While the crypto industry has never had a shortage of innovation, it is safe to say that the last two years have been turbocharged. Starting with the DeFi summer, the industry has seen an unprecedented pace of growth culminating last November when the market peaked.
And while prices have largely consolidated since then, development certainly hasn’t.
One of the main drivers of this innovation has been decentralized autonomous organizations (DAOs).
The novel organizational structure has been around since 2016, but started gaining prominence last year when many large decentralized protocols started adopting it as a governance solution. According to a report by Kraken, there are currently at least 188 DAOs exercising control over $12.8 billion in their respective treasuries. The growth of the DAO ecosystem has been so extreme that they began to generate value that puts them on a par with the TradFi markets.
But despite its tremendous growth and immense value captured, DAOs are still in their infancy. The organizational structure is largely a mystery to the market at large and is even distrusted by a large portion of the crypto industry.
In its latest report, Kraken Intelligence broke down the essence of DAOs in an attempt to make the new crypto paradigm more accessible to everyone.
What does a DAO do?
Kraken defines a decentralized autonomous organization as an internet-native entity that is collectively owned and managed by its members. This type of informal foundation draws its assets from a wide range of contributors, who then vote on how the funds are used. These assets are stored in the treasury, which splits the private key among multiple parties to prevent unauthorized use of the funds.
To decide how to use the funds and govern the organization, DAO members publish proposals that are then voted on. Most DAO governance processes take place in forums like Snapshot, where proposals and votes are discussed through public discourse.
And while DAOs can exist on any smart contract-enabled blockchain, most of them currently operate on Ethereum. Kraken Intelligence believes this is due to Ethereum’s first mover advantage as the first widely used smart contract layer 1 blockchain, as well as its large network effect and high liquidity. However, the tremendous growth seen in Layer 2 scaling solutions such as Polygon, other Layer 1 EVM-compliant chains such as Polkadot, and networks such as Solana, Fantom, Cardano, and Harmony means that DAOs will start to do the trick. slowly transition to other blockchains. too.
ƒmemThis is a natural progression from the rapid growth in the number of DAO members. The increase in the number of DAO members is measured through the number of governance token holders: Kraken Intelligence found that there has been a steady increase in the number of token holders in five major DAOs and noted that the growth was also visible in smaller ones. organizations too.
Graph showing the number of token holders in five major DAOs from June 2020 to January 2022 (Source: Kraken Intelligence)
The ten largest DAOs account for almost 80% of the $12.8 billion in AUM locked in the entire DAO ecosystem. And while this number does not take into account the market capitalizations of any DAO governance tokens, it is a good representation of the size of the DAO ecosystem.
Table showing the top ten DAOs by treasury (Source: Kraken Intelligence)
There are many uses for the $12.8 billion in assets that have been pooled into the DAO ecosystem so far. While Kraken Intelligence identified five main categories of DAOs, their report noted that they continue to innovate with more applications, such as gaming and play-to-win (P2E) insurance.
The most common use cases for DAOs are NFT collection and incubation, protocol governance, investment management, social membership, and grant development.
DAO NFT
The latest addition to the DAO ecosystem, NFT-focused DAOs are collectives of art curators created to promote NFTs and art culture. What makes NFT DAOs unique is the fact that their members are not as concerned about the profitability of their holdings. Instead, his primary interest lies in driving cultural impact and bringing community and media attention to the NFT space.
Some of the more notable NFT DAOs include PleasrDAO, Fingerprints DAO, Flamingo DAO, and Jenny DAO. While the full treasury balances of these DAOs remain unknown, they gained prominence in the space by advancing the NFT market through the collection and fractionation of prominent top-tier NFTs. They have also set minimum values for coveted NFT collections, establishing a role as market drivers.
Governance of DAO protocols
As the name suggests, protocol governance DAOs exist primarily to govern the policies of your protocol. They focus on directing the development and offerings of a DeFi protocol and work to provide a structured upgrade process when needed.
These are the largest DAOs by scale, and as such often attract the most media attention. There are several multi-million dollar DAOs, including SushiSwap, Curve Finance, MakerDAO, Compound, and Audius. These DAOs offer token holders the right to vote on protocol policies and provide them with various monetary rewards to incentivize their participation in governance.
All of this has led to a significant increase in total value locked (TVL) in many of these DAO-driven protocols.
Chart showing total value locked (TVL) across ten major DAO-governed DeFi protocols (Source: Kraken Intelligence)
Investment DAO
Investment DAOs were the first type of DAO to emerge in the DeFi space. In 2016, The DAO emerged as the first community investment DAO, open source capital among contributors to invest in its brand and portfolio.
And while The DAO’s short-lived success ended in an infamous smart contract exploit that caused the network to split into Ethereum and Ethereum Classic, the category continued to thrive to this day. Kraken Intelligence recognized the potential of investment DAOs to drive innovation in the crypto ecosystem. These DAOs have so far done a very good job of providing adequate funding and resources to ambitious Web3 developers and protocols.
Investment DAOs work almost exactly like traditional hedge funds. However, they provide more accessibility to retail investors, provide better scalability as the fund continues to grow, require almost no overhead costs, and offer unprecedented speed of decision-making and autonomy.
The two most notable investment DAOs to emerge in the crypto market are Venture DAO and LAO. Both have provided crucial funding for promising early-stage startups like Rarible, raising tens of thousands of ETH in contributions.
Social DAOs
As decentralized and autonomous social platforms, these DAOs exist to foster a community of like-minded people and allow them to interact with each other. Members gain access to the community through a token, which can be either fungible or non-fungible. Many communities choose to grant memberships through NFTs as they are an indicator of social status and an easy way to differentiate members.
Social DAOs that grant membership via tokens offer users a much more tangible monetary benefit: as the community begins to gain more traction, the price of their token increases.
However, these economic incentives represent a very small part of the social DAO. So far, social DAOs have been more successful at fostering a sense of community and vision among like-minded people than at providing wealth.
Grant DAO
Unlike investment DAOs, which are essentially for-profit organizations, grant DAOs exist to fund various development initiatives. They often serve as hubs for collaborators to learn, develop, and connect, as well as incubate emerging or growing projects in a decentralized manner.
Kraken Intelligence notes that grant DAOs have the potential to be major market drivers and are often responsible for pushing the frontier of the cryptocurrency space across many different initiatives.
The biggest and best example of a DAO grant is Gitcoin, which has distributed over $53 million in grants to thousands of projects and developers working on Web3. Gitcoin has also funded and organized hackathons and bounties within the DAO, providing work for developers and supporting community projects.
The future is bright for DAOs
The crypto industry is cursed with trends. Whether we like it or not, hype is responsible for the rise and fall of most projects and is the main driving force in the market.
However, that does not mean that the real utility has no voice in the market. While it can be hard to tell the true value from the hype, it’s safe to say that DAOs are more than just a fad. Ambitious projects like the DAO Constitution show that the market sees immense value in organizations that provide autonomy and decentralization, even if they ultimately fail to achieve their goals. The success of SushiSwap and Curve also shows that protocols can be highly successful financially even if they are governed by a community.
The eyes of the market point to DAOs.
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