Disclaimer: The opinions expressed in this article are solely those of the author and do not reflect the views and opinions of the editorial team at crypto.news.
Blockchain technology holds promise beyond just monetary and financial applications. It has the potential to create decentralized protocols that can revolutionize the way communities function by enforcing rules of interaction at the protocol level. This shift from social consensus to technical consensus paves the way for protocol-based social interactions that encompass business and societal governance.
While it may still be some time before we see states governed by decentralized autonomous organizations (DAOs), functioning DAOs already exist and manage crypto communities, establishing rules for ecosystem operations. These setups will inevitably have an impact on the real world, leading to the emergence of “real-world” businesses based on DAO models.
Currently, we are witnessing the integration of crypto-inspired mechanics into traditional businesses, which can be broadly categorized into three groups:
1) Immutable ledger for record-keeping and automated transactions: Blockchain can serve as an unchangeable ledger that facilitates record-keeping and automates business transactions through smart contracts. For example, in the real estate industry, ownership can be tracked and verified on-chain, and property rights can be tokenized as NFTs (non-fungible tokens) and transferred accordingly. Blockchain also benefits supply chain management and logistics by making business flows tamper-proof and automated.
2) Tokenization: Tokenization allows any existing value to be represented on the blockchain. Loyalty rewards programs, for instance, can convert loyalty points into tokens that are distributed to users with each transaction, creating a market for loyalty rewards and attracting more customers. Distributed collaboration networks, such as decentralized physical infrastructure networks (DePINs) and AI networks, reward participants with tokens that can be used within the ecosystem, creating a self-sustaining economy.
3) Distributed governance: Implementing a distributed governance approach to making business decisions and building business structures based on DAO-inspired ideas would be a more comprehensive way to apply blockchain technology to real-world businesses.
To illustrate this, let’s consider a ride-sharing business based on the DAO approach. The ecosystem includes drivers, passengers, payment providers, and infrastructure providers. Payment and infrastructure providers maintain the network, handle payments, and develop the underlying protocol. A smart contract manages driver-passenger matching and tracks the ride flow, with reputation scores recorded on the blockchain. Cash flows directly from passengers to drivers, increasing driver profits, while a portion is directed to the infrastructure provider to sustain the network. Ecosystem governance tokens, earned by drivers and passengers as loyalty rewards, allow all participants to influence system parameters, ensuring a balance of interests.
At Waves, one of the earliest L1 blockchains launched in 2016, we have always been interested in governance models. In 2022, we introduced Power Protocol to advance blockchain governance.
However, the Waves ecosystem faced a stress test triggered by the bankruptcy of FTX and the depegging of the Luna stablecoin. Waves’ algorithmic stablecoin USDN failed to maintain its $1 peg, resulting in a sell-off of the Waves token and initiating a slow death spiral. Many products on Waves relied on USDN, causing a contagion effect. Despite efforts to mitigate losses, the only solution was to continue ecosystem development by launching new products and creating value.
This is where the DAO model came into play, as the ecosystem funding process became fully decentralized. Waves DAO was launched, allowing Waves network validators and active community members to decide how to allocate part of the inflation earned by validators to further propel the ecosystem and launch new products.
An important aspect of Power Protocol is its slashing mechanics, which provide accountability for the decision-making process. The DAO had predefined key performance indicators (KPIs) before its launch. If the governance process leads to meeting those KPIs, decision-makers are rewarded and their voting power increases. Conversely, if the KPIs are not met, decision-makers are penalized by having their voting power reduced. In my opinion, this is crucial for the real-world application of DAOs. Simple DAO models commonly used in the crypto space are actually less effective than off-chain governance, as they lack checks and balances against manipulation and abuse and typically rely on weighted voting based on token balances, allowing a group of token holders with the most tokens to approve any proposal.
In Waves’ DAO, slashing provided a higher level of accountability for participants and ensured that the DAO focused on its primary goal of funding development and propelling the ecosystem as a whole.
The Waves example demonstrates that DAO models can succeed where centralized models fail. Properly implemented decentralized governance can be more robust and resilient than centralized counterparts. This approach is not limited to blockchain but can transform any business model by making governance more inclusive, setting clear KPIs, and optimizing cash flows.