Author: MiddleX

Reviewer: Owen

The hotspots of capital interest are ever-changing. In this cycle of bull and bear, a number of start-ups were trying to make a profit in the Web3 space but lacked the conviction to leave for new capital hotspots. But in our point of view, the opportunity in Web3 is as big as an iceberg, and what is being explored is just the tip of it.

We’ve all experienced many hotspots in the Web3 world, from Bitcoin to Ether, IC0 to X2EARN, DeFi to Meta-Universe, and NFT to DAO, each one is a point of excitement. But our understanding of the power of Web3 should not dwell on those points. We. try to sort out a framework to understand the underlying logic of how Web3 is transforming the world.

Industrialisation has provided us with a world of material abundance. In such a world, companies, as an organizational act, are the main actors in the provision of social services. They are competing and innovating to make greater profits and to create better services for users. However, there are areas where we find some worrying situations

Some areas require a large initial investment, a strong network effect, or high admittance threshold, creating a monopoly situation for a small number of players who make excessive profits through exploitative pricing to the detriment of the public interest;

With the advent of the information age, information services have become an important type of service. However, the centralized subjects that hold a large amount of user data tend to keep it for themselves, creating a data island effect. Furthermore, these subjects are free to violate user privacy and even influence public sentiment and thought at the same time.

In some ‘network-as-a-service’ areas, there are almost only the players in the network but the rule-making right is in the hands of the centralized subjects who launched the network in the first place, and who derive most of the benefits from it.

Blockchain technology has given us a new option, that of decentralized services, which we call De-Service.

Cryptocurrency

Bitcoin was the first De-Services to attempt to provide a new type of currency, almost directly resisting the hardest part (the most consensus part) of the centralized world, with hellish difficulty. Although Bitcoin has not become a payment system as Satoshi Nakamoto imaged, it has become recognized as ‘digital gold’. Bitcoin has ultimately made a breach in the existing monetary system and put the theory of free money created by Hayek into practice, and played a good role as an example.

Computation

Ethereum is also essentially providing De-Service, which attempts to provide a universal computing platform, consisting of tens of thousands of nodes, where anyone can run a program on it and output consistent results through a consensus mechanism. This kind of computation is highly redundant, though, and you must pay a huge cost for the results to be credible. For solving this problem, L2 scheme represented by Rollup was proposed. The basic idea of it is “compute off-chain, verify on-chain” in which the “verify” must be “lazy” rather than recalculating on-chain. it was realized in two kinds of general solutions, one relies on the user’s economic rationality, requiring participants to provide a certain amount of deposit and will be punished if they make mistakes but rewarded for finding errors and challenging the mistakes, and the on-chain computation part in this solution only needing to be initiated when a dispute needs to be adjudicated. The other relies on cryptography, requiring participants to generate a proof of validity off-chain, and the process of verifying the validity of the proof on-chain which could be equivalent to calculating the whole process, with a very low cost.

Like Bitcoin, Ethereum has not evolved much from its original vision, instead of becoming the “world machine”, it has become the largest smart contract platform (which is not to say that smart contract platforms are not great). Except for Ethereum, new public chains are still paying efforts to become one of universal computing platforms, such as Dfinity, Golem, and iExec, which are trying to provide decentralized computing services and challenge traditional cloud computing services companies.

In addition to public chains like Ethereum that provide general-purpose computing services, some platforms are providing dedicated computing services that are specific to certain domains or specific to certain types of computing, such as decentralized video transcoding services provided by Livepeer, decentralized graphics rendering services provided by Render, and privacy computing services provided by Phala. We can foresee many more types of dedicated computing services in the future.

Storage

Filecoin is a De-Sevice system that provides decentralized storage services. Miners earn FIL by providing storage space to the system, and users of storage space pay FIL to access the services. Since the launch of its main network in 2020, Filecoin has amassed 400 PiB of storage from tens of thousands of storage miners around the world, with the vision of becoming a “global hard drive” that challenges traditional centralized cloud storage providers. Beyond Filecoin, there are a number of start-ups that offer differentiated services, such as Arweave offer perpetual storage, Sia offers large file backup storage, and Storj and Crust offer encrypted storage.

Bandwidth

In addition to storage and computing, the third essential component of the Internet infrastructure is bandwidth. Meson Network, a De-Service system in the bandwidth. part, consolidates and monetizes idle bandwidth for long-tail users at a low cost, and thus provides a decentralized and efficient bandwidth market. Instead of dealing with sales from centralized bandwidth organizations, users will simply upload or access resources in the marketplace according to the standards and protocols in the Meson Network.

Web2 companies that provide streaming services such as video streaming and online gaming spend huge amounts of money on CDNs every year, mainly because of the need to distribute large amounts of content to users at high speeds. With the advent of Web3, more user data is being generated and the demand for range and delivery speed from the metaverse and GameFi is expected to grow exponentially, and the efficient CDN services provided by the Meson Network serving as the foundation for data delivery for the decentralized storage, computing, and dApp ecosystem. Meson Network currently aggregates over 30,000 nodes worldwide with a total bandwidth of approximately 40Tb/s and is providing data delivery services for platforms such as Matters, Mask Network, IPFS, RSS3, Arweave, and more.

Telecom

There is no shortage of De-Service start-ups in the Telecom field — — Helium is a globally decentralized hotspot network providing wireless networks for mobile devices, including IoT devices. Any entity can operate a mobile hotspot device and provide hotspot services to earn HNT. Helium’s ‘miners’ have deployed hundreds of thousands of hotspots around the world, which means that Helium has profoundly changed the structure of how Telecom networks are built, operated, and owned. Moreover, with the development of 5G and IoT, the traditional top-down approach of building networks by Telecom is no longer cost-effective, and decentralized hotspot networks like Helium will play an important role in building the next generation of mobile networks.

Map

De-Service by HIvemapper is a more agile, real-time map where the ‘miners’ install dedicated car recorders in their vehicles and submit road and street view data to the map system as they drive, earning $HONEY tokens Rewards. We are used to navigation products provided by big Internet companies, but these companies spend vast amounts of money every day to collect and update information. Hivemapper crowdsources the collection and updating of information to a wider audience who are not driving specifically to collect data in most cases but for the additional benefit of it. Hivemapper has almost fundamentally changed the way of building a map, reducing costs significantly. Furthermore, for Hivemapper, more sensors and IoT devices can be mounted on dedicated car recorders to provide the network with more diverse data on air, noise, weather, and more in the future.

Why Blockchain?

Why is De-Service only possible based on blockchain technology? The answer lies in two fundamental properties of this cutting-edge technology:

• Verifiable
• Non-permissive

These two properties allow us to create a system where

anyone can join the system and provide a service, or pay Tokens to request a service, with no restrictions on access;

It is verifiable whether the service provider has provided a service to the service requester. Verifiability is the ability of different people or institutions to reach the same conclusion by examining the same evidence, data, and records. To achieve verifiability in a system, all data records must be publicly accessible, consistent, and tamper-proof, which are characteristics that just blockchain provides.

The rules of the system are clear and transparent, no one can change or shut down the system without permission, and any change in the rules requires the coalescence of a consensus of the majority of participants;

If consensus cannot be built, a fork is formed for different consensus groups. To avoid forking, participants prefer to have a fair rule that can be accepted by the majority of participants.

Collaboration between participants is coordinated by tokens and a corresponding economic model.

Based on blockchain technology, Web3 creates a wide road for everyone to walk on not just for genius.

Finance

The DeFi Summer of 2020 created a lot of surprises for us with the emergence of many Web3 native financial innovations, many of which are now work as infrastructure.

Before the advent of AMM, the market maker was a walled-off industry that was difficult for the general entity to participate in. Because of the barriers in capital and expertise part, it was monopolized by large institutions, which reaped high profits and became a veritable “financial aristocracy”.

AMM erases all this, as anyone with any volume of money, can provide liquidity to the AMM Pool and earn transaction fees. the essence of AMM is nothing more than a set of transparent algorithms and rules that run on the blockchain and therefore have verifiability, without any participant wondering whether the output of the AMM algorithm follows the algorithm’s rules.

Furthermore, the decentralized lending and borrowing protocols, income aggregators, derivatives protocols, insurance protocols, and the various combinations of products create an open and transparent financial system with no access restrictions for any user or funds, all of which have the opportunity to benefit from any investment. Although, just like traditional finance, DeFi is subject to various scams, money markets, high leverage, and gambling, there is no doubt that openness and transparency are the first steps toward fairness.

De-service Movement

We believe more in Serve to Earn than Ponzi X to Earn. The creation of blockchain technology gives us a great opportunity to connect certain resources or services together to build an open, decentralized network with transparent rules, in which. free resource. exchange and value creation are allowed.

If the service is provided by a centralized institution we call it Ce-Service, the service provided by a network made up of such resources and rules we can call it De-Service.

A large part of Ce-Service will be replaced by De-Service in the future and they will co-exist, cooperate, and even combine together as one, not “all or nothing”. For example, traditional telecom companies tend to cover densely populated areas, and Helium has a significant cost advantage in sparsely populated areas, and thus they work together for providing maximum network coverage.

So what does De-Service come into play?

Firstly, the De-Service model offers direct cost benefits and economic efficiencies, which allow better integration of unused resources or long-tail resources, creating a sharing economy that reduces the cost of services and enables users. to pay a little. The Token Economy further supports the De-Service network to be more flexible, responding the changes in demands, and avoiding wasted resources.

Secondly, in the De-Service model, the service providers are no longer traditional companies, but rather ‘nodes’ that actually own part of the entire network and make a profit from the services they provide. These ‘nodes’ are located in different geographical areas of the world, across different jurisdictions. Still, they share the same set of rules and have an equal opportunity to provide services for profit in the network. So, we believe that the De-Service model will promote capital distribution worldwide, slowing down the trends toward the rich and the poor. In addition to that, there has competition between nodes, avoiding the De-Service system to establish a situation of exploitative pricing and monopoly profits.

Thirdly, the data in it is anonymous and public, promoting the combination of different service systems while protecting the privacy of the participants.

De-Service systems also face many challenges.

First of all, the establishment of any bilateral marketplace is subject to the problem of “Prior supply or Prior demand”. It may go through a long or short token/money subsidy period to gather enough resources before gathering enough consumers. For example, Filecoin is still in a subsidy period and only a small part of the token rewards given to storage providers are paid by users of the storage service, the majority is paid by the network through inflationary rewards.

Secondly, a sound Token economy model is very necessary for sustainable growth. On the contrary, may accelerate the loss of resources and cause the network to decline.

