operate DAO decision making,” said Pieper.
He also noted that new tools are being introduced for creating new capabilities to help run DAOs more efficiently, and even extend decentralized governance to smaller use cases.
“For example, Gnosis Safe has established multi-signature secured vaults and a treasury management suite, Snapshot uses an off-chain voting system, and Kleros uses an arbitration layer to decentralize their entire process of governance,” he added.
More generally, Josh Katz expects a significant increase in DAOs and in the use of “autonomous financial instruments,” particularly in the DeFi sector.
“These will set the tone and trend for further mass adoption in other areas. Usually tech needs a sector to lead the way and we believe with DAOs it will be the DeFi sector which is quickly crossing over to the financial sector,” he told Cryptonews.com.
Legal and regulatory challenges
While there’s little doubt that DAOs will continue to proliferate, one obstacle on the route to greater deployment and adoption may be regulation.
“Regulatory environment is a moving target and any DAO that is US-based will need to be very clear around various regulatory and security laws as pertains to each particular use case,” warned Katz.
Because DAOs are such a new concept, few clear laws and regulations have yet to emerge, with different countries likely to take different approaches.
“Some jurisdictions, like Europe, are making serious attempts and these come with pros and cons. Existing practices might become more challenging and might need to change,” said Philipp Pieper.
Some tentative steps towards clearer regulations are being made in certain parts of the world. For example, Wyoming has recognized DAOs as limited liability companies, putting them on the same legal footing as a normal business.
Assuming that other jurisdictions follow suit, this should accelerate the growth of DAOs, which are potentially set to become the new big thing (once again) in crypto.
As Pieper concluded, “Legal confidence should increase adoption and has the potential to open up new use cases, even replacing real-world organizational forms by digitizing them.”