Decentralized Autonomous Organizations (DAO): The power of the global community using the example of UkraineDAO

With Putin’s war of aggression in Ukraine, one reads more about initiatives to help the victims of the war (sources: CNN, Cointelegraph, New York Times). One of the initiatives is called UkraineDAO and recently successfully raised several million USD in donations via a crowdfunding concept. — Authors: Svend Reuse, Duc Au

1. What is a DAO?

The acronym DAO stands for decentralized autonomous organization and makes its claim immediately clear in its name. Accordingly, the idea behind the three letters is the creation of an organization that is committed to the values of decentralization and autonomy (Source: Economist, Ethereum.org, Chohan, p. 1). This is made possible by blockchain technology and the use of smart contracts (source: Reuse/Frère/Schaab, pp. 43–68).

Outside of the blockchain universe, a DAO can be thought of as an ordinary company or organization. A company has one or more business purposes that management tries to achieve as best as possible with its strategic decisions. In the case of banks, this can be the provision of current accounts and payment cards (sources: BR, BTC-Echo, OMR). With regard to organizations, for example, there are various non-profit associations that collect funds and use them for a good cause.

What both examples have in common is that there is always a central authority above everything that makes the trend-setting decisions. These are hierarchically organized work organization structures. The parties involved — employees or members — usually have no direct possibility of influencing. DAOs thus represent a completely new form of participatory organization that lets your community participate in all decisions. According to the well-known industry platform “Coinmarketcap”, there are a large number of DAOs worldwide, which have a total market capitalization of over EUR 17 billion. Well-known DAO projects include the decentralized trading protocol from “Uniswap” or the decentralized stablecoin exchange “Curve” (source: Coinmarketcap). Figure 1 shows the top DAO tokens by market cap.

Figure 1: Overview of top DAO tokens by market capitalization; Source: Coinmarketcap, 2022

2. Decentralized governance through the use of tokens and smart contracts

Behind the idea of ​​the frequently quoted “Web 3.0” is the approach of breaking up hierarchical structures and central power structures. Because the power should not be in the hands of individuals (see meta or alphabet), but should rather be given back to the users (source: t3n digital pioneers). As previously noted, all members in a DAO have a say. Decisions are made here as a collective. This would be comparable to certain rights that a shareholder can exercise as an investor in a stock corporation. In general, all processes of a classic company in the world of DAOs are mapped in codes that ultimately lead to smart contracts. Since no central authority approves the decisions, DAOs use intelligent contracts that are made possible by means of transparent blockchain protocols (e.g. Ethereum) (source: Börsen-Zeitung). In this way, coordination within the organizations can be efficiently organized and implemented. For the participation of the community, tokens are issued, the sales proceeds of which are kept in a jointly controlled “treasury department”. The more tokens a person holds, the higher the voting rights in the DAO (source: Ethereum.org).

The principle of voting rights is explained below using Uniswap as an example. The native token “UNI” is a so-called ERC20 token and is primarily a tradable digital cryptoasset, comparable to Bitcoin or Ether (source: BTC-Echo). The token standard used shows that it is a peer-to-peer protocol based on the Ethereum blockchain. The special feature of the UNI token now lies in the additional voting right that can be exercised within the Uniswap governance. To do this, members can go to a “governance forum” and view the upcoming decisions (“proposals”). The right can either be exercised yourself or delegated to a third party. (Source: Uniswap).

3. The UkraineDAO

Ukraine Vice Prime Minister Mykhailo Fedorov tweeted on February 26, 2022 that the government was now allowing crypto donations. The post included the respective wallet addresses for BTC, ETH and USDT currencies and called for support for war-torn citizens (Source: Twitter). So far, a total donation of over USD 11.5 million has been recorded, most of which was made in the ether currency (source: BTC-Echo).

