DAO-2-DAO and DAOverse

Writer: Middle.X

Review: Owen

We have discussed the governance layer, collaboration layer, and organization layer of DAO successively, but all discussions are limited to the disassembly of a single DAO, not involving the interaction between DAO and DAO. Just like the human brain, the topology structure that is composed of neurosynapses is more important than each neuron. Therefore, we believe that it is necessary to discuss the interaction pattern between DAO and DAO in order to get a glimpse of the full picture of the crypto business world composed of many DAOs.

NFT《Connect》: Owned by

Over the past two years, hundreds of DAOs have emerged with over $18 billion under management, but at the mean time most DAOs are still operating like isolated islands, resulting to numerous different forms of DAO-DAO interactions have emerged. Based on what we have observed, we have grouped the current DAO-2-DAO(D2D) interactions into three categories, namely financial interactions, graft restructuring, and Metagovernance.

Financial Interaction: Trusted Contracts betwee DAO and DAO

The one-way payment behavior of one DAO to another DAO does not require a trusted binding form, but transactions are often two-way or even multi-way, where one DAO performs a certain behavior that based on the behavioral commitment of another DAO. For example:

  • Token exchange: two DAOs exchange the token in their Treasury at a certain rate
  • Co-funding: Two DAOs make payments to a third-party pool at a certain rate (with scenarios such as forming a joint venture, jointly providing liquidity to a pool of transactions, co-financing a cause, jointly providing bonuses for an event)

In traditional commercial, parties to a transaction often use paper documents to enter into a contract and rely on judicial force to guarantee each other’s performance, and in some cases, a trusted third party is introduced in to hold the funds, like Alipay the most typical case. But with DAO,this can be done through smart contracts.

A smart contract can be thought of as an on-chain script that performs an action or set of actions to change the state of the ledger once a certain set of conditions are reached. by deploying a smart contract, a set of digital contracts can be created and will be performed enforcedly when conditions are reached. If the conditions fail to be triggered when they time out, then the funds held in escrow in the contract can also be withdrawn, with no loss or risk to either party.

Though DAOs can write smart contracts at their own cost, using some of the mature smart contract frameworks can help establish contracts between DAOs more easily. Prime Deals, developed by Prime DAO, is one such smart contract framework focuses on trusted financial interactions for D2Ds. For some smart contract frameworks which core application scenario not be a D2D interaction scenario also can be applied to a D2D scenario indirectly, which allows non-developers to create a specific contract type by filling out forms, such as OpenLaw for creating a smart contract template marketplace, and Gnosis Conditioned Token FrameWork for creating conditional payment and prediction markets, and Kleros for creating hosted contracts.

Prime Deals is highly applicable to D2D scenarios, especially for Token Exchange and Co-Funding. The function Prime Deals supports include:

  • An unlimited number of DAOs can participate in the exchange process, turning a financial interaction between two parties into multiple parties
  • The ability to exchange multi-types tokens in a single contract
  • Allow DAOs to be appointed representatives for a particular contract
  • Conditions would be added in real time to respond to changes in the negotiation process
  • Supports multiple payments and recurring payments (with the help of Proposal Inverter) in addition to lump sum payment
  • Transactions can be set as“private” so that don’t disclose details until all participants are ready
  • Supports conditions nested in mul-layers to cope with comples cordination ,not just supporting a single condition.

Prime Deals is built on Ethereum and benefits from the composability of smart contracts, so no matter which governance framework (Gnosis Safe, Daohaus, or DAOstack) you uesed, Prime Deals will work. Prime Deals also plans to implement cross-chain interaction for D2D.

Prime DAO has implemented Token exchange with VitaDAO and Olympus DAO using the Prime Deals suite and has established a joint venture vault with Balance, Currently.

We believe that with the further prosperity of DAOs and the development of tool-based applications, the financial interaction between DAO and DAO will become more frequent and convenient, making DAOs form a safe and high-flowing network.

Grafting restructuring: merger, splitting, and business transfer of DAOs

Companies merger, split and business units trade with each other are common in traditional business. DAOs, as the native organizational form of Web3, will behave in a similar way.

There are at two high-impact DAO mergers and acquisitions that occurred at the end of last year.

On December 8, 2021, following a vote by their respective communities, xDAI and Gnosis decided to merge, with 1 STAKE (xDAI governance token) for 0.032 GNO (Gnosis governance token) within a certain period of time. After the merger, GNO acts as the unified governance token, and xDAI Chain was renamed to Gnosis Chain. Before that, xDAI Chain was a sidechain of Ethereum which was created to reduce Gas fees for the stablecoin DAI circulation, and xDAI was a shadow asset of DAI on xDAI Chain. xDAI is a decentralized prediction marketplace. Gnosis Safe is a multi-signature wallet creation tools, which is one of the businesses of Gnosis.

