What kind of DAO is Nervos DAO?

Editor's note: This article comes from Tuoluo Finance (ID: tuoluocaijing), author: Xiao Ye, Future Xiaogege

In the blockchain world, the DAO (Decentralized Autonomous Organizations) has always been the ideal concept of decentralization - a company similar to a cooperative. All participants own and control it, and decisions serve the collective interest, are integrated with code, and are executed using smart contracts.

So far, although there have been some "unsuccessful" cases of this concept, various DAO models have emerged, constantly trying to realize the concept of "decentralized autonomy".

Nervos DAO is a special setting in the Nervos CKB economic model. This month, with the launch of the mainnet of the public chain Nervos CKB, Nervos DAO will also be launched. What kind of DAO is this new DAO? How is it different from other DAOs? If it is not used for governance, what new uses will DAO have? This article hopes to explore these questions.

Nervos public chain and Nervos DAO

Nervos is a layered blockchain application ecosystem, which is divided into Layer 1 and Layer 2. Layer 1 uses the POW consensus mechanism like BTC and is only used for data storage and key arbitration. Layer 2 can carry various applications through smart contracts.

Layer 1 uses the PoW consensus mechanism like BTC, and is mainly used to store user assets, smart contracts and some key data. Layer 1 is responsible for state verification; Layer 2 supports various scalability solutions. Layer 2 developers can tailor it for specific applications and users in terms of throughput, finality, privacy and trust models. Layer 2 is responsible for state generation.

To understand Nervos DAO, you first need to understand Nervos' economic model and token distribution method.

#Nervos The economic model of CKB token

Table: Basic distribution model of Nervos tokens

#Genesis block allocation ratio

Figure: Supply distribution of genesis blocks on the mainnet

#Nervos Ecosystem Beneficiaries

Table: Nervos Ecosystem Beneficiaries

A simple understanding of Nervos' economic model can lead to several basic conclusions:

1. The Nervos CKB network hopes to maintain network security and stability through BTC’s mining mechanism.

2. The Nervos CKB network maintains the long-term vitality of the Nervos CKB network through the secondary issuance of CKB.

3. The issuance rate of CKB is high in the early stage, and will gradually decrease in the later stage, and eventually tend to be constant.

4. The secondary issuance of CKB will cause certain concerns about value dilution, which can be alleviated by depositing tokens in Nervos DAO.

Nervos DAO

In order to alleviate the concerns about value dilution caused by the secondary issuance of CKB, Nervos DAO came into being. Nervos DAO is a contract written at the bottom of the system that can automatically distribute the secondary issuance of CKB to the holders locked in the Nervos DAO contract.

For long-term coin holders, Nervos DAO may be similar to a bank's time deposit financial management. As long as they deposit coins, they can get locked-coin subsidies within the time specified in the contract and enjoy "passive income".

#Traditional DAO

In the traditional sense, DAO refers to a decentralized autonomous organization that collaborates on decision-making and governance based on trustless protocols (such as smart contracts). Bitcoin can be said to be the originator of the "DAO" concept. Miners are rewarded for mining and inject computing power into the Bitcoin network, thereby maintaining the security of the entire Bitcoin network. After the concept of "DAO" was officially proposed in 2013, DashDAO, TheDAO, MakerDAO, AragonDAO, etc. have all contributed their own design examples to this concept.

DashDAO

DashDAO adds 10% of the block rewards to the funding pool to fund proposals that promote the development of the Dash network and ecosystem. DashDAO is considered the first "meaningful DAO" and its emergence has promoted the vigorous development of the Dash ecosystem.

The DAO

The DAO was created in 2016 with the goal of establishing a decentralized business model run by smart contracts, in which token holders vote for proposals and projects that they believe will bring returns to the DAO organization, and are incentivized through project returns. At its peak, The DAO raised 14% of the total funds of Ethereum, but was eventually forced to terminate due to a code vulnerability and hacker attack.

