DAO Year-End Review: With Glory Comes Challenges

Author | Gu Yu

DAO is a new framework for human organizational coordination and the core organizational primitive of the Web3 world. With numerous advancements this year and the push from large institutions, it has become one of the most关注的赛道 in the crypto industry this year and is considered one of the most promising directions.

Specifically, this year the DAO field has experienced trends such as diversification of organizational types, rapid increase in treasury management scale, diversification of treasury asset types, the emergence of merger cases, and frequent governance attack incidents. Many well-known projects have also exposed various practical issues in their DAO governance processes.

In this article, Chain Catcher analyzes and introduces important trends, representative events, and exposed issues in the DAO field in 2021. We welcome reading and discussion.

1. DAO Development Trends

1) Diversification of DAO Organizational Types

With the further popularization of the decentralized spirit in the crypto industry, the DAO organizational model has been adopted by an increasing number of organizations, collectively promoting the development of organizations through community governance, leading many to believe that "everything can be a DAO."

Against this backdrop, the types of DAO organizations are showing a trend of extensive expansion. In addition to DAOs purely serving protocol/project development, there are venture capital DAOs (The LAO, Flamingo, etc.), media DAOs (Bankless DAO, GCR, etc.), grant DAOs (Uniswap Grant, Aave Grant, etc.), and collectible DAOs (PleasrDAO, Whale, etc.).

At the same time, almost all new token projects will establish DAO treasuries, allocating a portion of tokens to the treasury and allowing the community to decide on the use of funds. Established projects like 1inch, 0x Protocol, and Bybit have newly formed DAO treasuries.

By the end of the year, crowdfunding DAOs also became the focus of the crypto market. ConstitutionDAO raised over $40 million to bid for a copy of the U.S. Constitution. Although it was unsuccessful, its concept inspired the emergence of several similar organizations, sparking a wave of DAO enthusiasm.

2) Rapid Increase in DAO Treasury Management Scale

With the sharp increase in the number of DAO organizations, the value of assets managed by DAO treasuries is also rising rapidly. According to the Deep DAO website, the total value of assets managed by 188 DAO organizations currently exceeds $115 billion, more than a tenfold increase since the beginning of the year. At the same time, 20 DAO organizations have asset management scales exceeding $100 million, and 49 DAO organizations have asset management scales exceeding $10 million.

Source: Deep DAO

Among them, the DAO organizations with the largest asset management scales are Uniswap ($2.94 billion), BitDAO ($2.48 billion), Lido DAO ($600 million), Radicle ($590 million), and Compound ($570 million).

3) Emergence of DAO Merger Cases

Last year, Yearn Finance announced mergers with several well-known DeFi protocols like Pickle Finance and Cream Finance, but aside from resource integration among developers, there was not much substantial progress. This year, multiple merger cases between DAO organizations based on tokens and assets, approved through community voting, have occurred.

In April, Inverse Finance DAO, after a vote by token holders, acquired Tonic Finance and all its assets for 250 INV (worth $1.6755 million at the time), creating a precedent for project mergers in the DeFi industry.

In December, at least three similar DAO merger cases occurred. The Ethereum scaling solution xDai merged with Gnosis, with STAKE tokens being exchanged for GNO tokens; the DeFi liquidity management protocol Visor announced a merger with Gamma, with VISR tokens being fully exchanged for GAMMA; and the algorithmic stablecoin protocol Fei Protocol merged with the DeFi lending protocol Rari Capital, with RGT tokens fully exchanged for TRIBE.

Mergers between DAOs can allow different projects to complement each other's strengths and expand competitive advantages, becoming a choice for more and more well-known projects.

4) Diversification of DAO Treasury Asset Types

The initial assets of DAO treasury tokens are usually the project's own governance tokens or some ETH, which weakens the project's risk resistance. If the price of its own tokens plummets due to market conditions or unexpected events, it will be difficult to have sufficient financial resources to invest in project development.

Therefore, the diversification of DAO treasury assets has been particularly emphasized this year. Some DAOs may convert assets into stablecoins, purchase index funds, or exchange assets with other projects to enhance the treasury's risk resistance.

For example, this year, Balancer DAO exchanged governance token assets in its treasury with several projects, including Fei DAO, mStable, MIST, and PrimeDAO, with a total scale exceeding $10 million. Mask Network launched the ecosystem partner alliance SocialFi Alliance, helping various DeFi projects in the alliance to diversify and diversify their treasury assets through token swaps, completing token swaps with multiple projects like Perpetual and dHedge.

5) Frequent DAO Governance Attack Incidents

When project development decisions are entirely determined by DAO community votes, the risk of DAO governance attacks indirectly increases. Many malicious attackers attempt to exploit voting to launch governance attacks on projects and profit from them, with several similar cases occurring this year.

