Information source: ChainAlysis Decentralized Autonomous Organization (DAO) is the flagship product of web3. DAO is based on the Internet and blockchain and aims to provide enterprises, projects and communities with a new, democratic management structure in which any member can v

information source: ChainAlysis

Decentralized Autonomous Organization (DAO) is the flagship product of web3. DAO is based on the Internet and blockchain and aims to provide enterprises, projects and communities with a new, democratic management structure in which any member can vote on organizational decisions as long as they invest in the project.

At a high level, this is how DAO works.

1, the founder of The DAO has created a new cryptocurrency called a governance token.

2. They distribute these tokens to users, investors and other stakeholders.

3. Each token corresponds to a certain number of voting rights within the organization. Each token also corresponds to a price on the secondary market, where it can be bought and sold at will.

While this process is often described as a way to decentralize power, governance token data shows that DAO ownership is highly centralized.

Centralization of governance token holdings

By analyzing the distribution of governance tokens for ten major DAOs, we found that in several major DAOs, less than 1% of all holders own 90% voting rights.

holds 90% of the user share data of governance tokens in DAO.

This has a profound impact on the governance of DAO. For example, if just a small group of the top 1% of holders worked together, they could theoretically outvote the remaining 99% on any decision. This has obvious practical implications, in terms of investor sentiment, and is likely to influence whether small holders feel they can meaningfully contribute to the proposal process.

The impact of high concentration on DAO governance

There are three key governance actions for a governance token holder. Voting is simple - any holder can do it. But what about creating a proposal through it?

According to the proposal requirements of these ten DAOs, we found:

1. Users must hold 0.1% to 1% of the outstanding token supply before they can create a proposal.

2. A user must hold between 1% and 4% to pass.

Using these ranges as upper and lower bounds, we found that between one thousandth and one ten thousandth of the ten DAO holders had enough tokens to create a proposal.

There are several trade-offs here. If too many holders can create a proposal, the quality of the average proposal may decline and the DAO may be filled with all kinds of governance spam. But if there are too few, the community may feel that "decentralized governance" is fake.

When it comes to single-handedly passing a proposal, 1/10,000 to 1/30,000 holders have enough tokens to do it. Over-concentration of voting power in

DAO leads to decisions that appear to go against the decentralization principles that web3 is built on. For example, in June 2022, the DAO that manages Solend, a Solana-based lending protocol, faced a problem: Solana’s price was falling, and if it dropped further, the protocol’s largest whale users would face margin calls, which could bankrupt Solend, And sending approximately $20 million worth of Solana to the market could drive the asset’s price down and disrupt the entire Solana ecosystem. The DAO called a vote to take control of the whales' accounts and liquidate their positions through the OTC market instead of the open market.

The proposal passed easily, with more than 1.1 million "yes" votes to 30,000 "no" votes. However, over 1 million of those tickets came from a single user with a huge governance token holding. Without their votes, the bill would not pass the 1% participation rate required for a quorum.

The decision sparked a backlash from the cryptocurrency community, with many questioning how a platform could claim to be decentralized and then control users’ funds against their will. After this, Solend DAO voted again to invalidate the proposal, and whale users finally began to unwind. While in this case, a crisis was averted, it raises the question of whether the DAO has the ability to act in the best interest of all participants when a few voters control such a large share of the governance tokens. How is

DAO governed? The actual governance process of

varies from DAO to DAO, and this question is best answered with examples.Let’s start with the biggest one: Uniswap.

Example: Uniswap Governance

Uniswap is a decentralized exchange (DEX) that, like many DeFi protocols, is managed by a DAO.

Anyone who holds Uniswap’s governance token UNI is a member of this DAO. They can participate in governance by delegating their voting rights to their own or other people's addresses, making their opinions public, or submitting their own proposals. The content of these proposals varies widely: holders recently voted on whether to fund a grant project, whether to integrate a new blockchain, and whether to lower the governance proposal submission threshold.

However, before someone can submit a proper proposal, their idea must pass the first two stages: a temperature check and a consensus check.

1. The temperature check determines whether there is enough community will to change the status quo. At the end of the two days, a majority with a threshold of 25,000 UNI votes in favor won.

2. Consensus checking establishes a formal discussion around a potential proposal. At the end of five days, a majority of 50,000 UNI yes votes wins.

If both checks pass, the formal governance proposal can be put to a vote. There is then a seven-day review period to discuss the merits of the proposal in a governance forum. If at the end of the period there are at least 40 million votes in favor and a minority against, the proposal passes and will be enacted after a two-day time lock.

Example: Dream DAO Governance

Not all DAOs operate like Uniswap, but most at least run on similar infrastructure, using voting systems like Snapshot and chat servers like Discord. Dream DAO is no exception, although its mission and its governance process are necessarily unique.