Thirdly, a reasonable governance mechanism is needed to support sustainable development. It is impractical to govern purely by code, decentralised services need decentralized autonomous organizations (DAOs) to operate. Governance includes several important components ① Governance of rules, adjusting rules to fit the network development ② Management of the treasury of protocol, many De-Services have their own protocol treasury to support the long-term development of the network, so this money will be spent through governance ③ Self-censorship, review of non-compliance acts within the network to make it be a. long run network. For example, if someone is using Filecoin for storing violent pornography things, this should be intervened by governance mechanisms.

Lastly, the De-Service system needs to do its best to counter its own decentralization. Although it is freely accessible and therefore fully competitive, a few groups or participants within a particular region will likely take the lion’s share of the benefits from the network because they have certain resources or technical advantages, which may lead the system. to. become highly dependent on certain groups and will no longer be neutral.

Which First？

Which areas will give rise to De-Service first?

The virtual realm will precede the physical real

Standardized services will precede personalized services

The field/part where the centralization problem is significant.

Closing

De-Service is a vast and far-reaching social movement generated by blockchain technology, which is exploring and shaping a new type of production relationship for the information era. At the same time, it gives us a perspective to re-examine our world. We have reason to believe that the power of Web3 is continuing to bigger and that its transformation of the world has only just begun.

Written by Eunice

Reviewed by MIDDLE.X, Owen

Introduction

RMRK (pronounced “remark”) is a set of NFT standards that give NFTs infinite extensibility, hosted on the Kusama blockchain, Polkadot’s canary network, without the need for parachains or smart contracts. It is created by Bruno Škvorc, a former technical educator at the Web3 Foundation, in 2020. By storing NFT state transition data as “drawing graffiti” in the transaction extension field of the Polkadot/Kusama relay chain, the RMRK standard builds a more scalable, highly flexible, and cross-chain compatible NFT Layer 0 that is not dependent on smart contracts. The NFT created with the RMRK standard (rNFT) is multi-resource, nestable, renderable, and equipable to support the development of more complex NFT projects.

The RMRK team has always been highly active and intensive in its output, with frequent Github code commits and blog updates. Following the creation of the RMRK NFT standard, the team developed a trading platform Singular for rNFT, which is now the most popular NFT trading platform in the Kusama ecosystem.

Another popular product from RMRK is Kanaria, the first example of an rNFT application developed by the team. Kanaria birds are both an NFT collection and a dress-up game where Kanaria can wear other rNFTs to change their appearance.

And now the RMRK team is moving towards a new goal: creating a metaverse with rNFTs.

From “mock-scarce” to “digital scarcity”

Most metaverse projects currently use a centralized database to maintain a mapping table of NFTs and material route. When you log in by your wallet address, those projects program reads the NFTs in your wallet to find the material route from the mapping table and retrieves the file of material (that may stored on the server side or on the client side) to present you with the corresponding visual effects. This means that if the data table that maintains the mapping relationship between NFTs and material is lost, your game data and the metaverse experience will be lost. This does not fit with the intuition that blockchain is decentralized and secure.

It’s a completely different story if you build a metaverse with rNFT. The player’s game character is an rNFT, the character’s equipment are also rNFTs nested on top of the character(rNFT), which is made possible by the nestable feature of rNFT. There is no mapping table between the character and equipment, and no need for a centralized database to store the mapping table.

Nestability also solves the problem of mock-scarce in existing NFTs. It avoids the situation where a user logs into dozens of different instances of the metaverse using the same wallet address and reusing a particular NFT within that wallet. It is means that rNFT equipment must be nested to an rNFT character in order to render its vi sual effects in the metaverse space, and this nested relationship is exclusive so that if you have an equipment X that is equipped to character A, it cannot be equipped to character B. This helps precious NFTs equipment be truly scarce in the digital world

In most metaverse projects, however, the user’s NFT equipment is in the wallet rather than the game, meaning that the user can reuse a particular NFT in the same wallet that logs into different metaverse instances. For example, one of your sunglasses NFTs can appear on both metaverse A and metaverse B’s characters with different visual effects, which results in users experiencing a much-reduced digital scarcity of NFTs and thus make a detriment of discovering the true economic value of an NFT.

However, if you have rNFT equipment, you can reuse it but you must transfer it to another in-game character before that. It will automatically be removed from the original in-game character after you transfer it. You will only see that equipment appear on one rather than multiple in-game characters at any given time.

Skybreach

Skybreach is the first metaverse use case built with rNFT, which will incubate a truly decentralized metaverse place that give the feature of digital scarcity back to NFT itself. Skybreach may evolve into a habitat for Kanaria and other nascent rNFT biomes. The game characters, buildings, and various other equipment used to decorate Skybreach are also rNFTs.

Skybreach Land

There are 9 Skylands in Skybreach, each hosting 25,000 pieces of land, for a total of 225,000 plots. The vast majority of these plots will be sold and released to the market, and any landowner is free to build and manage them in order to maintain the economic value of the land and a good user experience. A bit of a ‘Harberger Tax’ mechanism has been added to the Skybreach, so that if you don’t take care of your land for a long time it will ‘decay’ and be confiscated and reverted to market circulation at a relatively cheap price.

Each land is a multi-resource rNFT. Players can build them with other rNFTs, such as image rNFTs, music rNFTs, etc. to do some basic rendering of the land space. Players can also make the land to be a more playable Play to Earn space by systematically embedding rNFTs, or even a playground for completing group tasks to gain game experience. Furthermore, players are also allowed to sell or rent out the land/plots or simply license it to someone who is devoted to building Skybreach once it has been launched.

Only 22,000 lands of currently Skyland for sale, including 16,000 Common Land, 5,000 Rare Land, and 1,000 Epic Land.（we call those lands as Regular Land in this article）

The remaining 3,000 special lands, including 500 Premium Lands that are public property are owned and allocated by the RMRK team, and 2,500 Harbertaxed Lands which are usually located close to city centers, shuttle gateways, airship portal, and so on that with public transport value, are not for sale.

There is no limit to the number of plots that can be owned by one address. Players are free to buy and construct on them.

Skybreach plots

Each piece of Land consists of 32*32 small plots, so there will be 1024 plots of a Land, each plot can be nested with at least two rNFTs.

Skybreach Land Teir

A piece of land can be traded as a whole, or it can be flexibly split into individual plots or groups of plots. For example, selling a combination of 3*5 or 25*25 plots with regularly shaped boundaries but irregularly shaped boundaries is also allowed. (However, buying plots with regularly shaped boundaries is the best cost-effective solution, for reasons described later.)

A Skyland consisted of 25,000 pieces of land(1024 plots of each). This means that in just one-level height/depth (explained later in the “Land Tier” section), Skybreach has released 9*25,000*1024=230.4 million NFT slots, which is tantamount to opening up a huge NFT creation workshop.

Now, let's introduce one of the core mechanisms of Skybreach——Land Tier.

Each plot has its own tier, categorized into depth and height, referring to the number of floors below ground and above ground that a building can be built on respectively. With higher and deeper plots, taller and bigger buildings can be built and thus carry out more intensive and active commercial activities. Different type of land has their own initial tier and decay speed, as shown in the following

In addition to the initial tier, the relative position of one of your plots also has an effect on its tier, known as the Adjacency Bonus. For example, if you have a piece of land consisting of 3*3 plots, the height/depth of the central plot will be +1; if you have a piece of land consisting of 5*5 plots, the height/depth of the central plot will be +2 and the height/depth of the 8 plots around the central plot will be +1. In simple terms, under the same landowner, the Adjacency Bonus of a plot depends on how many circles of plots there are around it. It is important to note that only a ‘full plots circle’ is available work for Adjacency Bonus for the central plot, a circle with a missing plot does not work for it.

Only a ‘full circle’ is available work for Adjacency Bonus for the central plot.

In our point of view, it is a purpose to encourage players to construct buildings starting from the relative central plots and expanding evenly to the periphery, rather than constructing from different scattered plots without planning. It facilitates a clustering effect of community activities within that piece of land.

Additionally, it is more advantageous for one address to own a whole piece of land than multiple addresses to own parts of it, as a whole land with 32*32 plots maximizes the Adjacency Bonus, which led the center four plots with +15 Adjacency Bonus. This encourages individuals to cooperate to buy a whole piece of land by multi-signature addresses and operate the land as a guild.

The height/depth of a plot = initial height/depth + Adjacency Bonus. As an example, If you were to build a castle in the Skyland, it required that the height of the plot must be greater than or equal to 5, which could be achieved by:

(1) building the castle in the center of 9*9 plots.

(2) building the castle in the center of 3*3 plots and the central plot belongs to an Epic Land. (default height of an epic land is 3 + Adjacency Bonus 2 = 5).

In our point of view, Skybreach’s tier mechanism also with the added utility of encouraging players (land developers) to manage the land/plots in the long term and plan holistically, rather than splitting up and reselling plots and land to make a profit. That would break the plot circle around the central one, resulting in a reduction in the height/depth of the central plot.

In detail, if a castle (needs a 5-height plot) is built on a central plot of 5-height, but then one of the plots around it is sold out and results in the central plot height being reduced to 4, the castle will not be destroyed; but if the castle is demolished at this time for other reasons, the castle cannot be restored because the plot no longer meets the height requirement. The castle can only be restored if the surrounding sold plots are bought back and the height of the central plot is restored to 5 or more.

Plots Purchase

Users are able to create some rNFT widgets and buildings on their plots, fulfilling their design hobbies and desires. Or you can authorize the land for free to others who can use their talents to build and manage the land to make it a “hot area”.

If you design and manage your plots well, you will attract more people to buy the plot around you or come to this space to do business activities and complete other game-in tasks, making the land more playable, which will increase the value of your space in a blockchain world and thus there may some token benefits could get. If you don’t have time to take care of them, you can be a ‘property tycoon’ and sell them when the price rises, or be a ‘landlord’ and lease them out to those who want to build them.

Usually, the pioneer can get a relatively higher rate of return for less effort, competition, and money. Plots are relatively cheap to acquire for the early users who are probably getting more airdrops from the RMRK team later. For example, some specific buildings need to buy for late users but for early users is by airdrop. Although plots are cheap early on, the economic ecology of Skyland is relatively poor, and it’s not surprising.

Skybreach’s land sale was divided into five phases, all of which have now closed. If you still want to acquire land or plots, you can buy them on the secondary market

The Dutch auction is a good way to avoid both inflation and undervaluation of plots, and effectively find a fair market value for them.

Land Maintenance

The value of the land space requires the maintenance of the owners. the phenomenon of plots with nothing others, like buildings, avatars, activities, etc., is a waste of economy and space resources and not conducive to the user’s play experience. To prevent the formation of ghost towns and abandoned never-changeable land plots, the concept of World Decay has been introduced. The world of Skybreach is a chaotic and erosive one, and unless constructions on a piece of land are maintained, the ownership of the land can revert and constructions can be lost.

