Four years ago, Ethereum was on the brink of death, but now it is reborn because of Defi

Preface: Four years ago, the emergence of The DAO made the world pay attention to the concept of DAO (decentralized autonomous organization) for the first time, and its collapse also forced the immature Ethereum to walk through the gates of hell. Four years later, with the rise of the concept of Defi (decentralized finance), the DAO, which complements it, has once again returned to the public's attention, and this time, it has shed its past exaggerated coat.

What is DAO?

DAO stands for Decentralized Autonomous Organization, which means decentralized autonomous organization in Chinese. This concept originated from DAC (Decentralized Autonomous Corporation) proposed by Daniel Larmier (BM) ^[1] , and was later adapted into DAO by Vitalik Buterin and written into the Ethereum white paper ^[2] .

So what is the difference between the two?

Organizations are typically made up of layered stacks of written agreements between people, and companies are a collection of contracts, including shareholder agreements, deeds, leases, service provider agreements, employment contracts, customer terms and services, etc., which are governed by a high-level shared set of contracts called laws. And the "economy" as a whole is made up of a network of stacks of contracts, all of which are enforced by courts with strict jurisdiction.

Essentially, organizations are made up of contracts, and the economy is a network of contracts ^[3] .

The so-called DAO allows members distributed around the world to vote on proposals and make final decisions with minimal trust.

This is naturally inseparable from the concept of contracts, but the contracts involved in DAO are what we call smart contracts. They are digital agreements written in code and are enforced by the blockchain network rather than through the courts.

Smart contracts are to paper contracts what email is to letters: faster, cheaper, and more scalable. They also reduce the cost of coordinating and enforcing agreements, just as the internet reduced the marginal cost of communication to near zero.

The DAO raised 11.7 million ETH, and its collapse once pushed Ethereum to the brink of death

When talking about DAO, we inevitably have to talk about The DAO. Although it is not the first DAO organization in human history, The DAO is definitely the most famous DAO known to people.

This decentralized autonomous organization was launched in April 2016 and raised 11.7 million ETH worldwide in just 28 days ^[4] . In terms of the size of ETH, The DAO is the blockchain project with the most funds ever raised. Even EOS, which later raised nearly US$4 billion (a total of 7.2117 million ETH ^[5] ), cannot match it.

The goal of establishing The DAO is to serve as a decentralized venture capital fund. Anyone who purchases DAO Tokens can vote on investment plans. In other words, everyone can be a VC investor, and the investment results are determined by consensus.

This vision sounds like a very cool plan and was once touted by the Ethereum community as a subversion of the VC model.

However, just two months later, a hacker found a fatal recursive call vulnerability in the contract code of The DAO, which allowed him to withdraw 3.6 million ETH (currently worth US$806 million) from The Dao's contract. After this incident, the Ethereum community was in a state of panic, and the developers decided to stop verifying all transactions that day. As a result, the price of Ethereum fell from 145 yuan to a low of 68 yuan.

After that, Ethereum co-founder Vitalik Buterin proposed a hard fork. With the support of community members, he started a new chain with no record of stolen transactions and named it Ethereum, thereby returning the huge amount of Ether funds involved to the participants.

This incident once pushed Ethereum to the brink of death, and also warned future generations about the importance of smart contract security audits.

The rebirth and expansion of DAO

Innovation does not happen overnight. If no one had continued to modify the car after the "Cabo Reo" accident, we might still be riding in a four-wheeled carriage today.

The same is true for innovation in DAO.

It is undeniable that the concept of DAO is very exciting because it strives to solve all the problems in the way modern organizations operate. In theory, a perfectly structured DAO can provide every participant with the opportunity to shape the organization. There will be no hierarchy here, which means that any innovative ideas proposed by anyone are likely to be considered and accepted by the entire organization. Every participant can make his or her own voice, and the rules are clear and simple, leaving no room for any arguments.

Finally, since all rules and every voting transaction are recorded in the blockchain and can be reviewed by anyone, DAO is completely transparent.

Many people would criticize this idea. For example, MIT's Technology Review once commented that entrusting important financial decisions to the public is a bad idea and is unlikely to produce any returns.

Despite this, this still cannot stop people from exploring such imaginative experiments.

Today, the DeFi project Maker, which we are familiar with, has an autonomous organization called MakerDAO. Similar DAO organizations include KyberDAO of Kyber and SynthetixDAO of Synthetix ^[6] .

Simply put, they all use governance tokens to allow participants to vote on changes to the protocol rules, thereby achieving decentralized community governance.

However, governance-type DAOs are only one branch of DAOs. There are many other types of DAOs. For example, Moloch is a popular shared DAO that focuses on funding Ethereum development through grants. Anyone can submit a proposal to the Moloch DAO and receive funding. Vitalik Buterin and Joseph Lubin, two co-founders of Ethereum, have donated 1,000 ETH to the DAO. To date, Moloch DAO has funded more than $300,000 in funding for Ethereum projects including Lighthouse security audits and Tornado Cash ^[7] .

MetaCartel: As a fork of Moloch, MetaCartel is similar to Moloch in operation, the difference lies in the direction of funding.

Simply put, Moloch focuses on Ethereum development, while MetaCartel focuses on funding the Ethereum application layer. More specifically, MetaCartel provides small grants (usually in the range of $1,000-5,000) to consumer applications (i.e. dApps).

MetaCartel Ventures (also known as Ventures DAO) is a for-profit DAO of the same type as the collapsed The DAO that leverages the Moloch V2 smart contract, which allows DAOs to invest in early-stage projects in a compatible, on-chain manner.