In March, the cross-chain stablecoin project True Seigniorage Dollar (TSD) suffered a governance attack. Since developers only held 9% of the DAO voting rights, malicious attackers gradually accumulated TSD tokens at a low price, eventually controlling 33% of the DAO voting rights, and then proposed a plan and voted in favor. During implementation, the attackers added code to mint, creating 11.8 billion TSD for themselves, and then profited by dumping the tokens.

In September, a proposal passed by the Venus lending protocol on BSC was also canceled by the project team using security mechanisms. This proposal aimed to encourage community members to vote by promising token distribution and intended to grant a team named "Bravo" voting and fundraising capabilities equal to the original governance team. However, the official stated that anonymous individuals attempted to control the protocol through bribery, leading to the proposal's cancellation.

At the end of this month, the synthetic asset protocol Mirror also suffered a governance attack. The attacker initiated proposal 185, attempting to steal $38 million worth of MIR tokens from the protocol. The proposal disguised itself as a governance request for deep cooperation with Solana, attempting to deceive the community into voting in favor. Additionally, the attacker initiated several similar false governance proposals to reduce the attention on proposal 185, but ultimately failed.

2. Important Events in the DAO Field

1) Legalization of DAO Organizations in Wyoming

In March, the Wyoming Senate Committee officially voted to pass the DAO bill, which allows the public to create an entity actually called "DAO" and organize affairs using various legal documents, legal agreements, or smart contracts, even running their organization and managing assets on Ethereum.

The bill took effect on July 1, and thereafter, CryptoFed DAO was recognized as the first legal DAO organization in the United States.

2) Uniswap Grant Incident

In early July, an organization called the DeFi Education Fund sold 500,000 UNI tokens, profiting over $10 million, which brought to light the reason why the organization had received a grant of 1 million UNI from the Uniswap treasury.

Previously, in June, the Uniswap community voted on a proposal to fund the organization with 1 million UNI, which passed with the support of blockchain enthusiast organizations from Harvard University, the University of Pennsylvania, Columbia University, and UCLA. Further analysis indicated that the voting rights of these institutions were delegated by a16z, leading to suspicions that the organization was essentially a lobbying fund pushed by a16z for its own interests.

Additionally, the organization was also suspected of lacking transparency, insider trading, and failing to fulfill commitments, leading to criticism of many DeFi protocols being controlled by large institutions.

For more details on this incident, please refer to the article "Reviewing the Uniswap Grant Incident: What Kind of Organization is the DeFi Education Fund that Made Millions?".

3) Sushiswap Financing Proposal Incident

In early July, Sushiswap co-founder 0xMaki posted a proposal on the official governance forum, suggesting that a portion of the approximately 51 million SUSHI held by the SushiSwap treasury be used for institutional investors, with a maximum sale of $60 million at a price of 20-30% of the time-weighted average price over the 30 days prior to the proposal's conclusion, with terms including a 6-month lock-up period and an 18-month linear release period.

Due to the financing being conducted at a discount and the lock-up period being too short, the proposal sparked significant opposition and discussion among users and industry institutions. Industry KOLs, including partners from Lightspeed Venture Partners, Pantera Capital, DeFiance Capital, and FTX founder SBF, participated and provided suggestions for modifying the proposal. Ultimately, Sushiswap decided to abandon the financing.

This proposal may be one of the most discussed and widely influential proposals in the crypto industry, as community members exerted massive pressure to force the project team to modify the proposal details, while the venture capital institutions involved publicly presented their ideas and strategic values to align with the community, becoming a classic case of community governance.

For more details on this incident, please refer to the article "SushiSwap Token Sale Proposal Sparks Community Doubts, May Become a Classic Case of DeFi Governance".

4) Venus Proposal Passed by Vote Canceled by Official Team

In September, a governance proposal from the Venus community on BSC was canceled by the official Venus address through a security measure called "one-click cancellation" after receiving a majority vote. This is one of the few instances in the DeFi industry where an on-chain governance proposal was passed but not implemented.

It is reported that the proposal aimed to encourage community members to vote by promising token distribution and intended to grant a team named "Bravo" voting and fundraising capabilities equal to the original governance team, proposing a financing plan. The official Venus team later responded that this action was intended to prevent anonymous individuals from controlling the protocol through bribery, but many community members questioned the "centralized" nature of the governance.

5) ConstitutionDAO Crowdfunding to Bid for a Copy of the U.S. Constitution

In November, ConstitutionDAO launched a crowdfunding campaign to bid for a copy of the U.S. Constitution, raising over $45 million worth of ETH in just four days, with a total of 17,437 users participating in donations. At the same time, PEOPLE tokens were issued to all donors, but ultimately the bid was unsuccessful, and refunds were issued to all users.