If the landowner never nested the Kanaria rNFT (or Bored Ape, maybe in the future) on the land rNFT at least once within a specified period of time, ownership of that land will return to Skyland and will be freely traded on the market (which will be a discounted price). At the same time, the rNFT resources nested on that land will be lost. Therefore, if you are lucky enough to buy a piece of land at a preferential price, please be sure to maintain it regularly. This maintenance is not difficult as long as carried out within the decay time shown in Table 1, otherwise, the loss will not only plots you purchased but other nested rNFT resources on them.

The good news is that if at some point you’re really too busy to take care of a piece of land you purchased, you can “escrow” it to Skybreach, locking up 10 xcRMRK into that land to keep it from being reclaimed and sold on the market for a “fire sale”. Those 10 xcRMRKs locked in Skybreach don’t count in currency circulation until you begin to maintain it.

Closing Thoughts

The RMRK team has not only pioneered the new NFT standard but continually built a steady stream of breakout popular apps based on it. Singular and Kanaria are both very successful, and now we can experience Skybreach, the first metauniverse product of the RMRK team.

In the future, based on Web3 cross-chain interactions Skybreach will be a universe of any kind of NFT, where all game characters can travel, settle, and conduct business in the Skyland. What is even more remarkable is that RMRK gives back to NFT its inherent scarcity, both in terms of address scarcity and visual effects scarcity. With rNFT, Skybreach has been created as a more decentralized, composable, and playable metaverse.

In a future where cross-chain interaction is possible, any rNFT will be genuinely unique.

Complexity often emerges from simple rules, just as hundreds of billions of neurons in the human brain create consciousness through the aggregation of simple synaptic connections (science cannot yet explain the origin of consciousness).

The basic rules of Skybreach are very simple, nothing more than nested rNFT structure + countable Land tier. On top of that are rNFTs such as buildings, characters, magical creatures, equipment, and a piece of land consisted of plots. Those connect and interact with each other and aggregate into communities, cities, and even virtual countries.

But on top of this, elements such as land, buildings, characters, magical creatures, accessories, etc., are embedded in it, connecting and interacting with each other, aggregating into communities, cities, and even virtual nations.

Skybreach is now like the virgin land in the United States of America just discovered in the 16th century, is untraveled, but flat and fertile, waiting to be exploited, created, and panned for gold

About PAKA

PAKA is a research-driven early-stage Venture Capital Firm in the form of DAO, aiming to discover and support the innovative crypto/Web3 companies and protocols of tomorrow. Our team is an exceptional crew of industry experts and creative problem solvers who are crypto native builders and long-term holders, knowing what the developers & founders need best to the early stage of a project. PAKA hopes to bring our experience in technology and project management to help the next generation of web3 entrepreneurs through the form of DAO.

Author: MiddleX
Translator: Eunice
Reviewer: Owen

what is L1, what is L2?

In author’s opinon, blockchains that are independently responsible for their own security are L1 and those security that rely on other L1s are L2. According to this definition, side chains are not L2 : light node sidechain, Plasma, Validium are all sidechains(a kind of new L1) rather than L2. Cosmos’ Zones are also not L2, but a L1 cluster with interoperability.

State Channel

Actually, the earliest L2 solution would be the state channel, of which Bitcoin’s Lightning Network is a typical example. More specifically speaking, Alice and Bob need to trade frequently, and if every transaction of them was on-chain recorded and the gas would be too expensive to trade, so they reach an agreement that stake a portion of their funds on the chain and open a channel that used to submit the “final state” of each other to L1 when a transaction needs to be settled, and make a off-chain trade at the time. If Alice submitting the “final state” commits fraud, Bob could apply for that L1 forfeit Alice staking funds by submitting a fraud proof (an updated final status) within the window period.

One obvious drawback of state channel is that everyone involved in the transaction needs to be online at the same time. If the transaction is only betwwen Alice and Bob, or additionally with Eva, this solution still work. But it is no longer feasible if there are more than three participants and be open accessable. Furthermore, there will be trust issues if a third party is entrusted with the settlemeny. It is means that the state channel loses its security attachment to L1 and degrades to a side chain.

Classic Rollups

Layer 2 scaling is the eternal theme of Ethereum, and the shape of Layer 2 on Ethereum has undergone a long evolution, and finally Rollups have become the mainstream solution now. The Sequencers of Rollups will first sort the transactions, pack the blocks, form a soft consensus on the transactions, and then submit them to Layer 1 to be verified by Layer 1 and reach a hard consensus.

Layer 1 will verify the data integrity and state validity of the blocks committed by Layer 2, but certainly not by re-running the transactions cause that would amount to no scaling. This is why lazy verification methods like OP (Optimistic) and ZK (Zero-knowledge proof) are available.

• The following example explains what OP is. Ethereum, as L1, does not verify whether the transactions submitted to it are correct by default, but any third party can do that anytime anywhere. If something is wrong, then Ethereum will verify the transactions and enforce the penalty (OP Rollup(L2) locks Sequencers’ deposits in the contracts deployed on Ethereum(L1)) if there absolutely had fraud. However, after the window period, Ethereum will assume the transactions are right if no one says something is wrong.
• To explain what ZK is. L2 generates a validity proof and Ethereum verifies it. If this proof is valid, the data is complete and the state is valid. In other words, verifying this proof is equivalent to recalculating the entire block, but the cost of verification is much less than recalculating it.

We would like to collectively call OP Rollups and ZK Rollups as Classic Rollups. They are Rollups 1.0.

Rollup in a Modular Blockchain Perspective

Modular Blockchain is a pop concept recently and gives us a brand new perspective on studying and designing a blockchain. Several new types of forms of Rollup have also emerged with its spirits.

Celestia, the creator of the concept of Modular Blockchain, divides the blockchain into such a hierarchy:

• Consensus Layer: To achieve the finality of the transactions and reach a consensus on the latest states;
• Storage Layer (Data Availability Layer): Permanently, immutably store transactions, guaranteeing the accessibility of historical transactions;
• Execution Layer: Calculating the latest states based on transactions;
• Settlement Layer: It refers to how the execution layer submits transactions and states to the Consensus and Storage Layers, and ensures the integrity of the transaction data and the validity of the state. Conversely to say, how the Consensus and Storage Layers verify the transaction integrity and state validity of the transactions submitted by the execution layer.

The Settlement Layer is a raw concept. It’s better to call it ‘Settlement Strategy’ instead of ‘Settlement Layer’. Because it is easy to misunderstand the term “layer” and think that there is some kind of entity. If you try to ask which L1 is the settlement layer of a Rollup solution? Then you have already fallen into this misunderstanding. You don’t need to get hung up on which blockchain the settlement layer is on, it’s just a strategy.

On the other hand, the connection between Consensus Layer and Storage Layer is very close. Only if both of them are safe, the blockchain can be safe. So it can be a complete Security Layer only when these two are combined.

So, in my view, the following picture can describe the concept of Modular Blockchain better.

Rollup Stripping the Storage Layer: Dual Layer 1-style Rollup

The security layer of the classic Rollups is unified and is on the same L1 as its storage and consensus layers. Inspired by the concept of Modular Blockchain, some Layer 2 have tried to strip out the Storage Layer, such as Celestium.

By using Ethereum as the Consensus Layer and Celestia as the Storage Layer, Celestium reduce the use of expensive Ethereum storage resources in favor of the cheaper Celestia to store transaction data.

This does create a cheaper Rollup, but the trust assumption increases compared to a classic Rollup, and Celestia must be secure. As an L2, Celestium’s security is dependent on two L1s, which does not imply an increase in security but rather a decrease. Assuming that Ethereum security is S1 and Celesita security is S2, then Celestium security is min (S1, S2). Therefore, since S1 > S2, Celestium security min (S1, S2) = S2.

Celestia is a pure storage-style public chain, and its main business is to provide data availability services for other public chains. If Celestia provides smart contract functionality, it would be better for Celestium to migrate the consensus layer to Celestia as well.

With the introduction of danksharding, Ethereum itself will have a Storage Layer as efficient as Celestia, and all kinds of Rollups stripped of Storage Layers may then turnback to classic Rollups. But as we all know, as the common saying ‘the argosy cannot make a swift u-turn’, the danksharding upgrade for Ethereum will be a long process.

Sovereign Rollup: Rollup that isn’t real Rollup

Sovereign Rollup is also a new concept in the context of modularity. Sovereign Rollup publishes transaction data to the Storage Layer that accepts all the submitted transaction data but does not verify and validate it at all. This means that the Storage Layer stores a “dirty ledger” with both valid and invalid data. It is up to Sovereign Rollup to define exactly what is valid and what is invalid. In other words, the sovereign Rollup is the interpretation layer of the data, defining the rules of interpretation of the data, and different rules of interpretation will form different forks.

Autonomous Forks，according to the creator(Celestia) of the concept of Sovereign Rollup, is the core feature of Sovereign Rollup，which actually requires a strong community consensus from Sovereign Rollup to make it possible, or the meaning of it would will be evolve into as ‘The Project parties can change the rule of data interpretation at any time’. This means that the Consensus Layer of Sovereign Rollup is itself and its security is not dependent on the Storage Layer, so it’s not an Layer 2 but an independent Layer 1 that outsources data availability. Seriously, it’s not suitable to name it Rollup, but should call it Roll-Beside or Rollout…

Storage-based Consensus Paradigm(SCP)

Since Sovereign Rollup does not inherit the security of the Storage Layer because the data interpretation rules are in itself instead of Storage Layer, can we image that handing over data interpretation rules to the Storage Layer as well? This is the core idea of the Storage-based Consensus Paradigm (SCP) proposed by Arweave.

Layer 2 commits the program code to the Storage Layer, and then commits the transaction data to the Storage Layer continuously, so that anyone can re-run the transaction data with the program code of the Storage Layer and get a consistent and up-to-date state. This enables the inheritance of security from the Storage Layer, thus making the Storage Layer the Layer 1. So, although the SCP-based Layer 2 is not called Rollup, it’s a real Rollup.

In my opinion, Arweave can give SCP a more fitting name: Code-Contained Rollup, driving it into the narrative of Rollup.

For SCP applications, although Layer 1 also stores a dirty ledger, invalid data is not indexed by the nodes.

Compared with classic Rollups, SCP-paradigm helps helps L2 implements security dependency to L1 without requiring L1 to perform any calculation (including data verification and state calculation). This brings two key features.

• Layer 2’s performance is virtually unlimited by Layer 1’s. Layer 2 can achieve a performance of TPS comparable to Web2.
• Layer 2’s VM environment is not limited by Layer 1, beacause Layer 1 is only responsible for storage and unnecessary to compatible with Layer 2 at the computational level. In this way, based on SCP paradigm, developers are allowed to use any language they are familiar with to develop Layer 2, and even not to use the blockchain structure.

SCP-paradigm L2 are not autonomously forkable but can be upgraded by redeployment like the classic Rollup.