Another DAO that must be mentioned is Aragon, also known as the DAO factory. It allows users to create a DAO within 5 minutes. To date, participants including Coinbase, Decentraland, and AAVE have created more than 1,300 small DAOs through this platform ^[8] .

After nearly four years of development, organizations using the DAO structure are quietly spreading, while hype about the disruptive nature of DAO is almost hard to hear. This is probably because the market has learned the painful lesson of the collapse of The DAO.

DeFi and DAO complement each other

The DAO, which is truly expected to be used on a large scale first, is actually very related to DeFi.

Today, we see that regulars on the Defi list, such as Compound, Maker, Kyber, Synthetix, Balancer, Aave, etc., have successively launched their own governance tokens. The decentralized governance community they involve is a DAO, which is related to the interests of the participants and can thus motivate participants to vote.

Recently, I saw a public account with a very interesting name, called the Way of DeFi, and it is not a bad idea to understand it as the DAO of DeFi.

Because every Defi project will essentially become a DAO, and gathering all the Defi information in the world can eventually become a DAO.

DAOs in the eyes of industry players and institutional investors

There will be a thousand Hamlets in the minds of a thousand readers, and when it comes to DAO, there will be many different interpretations.

For example, Vitalik, the originator of the DAO concept, not only donated money to related DAO projects, but also proposed the DAICO ^[9] financing concept that combines DAO and ICO. Unfortunately, this seemingly healthy model has not been widely adopted by the market.

For example, Luis Cuende, co-founder of Aragon, believes that DAO is the next big innovation after blogs and social media. He mentioned:

“The internet changed the way we organize, with the advent of blogs, which made it possible to share ideas instantly across borders. Blogs then gave way to social media, which made it possible to discuss ideas and influence communities around them.

Social media has become so powerful that it can even influence the election of a president. However, it is difficult to know how positive the impact of social media is.

If blogging and social media allowed humans to iterate culturally faster, DAOs allow society to iterate coordination models faster than ever before.”

So what do investment institutions think of DAO?

In this regard, Placeholder co-founder Joel Monegro once commented:

“In most places around the world, creating and maintaining a legal entity can cost thousands of dollars per year in operating and legal fees to maintain the organization. In my native Dominican Republic, it can take a year to form a charity. In contrast, DAOs are available anywhere there is an internet connection, and their global nature makes it easy to manage members from around the world.

You can program a DAO to be anything. A digital organization can be a for-profit business, a non-profit foundation, a cooperative, or even a court.”

Another well-known investor who participated in the DAO project, Tim Draper, is a well-known promoter of government innovation. After completing a $1 million investment in February this year, he commented:

“You can’t build a new jurisdiction every day, and after Aragon, world governance will never be the same.” ^[10]

Problems facing DAOs today

Although industry participants have high hopes for DAO, we still cannot forget the painful lessons that The DAO brought to the industry today.

For DAO organizations, the security of funds remains a top priority. For example, the previously exposed Maker governance attack plan, due to the introduction of flash loans, forced MakerDAO to urgently vote to modify the rules to prevent attacks ^[11] , thus successfully avoiding a potential crisis.

For DAOs that are still under exploration, the possibility of loopholes in the rules still exists. As the amount of money involved in DAOs increases, they become more attractive to attackers. This will be a problem that any Defi and DAO project will face.

Then, there is the issue of voting participation. For the vast majority of DAO projects today, when it comes to a new proposal, voters willing to vote are still a minority, which is undoubtedly not conducive to the representativeness of governance results.

The relevant solutions include, first, providing popular science information about the relevant proposals to make participants aware of the importance of governance; second, lowering the threshold for voting so that ordinary coin holders can also easily participate in voting. These are areas that many project parties need to improve.

My view on DAO

As a Bitcoin enthusiast, I have some different opinions about the origin of DAO, because in essence, Bitcoin should be the first DAO organization, but the people who directly participate in the voting are not the coin holders, but the developers and miners. When there are few controversial proposals, developers from all over the world can complete the voting internally, and when it comes to controversial proposals, miners are required to participate in the voting decision.

In other words, the largest DAO organization today should be the Bitcoin community, but I have to admit that such a DAO organization is not the best form.

Today, DAO entrepreneurs and investors portray DAO as a new form of alternative to existing organizational structures. Their visions of "faster iteration of coordination models", "saving organizational maintenance costs", and "encouraging innovation" all sound very good, but please do not forget that these DAOs are still in their very early stages and therefore involve greater risks.

When someone says "Let's suffocate for our dreams together", please open your eyes. The DAO that collapsed four years ago will not be the first DAO to die.

1.https://bitcoinmagazine.com/articles/bootstrapping-a-decentralized-autonomous-corporation-part-i-1379644274↵

2.https://github.com/ethereum/wiki/wiki/%5B%E4%B8%AD%E6%96%87%5D-%E4%BB%A5%E5%A4%AA%E5%9D%8A%E7%99%BD%E7%9A%AE%E4%B9%A6↵

3.https://www.placeholder.vc/blog/2020/5/7/aragon-daos↵

4.https://medium.com/swlh/the-story-of-the-dao-its-history-and-consequences-71e6a8a551ee↵

5.https://blockchair.com/ethereum/address/0xd0a6e6c54dbc68db5db3a091b171a77407ff7ccf↵

6.https://tokentuesdays.substack.com/p/how-daos-enable-self-sustainability↵

7.https://www.molochdao.com/projects↵

8.https://poweredby.aragon.org/↵

9.https://ethresear.ch/t/explanation-of-daicos/465↵

10. https://techcrunch.com/2020/02/19/tim-draper-puts-1m-into-the-aragon-blockchain-project-to-create-digital-courts/↵

11.https://arxiv.org/pdf/2002.08099.pdf↵

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