Dream DAO is an impact-driven DAO created by Civics Unplugged, a 501(c)(3) charity, to provide diverse Gen Z around the world with the training, funding, and community they need to use web3 for the betterment of humanity. Their governance process is run by holders of SkywalkerZ - NFT which serves as both a governance token and a fundraising incentive for anyone interested in donating to the project. For every SkywalkerZ NFT purchased by a donor, a new SkywalkerZ will be reserved for future Generation Z to join as a voting member, thereby gaining power in the DAO without paying a fee. Purchasers of the NFT can apply to join the DAO and become a voting member, or they can leave it to the Gen Z students they sponsor—either way, the NFT remains theirs.

By removing financial barriers to participating in the DAO governance process, Dream DAO empowers its target audience - future Gen Z leaders - to influence decision-making, be immersed in Web3, and actively leverage blockchain technology .

Which DAO is the most common and well-funded?

DAO spans the entire "breadth" of web3, they manage:

• DeFi protocols like Uniswap ($UNI) and Sushi ($SUSHI).
• Social clubs such as Friends With Benefits ($FWB) and Bored Ape Yacht Club ($APE).
• funders such as Gitcoin ($GTC) and Seed Club ($CLUB).
• Earn while you play gaming guilds such as Good Games Guild ($GGG) and Yield Guild Games ($YGG).
• NFT generator like Nouns (1 NFT = 1 vote).
• Venture funds such as MetaCartel and Orange DAO.
• Charities like Big Green DAO and DreamDAO (1 SkywalkerZ = 1 vote).
• Virtual worlds like Decentraland ($MANA) and Sandbox ($SAND).
• and many more. (Example: Constitution Dao, Lex Dao)

But in terms of raw numbers and warehouse size, DeFi-related DAOs have a huge lead. The DeFi category accounts for 83% of the treasury value held by all DAOs and 33% of all DAOs by volume.

Total assets held and number of DAOs by Web3 category

There are also a large number of DAOs focusing on venture capital, infrastructure and NFT, indicating that DAOs have strong appeal to investors, developers and artists. However, their on-chain treasury is relatively small.

To be fair, the lines between these categories are blurry.Gaming DAOs often engage with NFTs, venture DAOs often provide funding to DeFi, and infrastructure DAOs support all of the above categories.

Financial Management: What assets does the DAO hold?

Even though DAOs vary in type and size, most of their on-chain vaults hold similar cryptocurrencies. The most commonly held cryptocurrency is stablecoin (USDC), with more than half of the 197 DAOs we analyzed holding balances in USDC.

However, stablecoins rarely account for the majority of the value of assets on the chain. On average, 85% of a DAO’s on-chain assets are stored in a single asset, and of the DAOs we studied, only 23% of that asset was a stablecoin.

The percentage of DAO treasury allocated to stablecoins

The volatility of these on-chain Treasuries is roughly the same as Bitcoin. By assuming that the DAO’s current holdings are their historical portfolio over the past year, we find:

• DAOs with over $1 million in assets have an average annualized volatility of 82%, compared to 69% for Bitcoin.
• DAOs with more than $1 million in assets have experienced an average maximum shrinkage of 51% over the past year, compared with Bitcoin's 72% shrinkage.

DAO warehouse value is also quite correlated with Bitcoin price movements. 38% of on-chain DAO treasury bonds have a correlation with Bitcoin between 0.5 and 1.00.

How strongly does DAO warehouse value correlate with Bitcoin price movements

DAO One of the most interesting areas of money management that has yet to take off is mergers and acquisitions (M&A). Mergers and acquisitions make sense for DAOs because they allow DAOs to move into adjacent areas without having to develop in-house tools. As the DAO model matures, we suspect mergers and acquisitions will become more common.

The DAO has also been quite limited to date in terms of the types of tools it uses and holds. For example, few DAOs have used loans or credit so far, perhaps because of their uncertain legal status. As DAOs mature, we may see more standardized regulations, management policies, and reporting practices.

Who is contributing to DAO?

Although we do not collect demographic data about DAO participants, we can use blockchain data to learn something about DAO contributors.

Where DAO contributions come from. Token smart contracts = project-specific ERC-20 or layer 1 token contracts

As one would expect, DAO participants are advanced users of cryptocurrency services. Only 17.9% of DAO treasury funds come from centralized services, while the remaining 82.1% come from decentralized services. This suggests that most DAO contributors are also involved in DeFi platforms and may self-custody their cryptocurrencies.

The future of DAO

As DAOs gain momentum, a copycat industry of tool services and advocacy groups has emerged to help them grow and govern. Superdao simplifies the creation of DAOs; Snapshot simplifies governance; Coin Center promotes the industry on Capitol Hill . As they continue to expand, it will be interesting to see what they can accomplish, what they will become, and how far they will go in achieving their goals of decentralized internet ownership. With the proliferation of DAOs today, we will see a lot of opportunities.

This article is a preview version of ChainAlysis's "Web3 Status Report".