SCP provides a great way to retrofit Web2 applications for Web3. Web2 applications only need to be retrofitted at two points.

• Migrate to an account system based on digital signature
• Store data on chain

Things above can make them be real Web3 applications and enablle core features of Web3 applications as follow:

• Users gain free access with censorship-resistance
• Data canot be tampered. Users’ assets are inalienable without authorization

SCP can be upgraded by redeployment, although it cannot realize autonomous fork. The downside of the SCP paradigm is that interoperability is somewhat constrained by dirty ledger strategy and custom VM :

• The dirty ledger strategy results in applications or ledgers that interoperate with it being unable to determine the validity of a transaction based solely on the proof that the transaction exists on the chain, but instead need to re-run the entire transaction data off-chain.
• While custom VMs give developers freedom, it is difficult to establish trust-minimizing cross-ledger bridges between different VM environments

Nevertheless, SCP is a very promising paradigm. For some Web2 applications that want to be convert to the Web3 version, interoperability is not as urgently needed as it is for DeFi applications; the key is a low-cost migration.

Parachain

If we take a L2 perspective, Pokadot’s parachain is also Rollup. The Collator of a parachain are equivalent to the Sequencer of Rollup, as they collect and sort the transactions, pack the blocks and submit them to the relay chain.

Parachains

Unlike classic Rollups, Polkadot’s relay chain uses a different kind of ‘lazy validation’ approach, where relay chain randomy assign a subset of validators to each parachain, and those validator subsets are responsible for validating blocks submitted by the parachain to each parachain. Since the process of assigning the validator subsets is completely random and unpredictable, it does not reduce the security of the verification .

Interoperability

Polkadot has a unified interoperability that classic Rollup does not have. XCMP and communications based XCM allow the read and write between parachains and between parachains and relay chain as if happened on a same chain.

Interoperability between Etherumt Rollups is mainly constrainde by two factors：

• Both Op Rollups and ZK Rollups have delays in reaching finality, with more than 7 days due to the existence of a fraud proof window and more than 1 hour due to the complexity of generating proofs of validity respectively. Those delays may appear unacceptable and unforgivable for most scenarios need interoperability.

Some Cross-Rollup bridges treat L2’s soft confirmation as finality to achieve instant interoperability are have potential security hazard.

• As we can see, SNARKs and STARKs are not compatible and zkVM environment is not yet unified, as well as ZK-Rollups and Op-Rollups are not compatible to build trust-minimizing bridges.

Sharding Storage

The verifiers of Polkadot relay chain will use the erasure code technology to store the data submitted by parachains in a sharding way, which is exactly what the danksharding(Etherum upgrade) is going to achieve and also the way that storage-style public chain, such as Arweave and Celestia, could store data efficiently and permanently.

WASM

Polkadot ecosystem current prosperity is far from what many investors expected as a resulting of WASM has not really caught on yet. Early developers in the Web3 are still more comfortable with EVM and the development tools and resources related to EVM are relatively more sophisticated. But there are more advantageous aspects of WASM when it compared with EVM, which have been thoroughly analyzed in many articles. Even the Ethereum community is also actively discussing about how EVM convert to eWASM. It is foreseeable that as the next generation of developers who are familiar with WASM grow up, Polkadot ecosystem will shine.

From vilidator for shards to interoperability and then to erasurecode-based sharding storage and WASM, you can find that the destination of continuous upgrade of Etherum just where Polkadot started from. Gavin’s foresight in architectural design is is admirable.

Overall

We talked about L2 schemes like classic Rollup, SCP, and parachains. Their feature pairs are shown as following:

So，

• Classic Rollup, or Rollup 1.0, still dominates, but with further competition for Ethereum resources. Many Rollups will choose a cheaper data availability layer, although there will be a certain compromise in security.
• Danksharding can improve the storage performance of Ethereum, and there is hope that the data availability layer of Rollups will return to Ethereum, but the implementation cycle of Danksharding will be long.
• Sovereign Rollup is not a real Rollup, nor is it Layer 2, but an independent Layer 1 that outsources data availability.
• SCP is a new type of Rollup that deserves wide attention in the industry, I would like to call it Rollup 2.0, and it is the best path for Web2 applications to migrate to Web3. It is likely to bring us a wave of Cambrian explosion of Web3 applications.
• Altohugh EVM remains dominant in the short term, layout investments in projects related to WASM can make you more profitable;
• I’m an unwavering believer in the future of Polkadot

Acknowledgements

Thanks to Wei Xiong @Arweave for his detailed interpretation of SCP paradigm.

Thanks to msfew@HyperOracle for sharing so much about Rollup with the author.

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.

Review：Owen

Following the Steem incident, Justin Sun, a subject of heated conversation in the cryptocurrency world, was again caught up in allegations of governance attacks earlier this year. As the founder of the Tron public chain, a capital predator with over $1 billion in crypto assets, Sun’s on-chain address was widely tracked by crypto sleuths.

In January 2022, on-chain records show that an address suspected to belong to Sun Yuchen borrowed a large amount of $MKR from AAVE and proposed creating a DAI-TUSD pair within the community to support a fixed 1:1 exchange rate between the two. In March, another address suspected to belong to Sun Yuchen borrowed a large amount of $COMP from Compound, worth about $13 million, and transfer it to Binance, and a new address received about $9 million worth of $COMP from Binance soon after. The address used these $COMP to propose adding TUSD as pledged assets on Compound, which was ultimately rejected by a widely attended community vote.

While both proposals ended in failure but sparked an industry debate about DeFi’s governance. Some argue that it is unacceptable for the capital predator to use their “money power” to influence governance decisions directly and that DeFi governance should not be reduced to money politics; others argue that Sun Yunchen acted in full compliance with governance rules and that the capital predator used their financial resources to compete for access to assets in DeFi, helping to raise the price of governance token, which in turn will motivate more people and more money to participate, so what’s not to like?

Those who hold the latter view cite the success of the Curve protocol’s liquidity incentives as their main argument. As a stablecoin-focused AMM trading market, Curve created a liquidity incentive that offered different levels of $CRV rewards to liquidity providers for different pairs, depending on the percentage of votes each pair received in the governance vote. This mechanism triggered a fierce competition among stablecoin projects in the governance vote, known as the “Curve War”. Stablecoin projects tried their best to get more votes in order to gain more liquidity.

Since 2020, the Curve Protocol has been implementing such liquidity incentives, which has made the Curve Protocol a huge success. The Curve War drives up the price of $CRV, which stimulates more money to provide liquidity to the Curve Protocol, and the increase in liquidity further inflames the Curve War, a perfect flywheel effect!

No one thought Curve’s governance was kidnapped by money politics, but a genius project emerged from Curve War to find a loophole in the rules: Mochi Protocol.

Perhaps inspired by the Curve War flywheel effect, Mochi Protocol is planning to start its own flywheel effect. Mochi Protocol uses its governance token $Mochi INU to stimulate the liquidity of its USDM stablecoin in Curve. It uses a large amount of $Mochi INU to a vacuum casting of USDM in a large number that is then exchanged for DAI, and uses the DAI to buy a large amount of CVX (Convex Protocol’s governance token, which holds a large amount of CRV votes) to further compete for liquidity, and continues to leverage this liquidity to exchange USDM for DAI and then buy $CVX, and move this in circles. When USDM liquidity reaches $100 million, Mochi Protocol begins to cash out and run, depleting the liquidity and rendering the USDM hook ineffective, completing the “harvesting” of the liquidity provider’s funds.

At this point, you may be ambivalent about the politics of money in DeFi’s governance, which on the one hand may bring success to the protocol. on the other hand, may pose the risk of governance attacks and capital predator manipulation. Without a different perspective, it is difficult to look beyond our intuition of money politics and see the real issues in DeFi governance.

The Real Problem in DeFi Governance

Paka Labs believes that there are two key problems with the current governance mechanism of DeFi.

One, Governance Lever

The problem is that the $COMP and $MKR that address (which is suspected belong to Sun YunChen) used to participate in governance came from borrowing, not from the long-term asset holdings. If that address is adding some kind of highly controlled assets to the agreement, it is entirely possible for that address owner to use the agreement as his ATM by “banknote printing” and the owner has little downside risk at $COMP or $MKR, which is inconsistent with the principle of incentive compatibility. It still needs to provide the collateral if the address suspected to belong to Sun YunChen wants to use decentralized lending agreements to borrow governance tokens. In fact, if the borrower does not have sufficient collateral assets, he can also borrow governance tokens from others by issuing bond derivatives.

In the case of Curve War, there was a lot of bribery, with Curve War projects offering a meager incentive for others to vote as projects’ wished. (Of course, the “meager” here is in contrast to their direct purchase of these votes which will be much more expensive. (Bribes also include financial incentives to get others to delegate their votes to the specific subjects, which did not occur in Curve War because there is no delegation mechanism in Curve’s governance)

Borrowing votes and vote-buying provide leverage to governance participants, making a disproportion between the voting rights they gat and the responsibilities they are required to assume.

In addition, many DeFi protocols, where governance participation is so low that a very low percentage of votes can determine important matters involving significant funds or resources, are levers inborn. Solend, for example, made a staggering decision to take over hundreds of millions of dollars of assets of a capital predator with only a few hundred thousand dollars of voting rights. It was repealed by a new proposal due to strong opposition from the community.

In short, there is financial leverage in the governance voting process, which is an important issue that really threatens the fairness and security of governance.

Second, “open goal”

DeFi’s governance is more complicated than other types of DAO governance because DeFi has more resources than just the funds in the protocol Treasure, and even more than the funds in TVL (in fact, the ownership of the funds in TVL does not belong to the DeFi protocol itself, this is why Solend’s takeover of the account of the capital predators) was so controversial), and the most critical resources for the DeFi protocol are often non-financial resources, for example,

• Whitelist of collateral assets in lending protocols
• Liquidity resources in DEX

The allocation of non-financial resources of the protocol by governance votes cannot be understood as a simple governance activity, but rather as an activity of resource sale. From this perspective, Curve War can be understood as an auction of the liquidity resources of Curve. Since it is not political, there is no such thing as money politics. (The governance token carries the power to allocate valuable resources, which is why prices continued to rise wildly after Compound officially declared that $COMP had no financial value. Smart money realized this long ago!)

The real link that leads to risk is that this is an”open goal”, no one guard access to the assets. Let’s make a comparison with the process of cryptocurrency public onto CEX. If a Web3 project wants to be listed on a CEX, it needs to pay a listing fee mostly and reference checks will be done by the CEX, and if the reference checks fail, the token will not be listed. Some CEX would probably not adopt a “money is on the table” listing policy. Many DeFi protocols, however, do not have any risk control measures for asset access. This analogy is not entirely apt, but it illustrates the point.

