The 2022 DAO Report — Part 1

Introduction

4,000 active DAOs with a market capitalization of around $20 billion. Pretty cool, right? DAOs are disrupting coordination across investments, corporations, social clubs, politics, education, and so much more! We can become a part of this evolutionary process & gain first movers’ advantage by supporting this evolutionary process.

Workers have been coordinating under outdated corporate structures over the last few centuries using a top-down approach where a single decision-maker or group of centralized decision makers directs resources including labor & capital towards a goal.

The last few centuries have seen a huge growth in the number of businesses, corporations, and firms; several economists have studied this growth. The Nobel Prize-winning economist, Ronald Coase, dedicated a large part of his academic career to studying the structure of firms and why they exist. Ronald’s work on property rights and the transaction costs of contracting with labor and managing resources helped identify reasons for a firm. Some of his ideas were focused on centralized decision-making and the benefits to the firm, but other scientists have theorized that a more decentralized approach could be beneficial.

The advent of blockchain technology introduced a better way to organize ourselves in social and professional engagements and this has proven successful according to a report from Brain Newar in June 2022: “there are currently over 4,000 active DAOs with a market capitalization of around $20 billion”. Impressive DAO growth validates the need to coordinate human-work interaction in a decentralized manner.

What is a DAO and Why You Should Get Involved?

Let’s run through a quick refresher on DAOs.

A DAO is an organization that can operate with no central leadership. Basically, DAOs are characterized by 3 elements:1. Decentralized: The interactions of participants in the organization follow the principles of equality, voluntariness, reciprocity, and mutual benefit and are driven by individual resource endowment and complementary advantage and not that of an administrative top-down approach.

2. Autonomous: The operations are being managed by protocols and smart contracts eliminating the need for trust in a middleman, thanks to a “code is law” mutual agreement.

3. Organization: A group of people must come together to achieve a goal that may or may not have legal considerations depending on the formality of what is connecting them together.

DAOs are new organization models in which the management and operational rules are encoded on the blockchain in the form of smart contracts and can autonomously operate without centralized control or third-party intervention.

Decisions get made from the bottom up, governed by a community organized around a specific set of rules enforced on the blockchain.

DAOs are fully transparent because they can be built on open-source blockchains and anyone can view their code and audit their built-in treasuries as the blockchain records all financial transactions.

DAOs foster a decentralized network ecosystem where corporations, institutions, and companies fully embrace the ethos of decentralized coordination. Participants innovate and interact meaningfully to achieve goals in a trustless, autonomous, and decentralized manner. In this ecosystem, decisions are made via proposals and executed through codes leaving no room for trust to be placed in individuals or corporations.

DAOs enable decisions to deploy resources such as capital and labor to be made collectively in a transparent way, this is the frontier of human coordination and the biggest reason you should consider getting involved in DAOs.

The Evolution of DAOs

Everybody has in some way been part of a DAO. Every vested interest in an organization, spontaneous outpouring of support for a type of community, and voluntary interaction of a group of people have elements of what a DAO is. However, the advent of blockchain technology provided an efficient way to better manage and organize this human participation.

Cointelegraph Research identified three eras of DAO evolution where DAO 1.0 was the pre-digital Revolution and Bitcoin, DAO 2.0 was the advent of blockchain smart contracts, and DAO 3.0 was an explosion of DAO infrastructure growth.

DAO 1.0

The concepts for DAO 1.0 started over half a century ago and evolved through the idea of an internet-connected home. In 1997, Werner Dilger wrote a journal article on a smart home that would be integrated as part of the Internet of Things which he termed a decentralized autonomous organization. This time period, prior to the creation of the blockchain technology, can be called DAO 1.0. This was the start of the evolution of DAOs.

Satoshi Nakamoto released the Bitcoin whitepaper and mined the Genesis Block on Jan. 3, 2009. The Bitcoin network was then considered to be the first example of a blockchain-powered DAO. A DAO 1.0.

Bitcoin was once considered a DAO because most network participants had never met, and the network evolved through community agreement that required miners and nodes to signal their support. However, Bitcoin is no longer considered a DAO by today’s standards because it is a generation one (Gen1) blockchain that does not have smart contract capability.

Note: Smart Contracts allow parties to enter into a trustless agreement , which means you don’t have to rely on a third party — an individual, bank, government, etc. — to reward adherence or punish violation of the contract..

DAO 2.0

Multiple whitepapers were published between 2013–2014 including Ethereum’s whitepaper, explaining how the promise of Bitcoin can be improved upon through smart contract application. But the Dash network were the first movers towards DAO 2.0.

DAO 2.0 was particularly born out of the addition of Dash’s governance mechanism and smart contracts and with the next phase of blockchain protocols, such as Ethereum, EOS and Tezos.

Dash, a fork of Bitcoin, was the first cryptocurrency DAO to have a self-funding, self-governing protocol. Dash pioneered decentralised governance by blockchain with the launch of its two-tier masternode network in 2015, and it remains the industry’s longest-running DAO to date. This marked the change to the next era of DAO 2.0. This allowed for more decentralisation and wider adoption across decentralised applications (DApps).

Smart contracts became the differentiating factors of DAO 2.0. It enabled voting, proposing, signing, and delegating tokens in ways that support different functionalities that a DAO needs to operate. Decentralised applications use smart contract functionalities to allow members of DAOs to carry out the different coordination activities.

