Disclosure: The views and opinions expressed here are solely those of the author and do not represent the views and opinions of the crypto.news editorial team.
The promise of blockchain technology goes beyond purely monetary and financial applications. Blockchain technology allows the creation of decentralized protocols that can revolutionize the functioning of communities, by imposing rules of interaction between different actors at the protocol level. This change replaces social consensus with technical consensus, fostering social interactions based on protocols that encompass business and social governance.
While we may not see states governed by decentralized autonomous organizations, or DAOs, in the near future, however, functioning DAOs already manage cryptocurrency communities that set rules for ecosystem operations. These setups will inevitably influence the real world, leading to the emergence of “real-world” businesses based on DAO models.
Currently, we can see the integration of crypto-inspired mechanics into traditional businesses, which can be classified into three high-level groups:
1) Immutable ledger for record keeping and automated transactions
Blockchain can serve as an immutable ledger to facilitate record keeping and automate business transactions through smart contracts. A good example is real estate, where ownership can be tracked and verified on-chain, and property rights can be tokenized as nfts and transferred accordingly. Supply chain management and logistics also benefit from blockchain, making business flows automated and tamper-proof.
2) Tokenization
Tokenization allows any existing value to be represented on the blockchain. Loyalty rewards programs, for example, can convert loyalty points into tokens distributed to users with each translation, creating a market for loyalty rewards and attracting more customers. Distributed collaboration networks, such as decentralized physical infrastructure networks (DePINs) and artificial intelligence 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 holistic approach to applying blockchain technology to real-world business.
As an example, consider a ridesharing business based on the DAO approach. The ecosystem includes drivers, passengers, payment providers, and infrastructure providers. Infrastructure and payment providers maintain the network, handle payments, and develop the underlying protocol. A smart contract manages driver-passenger matching and tracks ride flow, with reputation scores recorded on-chain. Cash flows directly from passengers to drivers, increasing drivers’ earnings, while a portion is sent to the infrastructure provider to sustain the network. Ecosystem governance tokens, earned by drivers and passengers as loyalty rewards, allow all actors to influence system parameters, flexibly balancing interests.
At Waves, one of the first L1 blockchains launched in 2016, we have always been interested in governance models. In 2022, we launched Power Protocol to advance blockchain governance.
However, the Waves ecosystem is facing a stress test caused by the bankruptcy of FTX and the decoupling of the Luna stablecoin. Waves' algorithmic stablecoin USDN failed to maintain its $1 peg, triggering a sell-off of the Waves token and starting a slow death spiral. Many Waves products were dependent on USDN, which caused a contagion effect. Despite personal efforts to mitigate losses, the only solution was to continue developing the ecosystem by launching new products and creating value.
That’s where the DAO model came into play: the ecosystem’s funding process was completely decentralized. Waves DAO was launched, where validators of the Waves network and active community members decided how to spend part of the inflation the validators earned to further boost the ecosystem and launch new products.
An important part of Power Protocol is the slashing mechanics. It provides accountability for the decision-making process. The DAO had certain KPIs set before it was launched; if the governance process leads to those KPIs being met, the decision-makers are rewarded and their voting power is increased; otherwise, they are slashed and have their voting power taken away. In my opinion, this is crucial for real-world application of DAOs; simple DAO models typically used in crypto are actually worse than “off-chain” governance, as they have no checks and balances against manipulation and abuse, and typically just do weighted voting based on token balances, where the group of holders with the most tokens can have any proposal approved by the DAO.
In the Waves DAO, slashing provided a higher level of accountability for DAO participants and made the DAO focus on its main goal: funding the development process and driving 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 its centralized counterparts. This approach is not limited to blockchain, but can transform any business model by making governance more inclusive, establishing clear KPIs, and optimizing cash flows.