There was also another way for people critical of the government to help people. This is how a private movement was formed, which Ethereum founder Vitalik Buterin pointed out in his tweet on February 26th. A decentralized and autonomous organization with private individuals from various walks of life (e.g. artists, activists, influencers) was formed under the name “UkraineDAO”. The DAO advertises that 100% of donations go to the citizens of Ukraine and uses the transparency of cryptocurrencies to ensure this. On their own homepage, it is also stated that traditional fiat money could be controlled by central institutions and deliberately shifted to the detriment of the citizens. As proof of trust (or “Proof of Authenticity”), reference is made to the publicly visible transactions on the Etherscan and Zora platforms (sources: Etherscan, UkraineDAO, Zora).

4. Donation income through NFT sales proceeds

The UkraineDAO initiative initially offered the purchase of a non-fungible token (NFT) via the specialized platform “PartyBid”. The platform itself was in turn developed by a decentralized software organization called “PartyDAO” and pools funds from various investors to fund a joint NFT project (source: PartyBid). In the present case, the investors are the ones making donations for the victims of the Ukraine war. The Ukraine NFT flag was thus auctioned on March 3 for 2174 ETH. In return, as a sign of gratitude, the donors received so-called “$LOVE tokens”, which have a symbolic value and are intended to serve as a positive signal of support in the Ukraine war. At the time this article was written, the value of the token was around EUR 0.51 per token (source: Coinmarketcap).

5. Conclusion: Exciting concept, but not every DAO is a DAO

Undoubtedly, the concept of DAOs has exciting aspects that are contrary to the top-down approach in traditional companies. A functioning DAO governance or code-based company structure enables many advantages in which the members or the community can participate directly. The characteristically high degree of automation through the use of smart contracts can also lead to efficiency and scaling advantages (source: Cointelegraph, Deutsche Bank, Zeit).

The example of the UkraineDAO impressively shows how a handful of private individuals were able to carry out a large-scale fundraising campaign based on digital assets in a very short time. However, it should be noted that these are apparently still manual processes within the organization (e.g. integration of PartyBid, wallet transactions). The publicly available information on UkraineDAO does not indicate whether smart contracts are used. Furthermore, the $LOVE token does not have any co-determination rights for the donors, but primarily functions as a symbolic peace sign (no utility token). It was also stipulated from the beginning that the donations would be handed over to the non-profit initiative “Come Back Alive”, so that donors could not have a say in how the money was used (source: savelife). To what extent the UkraineDAO is planning further steps towards a “complete” DAO is not yet known. However, it should be noted that the blockchain technology in the Ukraine example provided provides crucial elements of support for the victims of the war.

What the future of the DAO looks like is still uncertain (source: TechCrunch). Similar to the blockchain and bitcoin technology, it has developed unnoticed in a very short time. As is so often the case with blockchain concepts, the absolute decentralization and autonomy should be emphasized (source: Fortune). But this is also a weakness. Thus, accountability, security, transparency and democracy in a DAO can be deduced as critical aspects that require special attention (source: Chohan, p. 4). Not all organizations should be decentralized and autonomous. In particular, sovereign tasks such as security, economic stability, currency or health should continue to be structured centrally, even if blockchain technology can streamline processes here. From the authors’ point of view, the scope of the DAO will focus more on examples like the one presented here.

Remarks

The article can also be read in German language at IT Finanzmagazin (Link).

About the authors

Prof. Dr. Svend Reuse is a member of the board of directors of the Kreissparkasse Düsseldorf. He is also an honorary professor at the FOM Hochschule für Oekonomie & Management and a member of the advisory board of the isf — Institute for Strategic Finance and the ZWIRN — Center for scientific, interdisciplinary risk management and sustainability. He is a co-opted researcher at Masaryk University Brno, Czech Republic. The statements represent the personal opinion of the author, which does not necessarily have to agree with that of the employer.

Cam-Duc Au is currently doing his PhD at the Masaryk University in Brno in the field of crypto robo-advisory. He works as Lecturer at FOM University of Applied Sciences for Economics and Management as well as Manager Holdings at P. Keppler Verlag.