MakerDAO

MakerDAO was founded in 2014 and is an automated mortgage platform on Ethereum. It adopts a dual-currency model, one is the stablecoin Dai, and the other is the equity token MKR. Dai was launched on the mainnet in December 2017. Through the dual-currency mechanism, MakerDAO enables the entire decentralized pledge loan system to operate. MakerDAO belongs to the DAO model project and is also one of the representatives of DeFi projects. One of the main purposes of the MakerDAO system is to maintain the value of the on-chain stablecoin DAI anchored to the US dollar. By mortgaging ETH to the CDP contract, DAI can maintain an exchange rate of about 1:1 to the US dollar. At the same time, the equity token MKR holders participate in governance by voting to determine the DAI rate and receive corresponding incentive returns.

Aragon DAO

AragonDAO was launched in November 2016 and is a tool that can autonomously create "decentralized organizations". Users can use AragonDAO to manage personal or organizational affairs, such as running and managing non-profit organizations, managing household expenses with partners, or conducting personal management. In the governance of Aragon DAO, things that can be done include: allocating shares to a group of initial members, voting on the shares of new members, voting on the release of funds from the DAO, or voting on anything without binding force, etc.

DAO can work towards the common goal of system development by binding relevant interests and coordinating resources when all parties do not know each other. It has a flexible organizational structure, avoids the geographical and cultural limitations of individuals and entities, and can instantly track and confirm participation and contribution to the project as well as contributions at different levels.

At the same time, DAO is functionally a company without legal personality, a general partnership, which means that DAO participants may be subject to unlimited legal liability. In terms of security, once the system is up and running and open source, it will increase the difficulty of modifying the initial DAO code. If there are security vulnerabilities, it will be easy to be exploited.

Table: Simple comparison of DAOs

#What is unique about Nervos DAO

The advantages and disadvantages of traditional DAOs are very obvious, but incentives can still mobilize the enthusiasm of system participants and the whole, and enable DAO to show great regional flexibility and participation flexibility. Nervos DAO does not adopt a voting design, but changes DAO from a C position to an auxiliary position for regulating the ecology, avoiding some problems that may arise in ecological governance.

Compared to the governance functions of most DAOs, Nervos DAO is more like a smart contract with financial management functions. It removes the voting and organizational governance processes in most DAO projects, and directly uses smart contracts to calculate interest, simplifying user operations and lowering the threshold. As long as the holder is willing to sacrifice the liquidity of the token, he can deposit CKB to obtain a certain amount of interest compensated by the system, thereby alleviating the dilution of the token value caused by the secondary issuance of CKB.

Figure: Nervos DAO’s calculation formula for interest

In general, the model of CKB secondary issuance + Nervos DAO, on the one hand, helps to stimulate miners to continue mining, prevent the lack of driving force caused by the gradual reduction of subsequent rewards caused by the original POW mining, and on the other hand, provides a solution to the problem of blockchain state explosion. Both the Nervos CKB network and CKB holders have the opportunity to balance their own interests through Nervos DAO, which is probably the interesting thing about Nervos DAO as an ecological regulator.

The starting point of this mechanism is good, but uncertainty still exists. It is possible that the fluctuation range of the currency price exceeds the anti-increase effect brought by the interest. At this time, the currency holders need to face the psychological game brought about by market fluctuations. In addition, whether the demand for CKB in the network will continue to grow in the future also needs to be tested in practice.

Summarize

The design of incentive mechanism and consensus mechanism is the key to determine whether a DAO can succeed. Nervos DAO is different from the traditional DAO in blockchain. Nervos DAO is a smart contract and a special setting in the CKB economic model. It is not used for governance, but more like an ecological regulator for the distribution of tokens. In combination with the secondary issuance of CKB, Nervos DAO has the opportunity to promote a win-win situation for the Nervos CKB network, miners, and CKB holders. The actual effect in the future still needs to be verified online.