DAO 3.0

DAO 3.0 was sparked by the hack of The DAO. The DAO was the first DAO entity built on top of the Ethereum blockchain in May 2016. The fall of The DAO became a cautionary learning moment for the entire crypto and DAO space.

While different DeFi-focused DAOs were created in its many forms, other projects started working on making the infrastructure and tooling applications, which would pave the way for an explosion in DAO growth, birthing the DAO 3.0 era. Some of the toolings built made treasury management easier, voting and proposal less costly, or made the entire start-up and operation of a DAO so easy that it could be done without needing to know how to code.

According to Cointelegraph reports, from 2019 to 2020, there was an increase of 660% in active DAOs. This period saw a major proliferation of DAOs that branched out away from focusing on DeFi to art, social activity, politics, NFTs, gaming, and beyond. This marked the start of DAO 3.0.

There continues to be positive momentum in DAOs as seen in the explosion from 700 DAOs in May 2021 to over 4,000 active DAOs in mid-2022.

Key DAO Metrics

The available DAO data/metrics are as diverse as DAOs themselves. Thus, this piece aims to provide data on traditional metrics that are closely related to the operation, adoption, and evolution of DAOs.

The metrics presented here include:

Popular DAO Blockchains

Ethereum remains the most used Layer1 blockchain for DAOs.

Of the top 100 governance tokens by market capitalization, 83 of the respective DAOs primarily link into the Ethereum ecosystem. This can be attributed to the massive network effect that comes as a result of building on the second-largest cryptocurrency by market capitalization.

Aragon, a protocol that makes the creation of a DAO simple with governance plugins and a simple user interface using the Ethereum blockchain has helped proliferate DAOs to a large extent. Aragon has accelerated the growth of DAOs as a global organizational solution for DAO builders by removing the hassle of coding. This has contributed to the massive adoption of the Ethereum blockchain for building DAOs.

Figure 1 shows a graphical representation of the most common blockchain protocol ecosystem for DAOs.

blockchain protocol ecosystem for DAOs

Participation in DAOs

The impressive growth in the numbers of DAOs over the past few months does not give us any information about the activity within them. Sourcing from Cointelegraph Research, figure 2 displays the number of daily voters active in the DAO space as tracked by DeepDAO.

Voting participation in DAOs

Although one voter may be active in different DAOs, it still tells a clear story about the rise and fall of DAO activity.

From the chart, we can clearly see the numbers of active DAO voters dropping to the levels of early last year despite the impressive increase in levels as of late 2021. This is no sign that the growth of DAOs is coming to an end. It clearly shows the waning interest of participants in DAOs as a result of the market downturn in the crypto space.

Nevertheless, this will likely result in a consolidation phase with DAOs having a clear value proposition for users and clients surviving.

Treasury Analysis

Each DAO’s treasury is made up of all assets stored in the DAO’s wallets.

The treasury is defined as assets under the discretion of a DAO — i.e., fully governed on-chain funds.

Also, we can measure the value of a DAO’s treasury, by including additional wallets, which may not be freely available to the DAO. Such wallets can contain reward fees or staking accounts. This is important because discrepancies can arise between total treasury holdings and what is liquid.

According to OpenOrgs.info, as of the 20th of September, 2022, GnosisDAOtotal treasury was $1.14 billion but only $234 million was liquid. The table below presents a makeup of 10 DAOs treasuries in more detail.

Liquidity of DAOs

DAOs also invest in other projects and hold their assets as a part of their balance sheets. Many DAOs hold the stable coin USDC, DAI, and USDT, with wrapped Ether (WETH) as their top non-stable asset.

Figure 4 shows the assets that DAOs have invested in as a part of their holdings.

Token holdings and investment by DAOs

VC Investments in DAOs

The venture capital (VC) side of a DAO has two components: VC investment in DAOs & VC DAOsthemselves.

Since 2021, venture capital involvement in funding DAO projects has been on the rise, frequently coinciding with macroeconomic and crypto market cycles. It was reported that VC investment hit a local peak of over $160 million in Q1 of 2022.

VC investment in DAOs

The involvement of VCs in DAOs can be attributed to the malleability of DAOs and how they can be easily formed and focused on different goals. VCs see them as a potentially good vehicle for a return on their investment even when they hold a higher degree of risk than other crypto investment vehicles.

DAOs, which were VC investments in another project, accounted for approximately 9% of all VC investment in Q1 2022 and dropped to less than 6% in Q2. This is consistent with current trends in traditional financial institutions and venture capital firms.

Share of VC investment

Also, some DAOs have even invested in other DAOs.

It should be noted that investment DAOs can gather information from all over the world, potentially better and faster than traditional systems, which may learn of trends or changes in a given industry later than DAO members. This provides an advantage to DAOs.

DAO treasury focus

top 10 DAO investment by VC

Conclusion

DAOs are an exciting phenomenon that is here to stay.

The possibilities of DAO implementation and how it can drive global engagement are seemingly endless, but this doesn’t mean it is going to be an easy ride ahead, after all, this is a new frontier.

As the blockchain industry continues to grow, DAO adoption will see a continued cycle of ups and downs on its way to becoming a standard operating practice among new and existing organizations. DAOs are here, DAOs are growing, but DAOs aren’t for everyone & everything.