While community members can spontaneously keep an eye out for governance proposals, they can also mobilize more members to veto proposals that add malicious assets against them, as Compound and MakerDAO did to veto the proposal suspected from Sun Yunchen. But such spontaneous monitoring behaviors by community members, lacking accountability and expertise, are enough, and there are always some “Big and Little Fishs” that can swoop this situation, such as the governance attack on Build Finance that was unobtrusively passed by a handful of votes controlled by attackers without the community noticing. This brought the vault assets to almost zero, leaving Build Finance in a state of total defeat and hard to reverse.

In order to safeguard the funds of DeFi participants, we need a more rigorous asset access vetting mechanism

How do we remove the levers of governance?

We need to crack each of them against each means of enabling governance leverage.

Defending against Vote Borrowing: Lock-up in exchange for Governance ights

First, vote borrowing is relatively easy to defend against. Both time-weighted voting and reputation-based voting can reduce the impact of vote borrowing. In fact, Curve’s governance already uses time-weighted voting. Curve’s governance right is achieved by voting with veCRV, not CRV, which could be obtained by locking up CRV. The longer the lock-up period, the more veCRV you get, for example, 4 years for 1 veCRV and 1 year for 0.25 veCRV.

There are two key points here, one, veCRV cannot be transferred. The reason why users can lend veCRV to Convex, StakeDAO, or Yearn Finance in Curve War is because of that Curve has a whitelist for a few subjects. Second, the number of veCRV decays linearly as the locked $CRV gradually approaches its expiration time. To maintain their voting right, users need to reset the time for lock-up.

The locking mechanism prevents anyone from obtaining a large number of votes by borrowing votes for a short period of time. If one wants to gain more votes, one must borrow for a longer period of time, which imposes a significant cost on the borrower.

We think it is likely that the mainstream DeFi protocols will evolve towards a time-weighted mechanism similar to Curve in the future, or towards a more complex reputation-based voting mechanism, and more and more nascent protocols will tend to move away from the 1T1V mechanism.

Defending against Vote-Buying: privacy technologies may promise for it

Vote-buying is a relatively difficult one.

While vote-buying exists in realpolitik, but not a common practice. After a voter throws his or her ballot into the box, there is no way for a third party to know which option the voter voted for, and it is even difficult for the voter to provide reliable evidence to prove he or she voted for a particular option, leaving no credible basis for vote-buying.

While for on-chain vote-buying, information is highly visible and easy to verify for the bribers and the information about the identity of the subjects involved in the vote-buying can be hidden and difficult to trace. This is an almost perfect ground for building a vote-buying market. In Curve War, it is a common practice for projects, and there are even some vote-buying service platforms have been built where users can be rewarded with tokens in exchange for their votes.

https://bribe.crv.finance/ (veCRV vote-buying platform)

https://votium.app/ (vlCVX vote-buying platform)

Bride Protocol is even more blatant in its claim to be a universal vote-buying platform, under the banner of “helping DAOs increase governance participation rate” and “helping governance tokens holders catch governance value”, with the intention of making “vote-buying” a neutral term in the DeFi governance context. It is true that vote-buying can increase the governance participation rate. But the false high participation rate is certainly not what the DeFi protocol wants to see.

Theoretically, the protocol could actively shield votes from vote-buying platforms, depriving bribe votes of their voting power, but this is based on the public availability of information about the vote-buying platform. If the vote-buying platform runs on private servers or is developed with privacy technologies on the chain, the active shield function becomes incapable.

So can we build a governance system where voting information is not visible? For example, using privacy technologies so that individual users’ voting information is not visible on the chain and only verifiable final vote results are visible. More than that users who vote cannot show credible proof to the vote-bribers of which option they voted for or to whom they delegated their votes. This is a throwaway idea that we hope to discuss and explore together.

It is important to note that even the most perfect technology cannot eliminate vote-buying completely. For example, vote-buying transactions that rely on acquaintances are difficult to observe. We can prevent vote-buying from becoming an effective market, so that to protect DeFi governance far to alienated by widespread vote-buying behavior.

Increasing Governance Participation Rate: Governance Political Parties and Governance Incentives

Even some of the benchmark DeFi protocols may without high governance participation rates, for example, only about 5% participation rate for Compound’s governance, which stimulus someone to capture the benefits of the protocols by controlling voting rights. Low turnout also motivates some protocols to achieve greater leverage through indirect governance, as detailed in Fei-Index-Aave’s operation.

From the perspective of democracy, projects always tries to get more people participate the voting process, but from the perspective of protocol governance security, the goal should be motivate as much as possible community members to complete the vote beavior among whole governance process. Sowe can find a new way for governance — — —protocol political parties.

While some protocols have already allowed people to delegate governance tokens to others to indirectly participate in governance. But such mechanisms have been hampered by a number of factors that have prevented significant increases in governance participation.

• Unless you are deeply involved in the community and know who the active contributors are and their propensity to vote on governance, you still don’t know the right people to delegate votes to.
• Voters who are delegated are inconsistent in their activity and no one asks them to do like that, leaving a portion of the vote dormant for long periods of time.
• There are always no rewards for participation in governance, which makes token holders prefer to stake/lock their tokens in DeFi to abtain interests.

Protocol parties promise to take the responsibility to get the vote of community members, and they hire experts to scrutinize each decision to do so.

In order for a party to have an incentive to participate responsibly in governance, and for token holders to have an incentive to entrust their votes to a party, protocols need to provide sufficient incentives to the participants in governance. The presence of a governance incentive is equivalent to taxing those who do not participate in governance and helps to “awaken” the “dormant” vote.

The governance incentive is divided into two parts, one is the reward for locking the governance tokens, somewhat like the staking reward in the PoS public chain, and the other part is the reward for voting behavior, such as the number of rewards depends on the how many times vote. The reward could be from inflationary or protocol profit.

One point to note here is that the party should not issue its own governance token, otherwise it will create opportunities for nesting-type leveraged governance similar to Fei-Index-Aave. Even if the party issues a governance token, it should not directly decide the voting of its proxy votes through its own governance voting process, but should appoint a professional committee to make voting decisions.

Currently, WildFireDAO has been created as a protocol political party and is actively involved in the governance of multiple protocols. Rabbithole has created its own governance committee as well to participate in the governance voting process of the protocols for which it holds governance tokens.

How to set up a gatekeeper mechanism?

After the governance attack on Mochi, Curve outlawed Mochi Protocol competing for liquidity. However, we need an ex-ante asset access link to ward off fraud and better protect DeFi participants’ funds than an ex-post “asset retirement”.

As mentioned before, in the current asset access mechanism of most DeFi, if you have enough money, you can get enough votes and thus put any asset you want to add into a DeFi — — — either as collateral for a lending protocol, as a reserve asset for a stablecoin, or be allowed to join a specific trading pair — — — which brings the governance attacks risk. By removing governance leverage, we can make it more expensive for attackers to gain voting rights, but beyond that, DeFi protocols should have a gatekeeping mechanism that serves as the ultimate security barrier against malicious asset additions.

It is inappropriate to have numerous token holders vetting access to assets. Otherwise, it comes back to the problem that voting rights may be captured by attackers for a short period of time to execute reference checks, and it is unlikely that voters will all bother to do responsible background checks on assets. A viable approach is for voters to develop vetting criteria and appoint a risk control team to do reference checks and decide whether to release those assets.

It is important to note that once the criteria are set, the review committee does not have the power to release assets that do not meet the criteria or to prevent assets that do meet the criteria from being added, otherwise the agreement can be removed or changed by a governance vote of the committee members. Of course, the audit criteria are, after all, just a few paragraphs, and in practice there must be discretionary power for the audit committee. Nevertheless, the criteria should be as clear as possible (e.g., a table to assess the decentralization of an asset) to reduce the possibility of fraud or bribery of the audit committee members. This is like the separation of the legislative and judicial branches in realpolitik.

In fact, in Compound, SushiSwap, there is a structure similar to the “Senate”, which has the power to veto all governance proposals, even those with a large number of votes. In practice, the Senate has also taken on the role of asset access vetting, vetoing proposals for malicious assets to be added. However, the mechanism is also controversial: proponents argue that the power of the Senate and the power of the governance vote can check each other and achieve a bicameral structure similar to that in democracy, while opponents argue that the Senate, which can veto all proposals, could well become the dictator of the agreement.

We see two central joints here.

• The scope of the Senate’s authority, whether it has other powers besides proposal veto, for instance, in some governance structures, the Senate also has the authority to suspend protocol, initiate emergency proposals, etc. In some early development DeFi protocols, the Senate has all superpowers to update the code at any time. The different scope of authority determines the nature of the Senate — dictator, or gatekeeper. However, for DeFi, which is at a relatively early stage of development, the code is not yet mature and the economic system is not yet validated, so it is not a good idea to have a dictator as a gatekeeper.
• Whetherelection and removal of members of the Senate are decided by a governance vote or not determines whether the senate is an independently existing power entity or just a surrogate of power authorized by the governance vote.

In summary, we believe it is necessary to have a committee empowered and overseen by the governance vote to be responsible for asset auditing, either as a separate department or could be held by a “senate” of agreement.

Summary

As DeFi has evolved, part of the protocol has become one of Web3 infrastructures with the attributes of a public good. Their basic responsibility is to protect the financial security of participants which is the baseline of DeFi’s development. There are two major risk factors, one is the potential for governance powers to be amplified by financial leverage, leading to power and responsibility inequitable governance, and the other is the lack of a reliable asset access vetting process.

This paper provides several approaches to eliminate governance leverage, among which lock-up mechanisms to defend against vote borrowing have been widely used, and parties and incentives to increase governance participation rate are being practiced one after another. Only vote-buying remains a thorny problem. For the vote-buying problem, privacy technology Is one of the options to prevent it, but the technical threshold is too high and thus can not be realized in the short term. Furthermore, the gatekeeper mechanism, which is to delegate a risk control team to investigate and vet assets that will be added to DeFi according to established principles, is also a good choice to do. However, there may a more sophisticated mode to address those types governance issues in a near future.

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.

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 “Understand the multi-layer structure and scalability of DAOs”. 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.

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.