On December 22, 2021, the proposal for the merger of Rari Capital and Fei Protocol was approved by the majority vote of both DAO members, which bringing the total TVL to $2 billion after that. Under the terms of the merger, RGT (Rari governance token) holders need to exchange RGT into TRIBE (Fei governance Token) at a ratio of 1:26.7 within 180 days. This proposal also agrees that Fei will service Rari’s debt that caused by the $10 million breaches which happend in May 2021. TRIBE holders who are unhappy with the merger decision could choose “rage withdrawal” and the new entity will be known as Tribe DAO.

Fei Protocol is an over-collateralized stablecoin( Fei) protocol. Unlike the DAI created by MakerDAO, Fei Protocol is pledged with an algorithmic reserve of Protocol Control Value (PCV). Rari is an open-rate lending protocol that allows anyone to create a lending pool permissionless, called Fuse pool. Both of them will act as sub-products under Tribe DAO.

Both DAO mergers in above go through the following steps:

1. each of them initiates a merger proposal.

2. both of them approve the merger proposal through governance votes.

3. Based on the exchange rate agreed in the proposal, the governance token of one DAO will be redeemed for the governance token of the other DAO by a deadline.

Mergers and acquisitions of DAOs is the big decision involving the entire value within the treasury, which is subject to full discussion, and broad consensus within the community, and must be reached only after an overwhelming vote victory.

Through mergers, DAOs can bring together the ecological resources and community power of multiple parties that will stimulate innovations, and it improving its competitiveness and survival chances. By the merger, xDAI Chain revitalize its ecosystem, the nascent Tribe DAO get a strong autonomous financial system.

Multiple DAOs could merge into one DAO, one DAO could split into multiple DAOs, and the businesses of each DAO could transfer among them. By contrast, the latter two are simpler processes that do not require a deadline to redeem the governance token.

A typical scenario where a DAO evolves into multiple DAOs is the incubation of a DAO, where a business unit in the DAO is transformed into a new DAO that vault is created and some of the funds of the parent DAO are transferred over. Another way is upgrading a sub-business multi-sig wallet (Pod) to a new DAO with the help of DAO tools, and governance tokens are created for it and governance rules are set.

The DAO tool can also be used to upgrade a sub-business multi-signature wallet (Pod) to a new DAO, create governance passes for it, and establish governance rules.

For DAOs with multiple businesses(service), there may be a need to trade business units between them, such as one DAO buying a business unit from another DAO, or two DAOs swapping one of their business units. We have introduced the fractal structure of DAO-Pod in detail in the previous article “”. This structure can effectively support the need for business units to be independent as DAOs, as well as trading business units between DAOs.

Whether it is the merging, splitting, or business trading of DAOs, it is essentially the reorganization and grafting of resources. It is important for the optimal allocation of resources in the DAOverse.

Metagovernance: DAO to DAO ownership and governance

A DAO can hold the governance token of another DAO and influence another DAO through governance vote. It refers to such a governance process as “MetaGovernance”.

We’ve seen this phenomenon in multiple governance cases.

In the summer of 2021, Fei protocol utilize its INDEX to list itself to Aave which is a lending protocol whose list of backed assets is governed by a governance vote. To add an asset type to the list of assets backed by Aave, an AIP (Aave Improvement Proposal) was required, which needs at least 80,000 $AAVE tokens (owned or delegated), the current price is $20 million. This was too high for Fei Protocol at that time. But the community soon came up with a slightly more indirect path to get to the goal, that would leverage governance with the help of Index Coop.

Index Coop is a DeFi Index fund and its sub-product DeFi Pulse Index holds over 100,000 $AAVE tokens in its vault. If you have enough $INDEX (INDEX Coop’s governance token), you have the opportunity to control the governance of these $AAVE tokens. After a month of planning and coordination, Fei Protocol decided to buy 100,000 $INDEX, at a current price of $4 million. With this $INDEX, the Fei Protocol initiated and approved the IndexCoop Improvement Proposal (IIP), which agreed to use the $AAVE from the vault to initiate listing AIP of Fei on the AAVE.

In this case, Fei Protocol achieved its goal by using $4 million to leverage $20 million in voting rights. Well done!

