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The Evolution of DAOs and Their Impact on DeFi


Leo Henkels

Witnessing the Dawn of DAOs

The world of decentralized autonomous organizations (DAOs) has undergone a remarkable transformation since its inception, evolving from nascent experiments to complex ecosystems reshaping decentralized finance's landscape (DeFi). In a conversation on the popular, "Just DAO It" podcast, hosted by Adam Miller, founder of MIDAO, and featuring Joseph Schiarizzi, co-founder of Open Dollar, the early days of DAOs were vividly recounted.

From the early days of The DAO and Moloch DAO to the cutting-edge platforms we see today, the DAO ecosystem has embraced a shift towards minimized governance and innovative financial instruments pushing the boundaries of what's possible in DeFi.

Joseph Schiarizzi, a seasoned DAO veteran, recounts his introduction to the DAO space at ETH Denver, a pivotal moment that set him on a path of exploration and discovery:

"I guess I was at ETH Denver, and I got the chance to meet ‘Peter Pan’ and a few other MetaCartel OGs like ‘Yer’. Let's see, who else was there... I don't know, but Peter Pan introduced me to everybody. They basically were like, 'Hey, you know, we're having this lunch, and you have to come because this is going to be huge.' There were only two DAOs at that point, right? There was Moloch DAO, and there was The DAO, you know, the Ethereum DAO, which was hacked and doesn’t really exist anymore"

Decentralized Autonomous Organization on blue background

The Pioneers: Moloch DAO and The DAO

Schiarizzi's recollection transports us back to a time when the DAO landscape was in its infancy, with only a handful of pioneering projects like Moloch DAO and The DAO paving the way. The latter, the infamous Ethereum DAO, was a groundbreaking initiative launched by the Ethereum Foundation in 2016, designed to serve as a decentralized venture capital fund. However, a devastating hack that drained millions of dollars from the DAO's treasury and led to its demise while also triggering the contentious Ethereum hard fork that birthed Ethereum Classic.

MetaCartel's Radical Experiment

Despite this setback, the DAO community remained undeterred, and projects like Moloch DAO emerged, laying the groundwork for a new era of decentralized governance. As Schiarizzi recounts:

"And MetaCartel came around and said, 'Hey, we're just going to put a few hundred ETH into this treasury, we're going to give it all away with no strings attached.' It was the first radical public goods experiment. We didn't call it public goods then; that wasn't really part of the crypto vernacular then. But it was really just, 'Let's give away this money to whoever is building cool stuff and build a cartel and test out these DAO theories that we've been experimenting with but haven't been implemented as a product yet.' There was no productized DAO at that point. And so, my interest really started with MetaCartel and getting super into that."

This radical approach of MetaCartel, which involved seeding a treasury with funds and distributing them without strings attached, marked a pivotal moment in the DAO evolution. It paved the way for a new era of experimentation and exploration, laying the foundation for today's diverse DAO ecosystem.

Collective Ownership and the Future of Work

As DAOs gained traction and more projects emerged, the need for robust governance mechanisms became increasingly apparent. Joseph Schiarizzi's experience with Raid Guild, a product development DAO, highlighted the power of collective ownership and decision-making:

"And then, in 2020, you know, crypto was finally useful for the first time with DeFi and NFTs and all this other stuff. And there were a lot of projects building, so I joined Raid Guild, which was and still is a product development shop that is kind of a collective of freelancers. 

I've been doing freelance software development for a long time; I've been a freelancer for years. But the amount of power that you get from teaming up with a couple of people in the DAO and saying, 'Hey, I need a designer for this project, and I need one other frontend,' and then coming together and being able to work as a collective and own, actually own instead of being hired as a contractor somewhere but owning the organization in the way that it was structured, was incredibly powerful. And I'm totally sold on it. I think it's one of the best possible models for hiring people and working. And I really think DAOs could be the future of work, too. Everything has basically come from that, and then I've had experiences since then. But that's basically my origin story."

Schiarizzi's experience underscores the transformative potential of DAOs in redefining traditional work paradigms. DAOs empower individuals to collectively own and govern their organizations rather than being mere contractors or employees.

The Shift Towards Minimized Governance

However, as the DAO landscape evolved, a growing recognition emerged regarding the need for minimized governance and increased autonomy. This shift was driven by a desire to create capture-resistant organizations that could withstand external influences and maintain their core principles over time. Schiarizzi's involvement with Open Dollar, a pioneering DeFi project, exemplifies this ethos:

"Yeah, it's actually governed by a DAO. Okay, so it's governed; there's a DAO that governs it, but it's an 'ungoverned DAO.' And so we're trying to take this principle of minimized governance. I wrote about this on Open Dollar recently. I'd love to share that article with you. But there is a DAO. The ODG token holders, Open Dollar Governance token holders, get to vote on what types of collateral to add to the DAO and to raise or lower the debt limit for the protocol. And there are a lot of safeguards, like a long time-lock, so after a proposal goes through, if it's awful, people have a chance to sell all their tokens or exit their positions before it executes autonomously. And also, the ODG token has barely any control over the rest of the protocol.

Many DeFi protocols have created DAOs and given their governance tokens absolute authority to add extra fees, change how it works, upgrade the contracts, and change the logic of things. Open Dollar is likely not upgradeable. You could deploy a new version of it and then connect that to the DAO if you wanted, but we're trying to build the most autonomous code possible, the most immutable code possible, and take away all of these parameters that the DAO could update and just say, no, we're going to set them once at launch, and then we're going for it, right? And try to have as little governance as possible. And build it for longevity."

DeFi Decentralized Finance

Open Dollar's Innovative Financial Instruments

Open Dollar's approach to governance encapsulates the essence of minimized governance, where the DAO's control is limited to specific parameters like collateral types and debt limits. This restriction aims to create a resilient system that is largely autonomous and immutable, reducing the potential for external capture or manipulation.

Moreover, Open Dollar's innovative financial instruments are reshaping the DeFi landscape, offering users unprecedented flexibility and safety in managing their loans and collateral. By introducing non-fungible vaults, Open Dollar allows users to buy, sell, and transfer their loan positions seamlessly, a feature previously unavailable in traditional DeFi lending protocols.

As Schiarizzi explains:

"We have changed how vaults work in collateralized debt positions used to mint most decentralized stablecoins. Instead of paying back your debt to access your capital and collateral, you can sell your entire loan in the secondary loan marketplace. In the US alone, this is trillions of dollars in volume a year, but it's zero in DeFi. And that matters because there's this feature set of traditional finance that is not available in DeFi right now. And we need to make it more useful to have adoption and to allow DAOs to do all the things that traditional companies can do and to compete with them on-chain."

By bridging the gap between traditional finance and DeFi, Open Dollar is paving the way for DAOs to access previously unavailable financial instruments, empowering them to compete with conventional companies on a level playing field.

Conclusion: Reshaping the Future of Finance

The evolution of DAOs has been a remarkable journey, marked by experimentation, innovation, and a relentless pursuit of decentralized governance and financial empowerment. From the early days of The DAO and Moloch DAO to cutting-edge platforms like Open Dollar, the DAO ecosystem has consistently pushed boundaries, embracing minimized governance principles and pioneering financial instruments that are reshaping the DeFi landscape.

As more projects like Open Dollar emerge, offering innovative solutions that blend the best of traditional finance with the power of decentralization, DAOs are poised to play an increasingly significant role in the future of finance. By fostering capture-resistant organizations and enabling unprecedented flexibility in asset management, DAOs are redefining the boundaries of what's possible and paving the way for a more equitable and transparent financial ecosystem.