References：

Exploring DAO2DAO Collaboration Mechanisms

https://medium.com/primedao/exploring-dao2dao-collaboration-mechanisms-c37218a17a21

D2D: Community Report (Phase I)

https://www.notion.so/curvelabs/D2D-Community-Report-Phase-I-396f5d1935a94108989da8e8cb322f6f

Prime Deals: Trustless DAO2DAO, the cryptonative way

https://medium.com/primedao/prime-deals-trustless-dao2dao-the-cryptonative-way-261210ccda96

GIP 16 — Gnosis Chain — xDAI/Gnosis merge

https://forum.gnosis.io/t/gip-16-gnosis-chain-xdai-gnosis-merge/1904

Is TRIBE undervalued?

https://newsletter.banklesshq.com/p/is-tribe-undervalued?s=r

Tapping into DAO Ecology

https://thedaoist.mirror.xyz/8jKbVJCJgUFk5BT6RqE4UjGcWY3Qjr1ZnzVZVnvurIc

An Introduction to Metagovernance

https://medium.com/indexcoop/an-introduction-to-metagovernance-6bdb4a522ece

Metagovernance in Crypto

https://kydo.substack.com/p/metagovernance-in-crypto?s=r

The mythos of Curve Finance

https://theknower.substack.com/p/the-mythos-of-curve-finance?s=r

The Curve Emergency DAO has killed the USDM gauge

https://gov.curve.fi/t/the-curve-emergency-dao-has-killed-the-usdm-gauge/2307

DAO Delegates: Misunderstood and Misused

https://orca.mirror.xyz/D1L4lk9ErqahRYpWFNoPZOF-lSFY5czuJjq6OPn7UOw

Introducing Wildfire DAO

https://mirror.xyz/james.eth/71ibzWJvs3Frqu3beIzAtcQu5sJ2k8Hz15svQhBWKvI

From v0 to v1: RabbitHole Metagovernance Pod Learnings

https://rabbithole.mirror.xyz/_nNQuN6c7rGXlHkjkUcCBgYtd4gSB76HGUg-TiHtZ3k

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.

Review: Owen；Shawn Lin @1PAR

Translation：Eunice

As mentioned in the last article，Dao as an evolutionary organization, spontaneously evolved into a multi-layer structure as it scales up. This structure, like the bureaucracy in the company, it is fundamentally different from the bureaucracy but to solve the problem of scalability. In this article, we’ll take a closer look at the multi-layer structure of the DAO.

Last year, we’ve seen an explosion of DAO’s adoptions, dramatically on both the amount of fund managed and the tenfold size of DAO members . Currently, the total amount of funds managed in DAOs is around $9.8 billion, and there are more than 80 DAOs with more than $1 million AUM.

Over time, however, DAOs have begun to face scalability issues:

First, a DAO takes democracy as the most basic principle, but as more participants are involved in a DAO and more proposals and issues are under processing, it would fall into the dilemma that “everyone has to decide everything together”. Many DAO members have become overwhelmed with various votings and do not have enough background knowledge to make an informed decision, resulting in low participation rates and a centralization tendency.

Secondly, DAO naturally evolved into different project teams, all of which needed financial support from DAO, thus falling into the dilemma of “everything must be decided by everyone”. Each group’s funding decisions had to try to convince the majority of DAO voters, and a lot of communication and back and forth was required between project founders and DAO voters, which made DAOs inefficient and inflexible.

As a result, in help with the governance frameworks, DAOs evolve a multi-layer model to address these challenges. Governance frameworks that support multi-layer models include Moloch V2 and Orca.

DAO-Pod Architecture

Moloch V2 and Orca both chose to build a sub-group for DAOs. The DAO delegates a portion of its funding and some specific authority to a small team of trusted individuals for acting with relative initiative. Such a small, trusted team is known as Minion in Moloch V2 and Pod in Orca, which takes the form of a multi-sig wallet, despite the difference in the designation. The multi-sig wallet is funded by a vote of the DAO members who also vote to appoint a multi-sig committee which will be referred to as Pod throughout this article.

DAO itself is also a multi-sig wallet but has its own governance layer and persist in its governance independency through its own governance token and rules. While Pod has no governance token and relies on the multi-sig committee and relatively simple weight and threshold rules. Most importantly, the governance of a Pod is constrained by the parent DAO.

We distill the relationship between DAO and Pod into a “bounded delegation”

Entrusted by the parent DAO, Pod becomes a relatively independent financial entity. that can do the following things:

• Independently manage the funds in Pod, which can be used for external investment, donation, Swap, service procurement, etc.
• Initiate Coodinape rounds (a DAO tool used to distribute rewards and payrolls), or by other means, allocate the compensation to the contributors internally.
• Pod vault can also be used for fund receivables, but the funds in the vault as one still belong to the parent DAO.

At the same time, Pods are subject to a number of constraints on the parent DAO, including:

• The ownership of Pod vault is vested in the parent DAO, with the multi-sig committee acting only as the authorized administrator.
• A Pod cannot change the multi-sig committee members and their respective multi-sig weights without authorization, nor can it change the multi-sig rules. Those rights are vested in the parent DAO.
• Parent DAO has the right to withdraw the Pod funds and cancel the Pod;
• Parent DAO may set certain limitations for the fund payment of Pod to reduce funding risks, such as single transaction limitations, daily transaction limitations, black and white lists of payments, etc..

In a constrained delegation structure, both constraint and delegation are indispensable. Delegation refers to the full authorization to Pod, while constraint defines the boundary of authorization. This structure takes the DAO out of the aforementioned dilemma of “everyone has to decide everything” and “everything must be decided by everyone “. this structure’s advantages include:

• By delegating Pods, significantly reduced the pressure on DAO governance, allowing DAO members to focus their voting efforts on core critical issues.
• By appointing multisign committees, it allows professionals to decide on professional affairs. Creating Pods that delegate out not just the right to manage funds, but the right to decide on affairs within a certain scope.
• By dividing Pods, small teams with small scale and tacit cooperation can control a part of the resources of the DAO, so as to realize fast decision making and quick actions, allowing DAO’s grassroots to obtain execution power comparable to that of a centralized organization.
• Make it easier for the DAO to manage its budget by depositing funds into the Pod.
• By creating a temporary Pod and electing an administrator, it is easy for DAOs to perform time-sensitive actions, such as external asset swaps and asset bids

A decentralized top level of decision making plus multiple execution teams with partial resources that can move quickly is an optimized form of DAO that allows the DAO to maintain democracy and agile at the same time.

At the same time, creating a Pod and making a deposit in it is equivalent to creating a new asset package. DAO can directly take Pod as an asset for external exchange, transfer, mortgage, and other operations.

From Two-layer to Multi-layer

So far, we are talking about a two-layer organization of DAOs and Pods. In fact, both DAOs and Pods themselves can be multi-layered and form an infinite multi-layer system.

Any DAO is a kind of national entity, which does not subordinate to any jurisdiction, and to some extent, it has its own independent “sovereignty” and has the final say on all internal affairs. However, if one DAO holds the majority or even all of the governance tokens of another DAO, and has decisive influence in the governance vote, there will be a de facto subordination relationship.

The Pod directly created by the parent DAO is not the smallest unit in the DAO. Pods can also create and manage their own sub-Pods, which can achieve infinite layers of Pod technically. It’s like the “sand paradox” that you can find the smallest grain of sand in the world, but you can always smash it into more and smaller grain. For Pods, there’s no Planck scale.

Therefore, a multi-layer DAO system may look like this: DAO in DAO, Pod in Pod.

Pod to DAO

Formally, the only difference between a Pod and a DAO is that a Pod does not have its own governance token. If a Pod is authorized by the parent DAO to issue its own governance token, the Pod will no longer be a Pod but will have its own independent “sovereignty” and become a DAO eventually. Correspondingly, the Pod’s subordination to the parent DAO evolves into an investment relationship from one DAO to another DAO. In this case, we can think of the parent DAO as an incubator and the Pod as an incubated project, then at a point in time, the Pod can “start on its own” and become a new DAO. For example, indiGG, the Indian branch of YGG DAO, grew much faster than the other branches and started to operate independently, issued its own token and formed an investment relationship with. YGG DAO, which became a kind of “subsidiary” structure.

Independent Pod

As mentioned above, there seems to be an assumption that a Pod must be created by a DAO and must be subordinate to a DAO. However, we believe that the concept of Pod should not be limited to this, as a Pod is essentially a multi-sig wallet so we can also argue that a multi-sig wallet is a Pod. If you created a multi-sig wallet using Gnosis Safe, you are created a Pod. In fact, the Pod vault in Orca is built using Gnosis Safe as its kernel.

We found that DAOs often start with a group chat plus a multisign address. A few members thought something was cool and created a multisign address, posted a vision, and started raising money. In the early days of a DAO, founding members tended not to want to overdo things that creating a multi-sig address is the priority rather than a complex governance layer. Well-known DAOs like Constitution DAO, FreeDAO, and PleasureDAO, started as a simple initiative to raise funds with multiple signed addresses and then evolved into DAOs.

As practice goes on, projects may fall silent due to failure, or they may attract more participants due to success. If the project is successful, there will come a point when multi-sig wallets are no longer enough to coordinate those many participants, and building a full governance layer becomes necessary. Thanks to the composability of crypto products, instead of creating a new DAO and transferring funds over, you can upgrade a Gnosis Safe multi-sign address directly to a DAO, meaning you upgrade a standalone Pod to a DAO.

Multi-layer structure makes DAO organizations more vitality

A multi-layered structure consisting of Pods and DAOs will always evolve according to business needs. Within a DAO, Pods that cannot effectively achieve business goals will be removed, while successful Pods will be retained and even evolve into a multi-layered Pod structure until they can be separated from the parent DAO and become a new DAO, which may combine with its parent DAO into a larger organism what we can call it a DAO community.

Unlike the rigid hierarchical setup of a hierarchy, the multi-layer structure of DAOs is always in the process of change and evolution is from the bottom up. Its layered-structure appears and dissipates according to the situation, and is self-organizing and self-adapting. In a bureaucratic system, subordinates are responsible to superiors and one level is responsible to the next, while in DAO, superiors delegate authority to subordinates and one level to the next. The bureaucratic system is a system of control, while DAO is an authorization system in that each level has full autonomy, and the hierarchical management structure is replaced with decentralized authority and collective intelligence.

The multi-layer structure gives the DAO almost unlimited scalability and creates a naturally evolving organizational form. Although there is no shortage of efforts to explore evolutionary organizational forms, traditional organizations are limited by the opacity of information, and they always prefer control not authorization. On the other hand, DAO organizations, as the native organizational form of cryptography which financial transparency as the fundamental characteristic. It makes monitoring and tracking much easier, and even if the organizational resources are decentralized controlled by various groups. There is no need to worry too much about fraud. We believe DAOs (or DAO communities) will scale far beyond traditional bureaucratic organizations and reach a new frontier of large-scale human cooperation. As BitDAO founder Ben Zhou put it: “If we want to take our business from billions to trillions, we can’t exist as a company, but as a ‘Soci-phenomenon on’.”

The significance of a multi-layer structure goes beyond giving the DAO scalability and also enables the DAO to achieve better decentralization. If the DAO needs to decide numerous affairs through governance votes, then it will lead to a decline in participation because participants cannot invest enough time in governance affairs. By delegating to Pods, the DAO strips out those high-frequency daily decisions saving the bandwidth of governance participants’ minds and allowing them to be more actively involved in the governance of the DAO’s core affairs.