This kind of leveraged governance also exists in traditional business, for example, the company holds A 51% stake in holding B company, B company holds 51% stake in holding company C, then Company A indirectly controls Company C and the cost of control is only half of the direct control. In crypto business, the threshold for such indirect control is even lower, because the Daos like Aave and Index Coop, tend to adopt the Relative Majority principle in order to improve governance efficiency, which only needs to obtain a majority in a low number of votes to get a proposal approved.

For example, the effective threshold of Index Coop is 5%, which means that as long as 5% of $INDEX votes are cast, if more than 55% of the vote in favor of the proposal, it is equivalent to all of them voting in favor. Thus, you can achieve leveraged governance at a much lower cost, unless your proposal is likely to encounter strong community opposition.

Another typical case of MetaGovernance is Curve War.

Curve is currently the largest stablecoin trading market in the crypto world, and its governance token is CRV. Curve will incentive CRV for liquidity providers, but the reward is different for different trading pairs. Trading pairs with larger incentives have the opportunity to capture more liquidity. The distribution of the rewards is based on the percentage of votes received by each transaction pair in the governance vote.

The players competing include Olympus, Luna, Abracadabra, Frax, Alchemix, Tribe, Redacted, and others, even bustling.

Awards will be distributed based on the percentage of votes received by each transaction pair in the governance vote. This mechanism induced competition among stablecoin projects for Curve liquidity. They tilt Curve’s liquidity bonus towards them by controlling more CRV voting rights. The players involved in the competition include Olympus, Luna, Abracadabra, Frax, Alchemix, Tribe, Redacted, and others.

Curve adopts time weighted voting scheme where voters need to lock up CRV to get veCRV, the longer they lock up the more veCRV they get, and the actual voting will be carried out by veCRV.

Little by Little, second-tier governance entities like Convex have emerged to serve such competition specifically by simplifying operations. Convex borrows veCRV in bulk by issuing cvxCRV and providing its governance token CVX as interest. You can influence the allocation of votes for veCRV in the Convex vault by vlCVX (voting token obtained by staking CVX).

With over 80% of veCRX gathered in Convex, Curve War switch to continue in the way as Convex War.

There have been numerous articles detailing and analyzing the causes and consequences of the Curve War, so we will not dwell too much on them.

In both cases, Fei-Index-Aave Leveraged Governance and Curve War, we see a DAO voting to influence another DAO through governance. But in both cases, we can hardly regard it as positive. The fact that Fei Protocol brought Fei to Aave at a relatively small cost may not have been too damaging to Aave, but it was by no means what Aave would have wanted. As a result of Fei Protocol’s actions, the vote of $AAVE held by Index Coop is not express Aave’s interests, but Fei Protocol’s.

As the Curve War continues, besides lobbying politics among competitors, financial behaviors such as ticket borrowing (borrowing governance tokens by issuing bond derivatives and paying interest) and vote bribery (influencing the vote of governance token holders through financial benefits) are more common, which is the same as the case of Aave — — governance behaviors are not driven by the protocol’s interests, but by outside interests. More seriously, there are acts like Mochi Inu’s gouging of Curve through governance votes for its own benefit, or what we could also call — — governance attacks!

Mochi utilizes its governance token MOCHI INU to incentivize the liquidity of its stablecoin USDM in Curve and mint a large amount of USDM out of thin air as it takes large Mochi holdings. Then, exchanged that USDM for DAI that was used to buy CVX in bulk later to further incentivize liquidity. When USDM liquidity reached $100 million, Mochi began to cash out and run, depleting the liquidity in the pool and rendering USDM hooks ineffective, costing liquidity investors dearly.

Even though both Curve and Convex “blacklist” Mochi through emergency governance measures, this shocking scam has sparked community alarm about Metagovernance.

However, the effects of Metagovernance are not all negative. In some cases, it can be positive. It has been common for holders to delegate the governance token to active contributors in the community, electing them as representatives in order to achieve representative democracy. But personal representation may have problems of one kind or another:

  • The activity of individual representatives is unstable and highly mobile, with frequent departures, and voters need to change their proxy settings frequently, causing some votes to go dormant for long periods of time if they forget to do so.
  • Personal representatives do not have a public and consistent propensity to vote, and token holders do not know which representative they are going to delegate to.
  • They may be excellent contributors, but not excellent decision makers. They may have expertise in one area, but governance decisions will cover different topics that their areas of familiarity cannot all be covered;
  • A personal representative could be a delegator or not is often based only on their reputation in the community, not on whether they make the right decisions in governance voting.
  • In practice, delegating to them has had little effect on improving governance participation rates; for example, nearly 3/4 of $COMP representatives who get a proxy do not participate in voting.