Subsequently, due to the symbolic meaning of the PEOPLE token name and the enthusiastic market sentiment, the price of PEOPLE tokens soared dozens of times. Following this, several DAO organizations with specific plans to acquire NBA teams, rescue Silk Road founder Ross Ulbricht, and acquire the defunct movie rental company Blockbuster also emerged, sparking a wave of DAO enthusiasm.

6) Sushiswap Team Infighting Incident

At the end of November, several former Sushiswap team members publicly accused the project of having cliques and engaging in kickbacks, stating that Sushiswap was no longer a community-driven project but was controlled by a few individuals. Subsequently, the Sushiswap CTO responded multiple times on Twitter, raising many questions about the Sushi team's situation and causing a significant drop in the price of SUSHI.

In early December, the Sushiswap CTO ultimately decided to resign to quell external doubts, and multiple parties initiated proposals in the project's governance forum to determine a new organizational structure for Sushiswap. The discussions sparked by this incident regarding DAO organizational culture and operational mechanisms are also of significant value to the industry.

For more details on this incident, please refer to the article "In-Depth Investigation: Internal Strife Continues, What Happened Inside Sushiswap?".

7) EOS Community Votes to Cancel Token Grants to Block.one Accounts

In early December, the EOS community initiated an on-chain proposal vote to stop granting tokens to Block.one, as the speed and quality of code output for EOSIO had significantly declined, and many commitments had not been fulfilled.

The proposal was successfully passed, bringing EOS back into the mainstream view of the industry and gaining recognition from many industry professionals. This is also one of the few instances where a community punished an official organization through voting in DAO governance, providing a reference for future DAO governance directions.

3. Issues Facing DAOs

1) DAO Infrastructure Still Not Perfect

DAO infrastructure can be divided into two parts: DAO launchers and DAO management tools, involving core team participation, asset management, community participation, and token distribution, primarily aimed at improving the operational efficiency of DAO organizations. Tools and products launched this year to serve DAOs include treasury management tools like Parcel, decentralized code management tools like Orgs, task bounty platforms like Layer3, and DAO extension toolkits like Zadiac.

All DAO organizations need these tools and processes to support the current state of DAO operations, even modularly woven into current DAO institutions. However, as an emerging phenomenon, most of this infrastructure is still in its infancy. For example, tools that automatically execute upon voting approval greatly limit the development of DAO organizations.

2) Low Participation of Ordinary Users, Governance Still Has Centralized Attributes

Any project requires the participation of a large number of ordinary users to achieve true decentralization. From the voting data of Snapshot, although voting incurs no gas fees, the number of voters and participation rates for most projects are not optimistic.

According to Chain Catcher's statistics at the end of October this year, most projects had between 5-15 proposals from July to October, with an average of fewer than 100 voting addresses. Projects like Sushiswap (1014), Gitcoin (787), and dYdX (670) are relatively leading, with only 6 projects having an average number of voting addresses exceeding 500, and 15 projects falling between 100-500.

Currently, small holders lack motivation to participate in governance, which leads to project votes being easily controlled by project teams and investment institutions. For example, in the previously mentioned Uniswap grant incident, although most UNI holders believed it was not in the project's interest, the proposal still passed due to the support of multiple institutions backed by a16z and several team members. The public only learned of the proposal's existence days after it was approved.

To address this, Vitalik also wrote in August this year proposing several solutions, such as using non-token-driven governance forms and reputation-based voting. For more details, see the article "Token Voting Should Not Be the Only Legitimate Form of Governance Power Decentralization".

3) DAO Operational Mechanisms Still Not Perfect, Limited Reference Cases

Currently, the operations of DAO organizations are still in the early exploration stage. Many DAO organizations encounter various issues during operations regarding how to coordinate internally, how to enhance transparency, and how to determine decision-making processes.

For example, Synthetix founder Kain Warwick decided to run for the council again in June after stepping away from the project to establish a clearer organizational structure and leadership team, as he found that the lack of leadership and a flat structure led to operational issues within the team, significant conflicts among engineers, unclear priorities, and increasing frustration.

"As a former leader and core contributor, I intentionally created an extremely flat structure to avoid core contributors gaining too much power in Synthetix and undermining our nascent decentralized governance," Kain Warwick stated. "While core contributors continue to perform well on their core priorities, many are intensifying efforts to solve problems, there is no clear process to facilitate this and ensure appropriate resource allocation to address these issues."

Similarly, the previously mentioned Sushiswap has been exposed for issues such as team members taking kickbacks and centralized decision-making, as well as internal voting demanding the resignation of former leader 0xMaki. The issues reflected include which problems should be decided by team members and which should be decided by DAO votes, as well as how to maintain operational transparency.

Overall, the DAO field has made significant progress this year and gained widespread recognition in the industry, but it still faces many practical obstacles that need further exploration and resolution.