Activating the power of “squad”

In social collaboration, one of the most basic units of collaboration is often not an individual, nor a large organization with a ponderous structure, but a small, relatively flat, closely collaborating team. Such a team has its size limit that is considered in the “squad theory” to be 12 people or less, as the size of a soccer team.

If it is too small and there is not enough momentum; if it is too large and it can easily split into multiple groups or evolve into a one-to-many communication pattern. More than 12 people mean that it exceeds the management scope of a team leader and may require something like hierarchical management. For a squad in DAO, more than 12 people may lead to the failure of a coordinape-style mutual evaluation system.

Within the squad, there has an open communication environment, naturally formed team norms, and collective memory. Furthermore, members fully understand each other with a tacit understanding that they do not even have to communicate every time. Collaboration within the squad is not loose, but tight. A larger organizational network may surround a squad, blurring its boundaries and making it appear larger, but for the core squad members, there is always an invisible circle that divides the boundaries of internal and external affinity.

From a military coup to the development of an Internet product, a squad has worked closely together at its core. In a successful squad, everyone can find a valuable position.

Pods endow its squad with appropriate financial resources and a certain degree of autonomy, which will further stimulate the squad’s creativity and execution. The squad can take care of everyone in it, so individuals will feel a greater degree of respect, freedom, and sense of belonging, and will be better engaged in value creation.

Catalyzing DAO to DAO Collaboration

A DAO is a network that participates in extensive collaboration and high-frequency interaction. The most basic form of interaction between DAO and DAO is financial interaction. Some financial interactions involve a large share of the DAO’s treasury and often require a vote by the DAO’s owners. However, more financial interactions tend to involve a smaller share of funds with relatively high frequency that may require significant communication efforts by negotiators. The latter one is not suitable for implent vote resolution, and it is more appropriate to authorize a Pod to complete it. We could build an interim Pod to manage every D2D cooperation involving financial interaction.

In addition, as we mentioned earlier, the Pod itself is an asset package of the DAO. The effect of asset packaging could be realized by injecting different types of assets into the Pod. “Trading Pod” can have the same effect as “trading Pod assets”, with significant savings in Gas compared to trading the assets in the Pod directly. At the same time, DAOs can transfer their Pod to another DAO for or without compensation, or exchange its Pods with other DAOs’ Pods to realize business combination and grafting.

Summary

As mentioned above, we have gained insight into the unique concept of Pods from several perspectives:

• From a technical perspective, a Pod is a multisign wallet, which can be subordinated to a DAO or another Pod or can exist independently, and a Pod can be upgraded to a DAO by creating a governance layer.
• From the perspective of organization, a Pod is an organizational unit, with Pods at the grassroots level often being a squad of close collaboration, in which individuals can give full play to their talents.
• From a financial perspective, a Pod is a set of packaged assets that can be exchanged, transferred, and mortgaged. Packaging assets into Pods simplifies the transaction process for multiple assets and saves Gas costs.
• From a business perspective, a Pod is a project, or business unit, under a DAO, which may be temporary or long-lived.

Observation from different perspectives gives us a deeper interpretation of Pods and more application scenarios to explore.

At the same time, we see that the nature of the DAO-Pod relationship is “bounded delegation”, and the infinite extension and natural rheology of the DAO-Pod structure. We found that the DAO-Pod structure not only enables great scalability for DAOs but also allows DAOs to become truly revolutionary organizations. We believe that the DAO-Pod structure will become a. new paradigm for DAOs and that a multi-layer, fractal, and rheological structure composed of DAOs and Pods will be the future of DAOs.

Reference

[1] Pods: The DAOnfall of Token Voting

https://orca.mirror.xyz/Y2xvPmB4cJH51srGqY6Mm_g38lV-7cwvtyDePnyzfAE

[2] How ENS DAO Brought Working Groups On-Chain

https://orca.mirror.xyz/mbZHxsYcf3ngpKFSzpQFshbpD3Re-w486dpbaI5iRyk

[3] Charting the Path to Unaccredited DAOs with Minion

https://medium.com/@thelaoofficial/the-path-to-unaccredited-daos-with-minion-8113213f7195

[4] Squad Wealth

https://otherinter.net/research/squad-wealth/

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.

Review: Owen；Shawn Lin @1PAR

Translation：Eunice

One of the greatest advantages of the crypto economy is the flexibility with which incentive structures can be designed, allowing virtually no constraints to build any form of economic system. In such an economic system, Token is the core of productive relations and an important tool for resource coordination. We have noticed the emergence of a new token incentive model, a new tokenomic model called X to Earn (X2E), where “X” denotes a user behavior encouraged by the system and “to Earn” means that the system provides a economic incentive for that behavior.

From the popularity of Axie Inifity, Play to Earn came to the forefront, and even established a huge Web3 gaming prolific guilds around Play To Earn. After that, StepN ( Move to Earn ) and LetMeSpeak ( Learn to Earn ) came out one after another, and Web3 users realized that the economic model of Play to Earn could have many variantions and it could be applied in more scenarios, so a more general concept was refined, namely, X to Earn.

The broad and narrow sense of X2E

X2E, in a broad context, can refer to all behaviors that gain benefits in Web3, including：

• Use specific hardware devices (generally known as mining equipments) to access decentralized networks and provide services to earn tokens (e.g., Filecoin, Meson, Phala, Helium), which is categorized as MachineFi in this industy; and
• Run nodes of public chain networks for block rewards, including in PoS public chain networks, where tokens are delegated to nodes for revenue.
• Funding in compounding DeFi dapps for yields.

However, the term X2E mentioned in this paper refers to its narrow sense, where X refers to a certain user behavior that emphasizes more on the users’ expenditure on time than on capitals.

Typical examples include:

• Play to earn: Axie Infinity
• Move to earn: StepN
• Learn to earn: Let me speak
• Drive to earn: HiveMapper, CPLE
• Write to earn: CoinHub, CyberNote

In addition, there are more innovative and diversified forms, such as Sing to Earn, Sleep to Earn, Eat to Earn, Meditate to Earn, etc.

Commonality and individuality of X2E projects

In many X2E projects, X is the variable and is the behavior incentivized in the economic system, and Earn is the commonality, which is token revenues generated by the users’ behaviors, and players can exchange those tokens into stablecoins or sell them or reuse them in the system. The token earned by the player may or may not be the same as the governance token of the project. More and more projects are choosing a dual-token model, which separates the governance token from the game token in order to decouplex governance risks and risks within the economic system.

In addition, the vast majority of projects with another commonality, that is, in order to enter the game and make profits, the players have to buy the “ticket” first.

Tickets are in the form of NFT, for example, to earn the token through StepN, you need to buy NFT sneakers; to earn the token by learning English through LetMeSpeak, you need to buy NFT virtual characters first. In some projects, tickets may also be in the form of staking voucher (e.g., CoinHub) or the purchase of smart hardware (e.g., HiveMapper).

Ponzi scheme ?

People are rushing to X2E projects for speculative and profit-seeking. But they are also generally apprehensive about its sustainability and are always ready to leave. What entrepreneurs on the track should be thinking about is that can they create a sustainable X2E model? How should it be done?

Just as life requires energy intake to maintain it, an X2E economic system requires a continuous infusion of capital to help players get rewarded in its ecosystem.

New users feed old users could be a choice for this, specifically, redeploy the fund from new users who bought “tickets” to maintain the earnings of incumbent users ( deploying this money into the bonus pool, or using it to buy the token in echanges). This is not sustainable.

Assuming that the expected monthly return for users is p , tickets price is v , the number of existing users in the current month is s, and the number of incremental users is i, then to maintain equilibrium needs to satisfy i*v >= s*p*v ，that is i >= s*p ，at least. i= s*p

Assuming that the expected payoff period is one month ( that mean monthly return is 100% ), and the number of existing users is 10, to keep the balance, the growth trend of users needs to be as the following curve.

This is a typical exponential growth curve.

This reavel that in order to keep the balance the number of exisiting users and increment users both need to increase, which means that the increment must also maintain a certain growth rate. In other words, in this formula, a sufficient accelerated velocity for the user growth is need in order to promise the general growth.

The constant growth in speed of users is with no promise, let alone the accelerated growth of users? Soon after such an economic system launch, yield p decreases until it fails to meet expectations, causing players leave and enter into a death spiral, a Ponzi scheme. To create a sustainable X2E economic model, we must find some alternative and sustainable sources of funding. Let’s look at a couple of possible paths.

Five possibilities for X2E program sustainability

Type 1 : pay-users feed earn-users

Without external funds, the X2E economy would be impossible for every player to Earn , as those who earn money for spending it, and those who earn money also need someone par for it. If there are players willing to pay, that mean such an economic system provides players with value other than profit only. Maybe this value is physical and joyful by playing the game, or it is helping users to develop a good habit, or a way to make a group of like-minded partners.

Play to Earn game, for example, if the appeal of playing the game goes beyond making money, and the playability of the game itself attracts players to pay, or let them to accept a situation where the revenue from playing is less than the cost, then the economy of system is likely to be balanced, a balance between pay-users and earn-users. In this scenario, pay-users are the real players of the game, and earn-users are somehow serving the pay-users.

This is an incremental process, at the early stage, high yield will attract many users to play to earn, as time goes by, the slowdown of users growth will lead to lower income (often reflected in the lower Token prices), part of the earn-users gradually exit, pay-users and part of the users who accept lower yield have left behind.

In this way, game publisher saves the money that should be spent on publicity, and utilize the power of the crowd to get the word out. In this sense, Play to Earn just change the way of game distributed, and essentially, the decisive factor for the success of a game is its playability rather than economic model.

Type 2 : “Laziness” feeds “Diligence”

Move to Earn and Learn to Earn projects are with the characteristic of “laziness” feeds “diligence”. These two types of programs have a common feature, that is, they use monetary gains to help users be more self-discipline which is not an easy thing. However, if good living habits can lead to positive and instant feedback in the form of money, it may will be more easy to do. When learning or exercising becomes an act of gain money, users are more likely be bouncy and full of energy.

However, without external funds, the problem – —someone earn, someone need to pay – —is still not getting around. It seems like all participants earn token rewards, but assuming that the total market value of token remains unchanged, and excluding the volatility of the secondary market, we can say that only those who cover the inflation are really earning money, otherwise they will become passive pay-users.

It is like that, at the begining everyone starts to earn tokens by excercising or studing, and eventually the relatively lazy ones pay for the relatively diligent ones, creating a balance.

While such a balance is not easy to achieve because the pay-users are involuntarily and passively paying, in spite of they also benefit to some extent from the self-discipline. On other hand, reasonably, not hardworking ones have to pay the price of their relative laziness, but who want to loss money by this way and there must be a limitation of the loss?