The solution to the above problem is to introduce group representatives: voting coalitions with specific values and voting preferences, which collect delegation from token holders and actively participate in governance. We might call this a GaaS (Governance as a Service) organization that commits to a governance participation rate to its delegates and provides them with regular governance reports that will public the record of their votes and the reasons for them, which is an attempt to demonstrate to their delegates that they are participating responsibly and in the interest of the project they are governing, rather than serving their own interests.

In addition, it seems that GaaS organizations should not issue their own governance tokens to prevent governance power from being captured by other entities when in circulation, i.e., GaaS organizations should exist as independent Pod. Even if a GaaS organization issues governance tokens, it should not allow its own governance process to directly determine the governance votes for shares held in the vault, it should delegate the responsibility for managing the votes to an independent group.

WildFire DAO is a typical example of a GaaS organization, it is dedicated to creating a Web3 world party that collects commissions and participates in governance for several projects. WildFire DAO has dedicated teams for each governed project. They will be responsible for staying in regular contact with core contributors, discussing project proposals, writing governance proposals, and organizing community communications.

Coincidentally, on January 11, 2022, RabbitHole announced the creation of a Metagovernance Committee and recruited governance experts. As Token holder, RabbitHole’s Metagovernance Pod has been actively involved in the governance of ENS, Uniswap, Aave, Compound Labs, The Graph, PoolTogether, and Mirror, and try to help these agreements get active contributors.

RabbitHole Metagovernance Pod Voting Display interface ()

GaaS organizations are a bit like Investment Stewardships in traditional finance. They hold clients’ shares, are actively involved in governance, oversee corporate executives and disclose voting to clients. Blackrock (BK) and Vanguard (Vanguard), for example, are major shareholders in several public companies. The former has a team of more than 50 people who interact with the companies they invest in on governance issues, and the latter voted on 168,000 proposals in 2020 alone.

GaaS organizations can also be described as “protocol political parties”, which can operate in a more organized and stable manner than individual “protocol politicians”.

Of course, DAO still faces many problems in order to promote a GaaS-based governance ecosystem, such as:

  • How to convince DAO governance token holders to entrust tickets to GaaS rather than DeFi protocols? Is it appropriate to offer higher yields?
  • How do you prevent the GaaS organizations from being lobbied or bribed by other interest entities?
  • How can we set a reasonable revenue model for GaaS organizations so that they don’t have to just “love it for the love of it”?

Those topics need to be discussed in more depth.

In summary, we believe that MetaGovernance is neutral, whether it is positive or negative depends on the construction of governance ecology. We believe that the over-financialization of governance tokens should be prevented and more governance token should be involved in governance rather than flowing into the DeFi market.

Summary

Above, we have discussed three typical D2D interaction scenarios. We see that the DAOverse (DAO Universe) constructed by numerous DAOs and D2D interactions is similar to the traditional business world constructed by companies, but presents a completely different scene.

Firstly, the interaction between traditional companies always needs to deal with long and complex legal files, which is inefficient. However, the exchange between DAOs relies on Web3 tools makes everything simple and efficient, and also makes the value flow and capital distribution in DAOs more quickly, in the end, it is the programmability of blockchain that gives DAOs the advantage.

Secondly, as DAO is a digital organization, D2D interaction shows stronger digital characteristics. D2D financial flow information has a high degree of data availability, which makes D2D interaction more automated. In addition, no matter how complex the value network built by D2D is, its topological structure is clearly visible, which facilitates the study of DAO sociology.

Finally, due to the unrestrained and open composability of DeFi, governance tokens in DAO face a more open ecological environment, showing a stronger financialization tendency than the stock of a company and more vulnerable to get governance attacks. DAOverse is filled with more rent-seeking and speculation. DAO governance will be more complex than corporate governance and will be more like politics than business. Of course, DAOverse is still in the process of evolution. Compared with the traditional business that has undergone a hundred years of trials and tribulations, DAOverse is still a new baby with a long way to go and its final outcome is uncertain.

PAKA is a DAO Venture co-founded by a group of Polkadot parachain initiators, aiming to discover and help innovative teams in the Polkadot and other Web 3 ecosystems. We hope to bring our experience in entrepreneurship and technology to help the next generation of entrepreneurs through the form of DAO while promoting the vision of Web3.0.

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PAKA

Founders fund in Polkadot ecosystem, running as a DAO venture. Long Polkadot, short Web2.0