The past two years in crypto have been absolutely astounding. From “DeFi summer” (now $250bn of total value locked) to “NFT craze” ($3.4bn monthly GMV on Opensea alone in August 2021) to Solana’s epic rise and various memecoin’s ultimate downfalls – the sheer pace of adoption and activity across the crypto ecosystem has been an incredible force.

Every venture fund in the world is currently deepening or developing a crypto thesis. Talent from traditional industries is pouring into crypto. And we now have an overarching, epochal narrative to define the movement: web3. 

Amongst all the areas to focus on, I have chosen to write about Decentralized Autonomous Organizations (DAOs). The reason for this is as follows:

• Incentive Innovation Rules All. Bitcoin provided a practical solution to the Byzantine Generals Problem by introducing an incentive innovation. In fact, much of crypto is about remixing existing technology with new incentives to create powerful new paradigms. DAOs are the natural frontier of incentive design in web3. 
• Capital Power. The DeFi ecosystem, with $250bn total value locked (TVL), is the current “super-app” of web3. While only ~$10bn of DeFi TVL (~4%) is currently held in DAOs, this number will likely increase exponentially as more and more DeFi protocols progressively decentralize governance. More money, more power – DeFi Treasury DAOs have the potential for massively influencing web3 in 2022 and beyond as capital power grows. 
• Web3 Promise. If the promise of web3 (versus web2) is to reduce centralized power in private, opaque corporate structures, then functional, community-led DAOs are a key prerequisite for the web3 promise to be fulfilled. 

I. DAO Basics

Decentralized Autonomous Organizations (DAOs) are not a new idea. In fact, Vitalik himself wrote about DAOs in the original Ethereum White Paper. His definition is as follows:

The general concept of a “decentralized autonomous organization” is that of a virtual entity that has a certain set of members or shareholders, which, perhaps with a 67% majority, have the right to spend the entity’s funds and modify its code.

Broadly speaking, DAOs are a governance structure (like private limited companies, or co-ops) for a group of people to make decisions. Unlike traditional structures, these decisions are coordinated and enforced on a blockchain. 

Let’s take the example of Uniswap and see how a DAO functions in practice. 

II. DAO Case Study: Uniswap in Action

While Uniswap did not start as a DAO (Jesse Walden’s piece covers web3 projects’ progressive decentralization trajectory in detail), it launched its governance token UNI in September 2020. 60% of the token supply was reserved for community members, and 15% was distributed to past users. 

Henceforth, UNI token holders would have voting power over key decisions and assets such as: (a) changes to the Uniswap protocol, including code modifications, new integrations, partnerships and more 

(b) UNI community treasury, or fund usage of the unallocated community UNI tokens, now over $3bn

(c) where to send or use Uniswap protocol revenue, which takes a fee from each transaction on the Uniswap protocol

(d) other assets such as the Uniswap ENS domain

This is massive: one of the largest DeFi protocols has essentially given UNI token holders decision-making rights over protocol changes, protocol revenue and treasury, as well as key protocol assets, just a few years into its existence! The web2 corollary would be if Uber or Facebook had allowed community-members to vote on app updates, revenue and balance sheet allocation, as well as core assets such as trademarks and intellectual property.