In order to slow down user churn, it is important that neither pay-users lose too much nor earn-users earn too much,

StepN, in order to achieve this, choose to limit the influx of new users moderately, and let users consume the token rewards in the system as much as possible in order to reduce the inflation (but now we see that almost all the token consumption scenarios in the StepN system point to earning more tokens, so a more inflationary pressure will increase later on); while LetMeSpeak chooses to give a certain lifetime to the NFT (admission ticket), making the economic model closer to the “clock in” model described as below.

Type 3 : “clock in” model

There is a gym business model where annual fee is $2,000 and you will get $20 back every time you go to the gym in a certain time period, so 100 days is the payback period in ideally. Compared to others, this is a model has a greater incentive effect for customers to persist in.

This clock in model means that the money each user can earn is the money they have already paid, so there is no possibility of it falling into a Ponzi scheme. That mean “lazy customer” who cannot make a return in that certain time period. will be the one to pay for the operating expenses of the gym. So the clock-in model can also be illustrated as “laziness feed diligence”.

Meditate to Earn adopts this model. Users pay $100 at first, then do 21 days of meditation training, each time you complete the meditation task you can get back $5 and get a NFT as meditation medal, if you do not complete the meditation training within the limited time period, the rest principal will be confiscated. (This program is still an experimental product at present.)

Type 4 : Group feeding Individual

We found some X2E programs that have a clear and profit model. After forming a network through X2E, they can provide social services through the network and earn profits that inject back into the bonus pool or use to buy back tokens then burn them to raise the token price. In this case, the profit of the whole network supporting the revenue of each single point.

HiveMapper is a Drive to Earn project, the vision of which is to build a Web3 map product in a decentralized way. Most of the mapping products we have in our phones now are centralized products like Google Maps, Gaode Maps, and Apple Maps. In fact, the companies that run these products are spending huge costs every day to hire dedicated people to collect and update geographic information, which only a giant company with deep pockets can do that.

HiveMapper uses blockchain + crowdsourcing data to build a global map. You just need to buy and install Hivemapper’s dashcam, then you can complete data collection while driving and earn token rewards called HONEY at the same time. Once such a global map is completed, its API will become usable and users will need to use HONEY token to gain access to the API. In this way, a commercial loop is formed.

Another Drive to Earn project CPLE (CarpoolsLifeEconomy) is dedicated to building a Web 3 Uber COMMUTE platform. The project also requires contributors to install a dashcam, on the basis of which they can earn token rewards by posting trip orders and completing them.

Type 5 : Cash the flow

The development of Web2 told us that the flow almost the most important element for a business to success and there are many opportunities to cash in it as long as the media traffic can be gathered. Take Tencent as an example, as we know WeChat and QQ are not profitable, but with the huge traffic of them, there are many profitable businesses could do for Tencent, including QQ music, Tencent video, Qzone, King of Glory and so on.

For Web3 as well, X2E projects with the ability of strong traffic attraction and user. retention. For example, Move to Earn project could develop an NFT trading marketplace in the future, and use that profits to subsidize the bonus pool. In fact, the process of buying virtual shoes for new Move to Earn users is a process to learn how to trade NFTs. This is a great way to set up a business.

Conclusion

We believe 2022 will be a great year for the X2E track. PAKA labs will support quality projects in this track. At the same time, we also would like to remind Web3 users to be aware of the X2E risks, because of its low entery barriers. However, we believe the programs that succeed in creating an sustainability X2E model are the ones that will survive, and even make another brilliant in a new wave of growth.

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.

Written by MIDDLE.X @ Paka Labs

Reviewed by Owen @ Paka Labs; Shawn Lin @ 1PAR Research

This is the second installment of the DAO series by PAKA. Our last post explored DAO around Tokens and Governance, this one will focus on people and collaboration. We will answer the following questions.

1. What is the organizational structure of a Dao?

2. How does a DAO work and how do its members coordinate?

3. What are the different contributors in a DAO according to the level of participation?

4. How does the DAO guide and motivate members to work for the DAO?

Each DAO has its own business model and strategic goals, according to which we can divide DAO into several categories.

There are Venture DAOs and NFT DAOs that focus on investment and pursue financial returns, Grant DAOs that are used to distribute funds, Protocol DAOs that are responsible for managing agreements and pursue public services within reasonable profits, and Social DAOs (or Club DAOs) that are dedicated to serving members and creating social opportunities for them.

An overview of the DAO ecosystem:

Regardless of the form of DAO, it is not enough to have a democratic governance to achieve all of the goals, there still need people to do things. Many DAOs choose to rely on a centralized team, which has its validity and efficiency advantages, but is far from the DAO we expect.

With the development of DAO, Community DAO has emerged with stronger community collaboration attributes, broader business scope, and stronger creative ability, of which Bankless DAO and SeeDAO are typical examples. The discussion of DAO collaboration in this post is basically based on Community DAO.

1. Organizational structure of DAO

As a decentralized organization, what is Dao’s structure? What are the similarities and differences with a corporate organization?

First, a typical DAO will have a decision-making committee ( core team) that is empowered to make decisions on the day-to-day affairs of the DAO so that endless voting can be avoided. The community empowers it to manage day-to-day affairs is similar to a board of directors appointing a CEO and executives to manage daily works.

The DAO uausally have several skill groups, also called guilds, depending on business needs. Each guild is a collection of people with specific skills who are willing to work for the organization. These guilds like departments in a corporate, but are completely different in nature. Each person in the guild can decide for themselves what to do or not, which projects to participate in or not. In some sence, these guilds as talent pools for DAOs.

DAO could running multiple projects at the same time, and each project team has members from multiple guilds. The projects and the guilds form a structure as below which is the organizational structure of the DAO, and we can express it in the following diagram.

2. How does DAO work

In such a structure, power is distributed to each person and relationships betwwen members are independent, so how to work? In fact, in business management, there has been such an exploration, that is Holacracy, and the idea of DAO’s operation coincides with Holacracy. For example, in DAO, there is a coordinator in each guild, who has the responsibility of cross-group communication but without the power to do decide the work of each person, which is very similar to Holacracy.

2.1 Projects and Tasks

DAO’s work is carried out more project-based. Any member of DAO can initiate a project. if you have a plan to promote DAO’s goals, then you can initiate it as a project in the community. Then, you need to advocate in the community to get enough support. The community decides whether to fund your project by voting. If it was successfully funded, you will be able to recruit members from the DAO’s guilds to go through it.

This is different from working in a company, where if you want to initiate a project, all you need to fight for is the boss’s approval, and then he allocates resources for you to complete the project, and one interesting thing is to convince one person or a group of people may need same efforts, and a group may not make better decisions than one. DAO’s approach is more about principles of democratic than principles of efficiency.

The project will be decomposed into samll tasks that can be divided into two types: one is Bounty tasks with short-cycle and clear delivery. Completing Bounty tasks can get bounty and some contribution values directly. There is another kind of Project Tasks with a higher degree of collaboration and a relatively high threshold for receiving a project task. Completing it has longer reward cycle and with no direct rewards but a dividend.

2.2 Contribution value, rank, medal

In DAO, completing tasks could earn contribution value, different DAO call these in. different names, some are called reputation, some are called experience value. It is non-negotiable and will determine your future token earnings and privileges (e.g. whitelist) in a specific way. Contribution value also determines your rank, and raising your rank could unlocks more access permission and gives you the opportunity to receive more tasks.

Project members get contribution value by completing work, and most of the project budget will be allocated to members in proportion to their contribution value. Contribution value is one of the core elements of a DAO, and we will further elaborate on this when we talk about allocation and motivation mechanism later on.

When specific tasks are completed, contributors are awarded a medal that with non-financial value and non-transferable but with social value within the community and as a proof of you have completed a particular challenge. These medals may as a proof of competency across organizations and as part of your Web3 resume.

2.3 Discord

There are many tools used to run a DAO, Discord is the most important one at present which is a very scalable community management tool that can easily manage a community of hundreds of thousands of people. Almost every DAO has its own Discord group.

Various other tools are used, such as Gnosis Safe, a multi-signature wallet for managing funds, and Rabit Hole, a tool for creating bounty tasks. As the DAO grows, more tools will emerge. We believe that a platform that integrates many useful tools and enables one-stop money management, task management, and contribution value management, is what DAO needs most. DAO framework providers such as Aragon, DAOstack, Moloch, and SubDAO are working hard for this.

3. Talent Inventory for DAO

The way DAOs operate reminds us of the “gamified organization” proposed by Kevin Werbach and Dan Hunter in their book “Gamified Thinking”. With instant feedback, quantifiable achievements, and honorable socialization to make work more interesting, which Dao is closer to gamified organizations.

At the same time, we should note that DAO is a boundary model organization where members are recognized according to their participation level. Although members of the DAO are spread across guilds and projects, their level of invovment is not uniform, and some of them are just potential participants. To gain a deeper understanding of DAO organizations, we need to make an inventory of DAO members based on their level of involvement.

We divide them into explicit human resources, which include full-time employees, deep contributors, and peripheral contributors (bounty hunters), and potential human resources, which include token holders, users and other stakeholders, and community watchers. As shown in the figure below.

3.1 Explicit Human Resources

• Full-time employees

Full-time employees usually appointed by a vote of the DAO or by the Chief Community Officer who slected by the Dao, they take specific responsibilities and will be paid rewards or receive a dividence. This takes them an advantage to know DAO’s contextual information, which may elicting malfeasance or arbitrage by them, to aviod this, full-time employees are monitored and held accountable by other DAO members in the same way as public officials.

The internal coordination costs of full-time employees should be as small as possible, so the unmber of employees not as many as there should be. A healthy and efficient DAO structure should be more like a lean full-time team + a large contributor base. Friends With Benefits (FWB) provides a good example: a remarkable full-time community officer + 200 active contributors has created a multi-billion dollar market cap project and be an example of a successful DAO organization.

• Deep Contributors

Deep contributors, while not necessarily working full-time for the DAO, spend a significant amount of time extensively participating in DAO meetings, executing and completing important tasks of the DAO. Deep contributors tend to be highly aligned with the DAO’s goals and culture, and devote their energy to the DAO, perhaps even more than full-time employees. They do not have an employment relationship with the DAO, nor assume responsibility for the post, but they have a strong sense of ownership. Deep contributors who are excellent contributors and have some irreplaceability can gain no less influence in the community than full-time employees.

Deep contributors’ accountability may resulting from holding the DAO’s token or from the DAO’s value recognition. In addition to actively completing the work of the DAO, they may also think deeply about the future development of the DAO, and gives suggestions, even spontaneously initiate projects and actions that are beneficial to the development of the DAO.

• External Contributors (Bounty Hunters)

In order to fully mobilize community power and community wisdom, DAOs tend to break down some of the works into a large number of bounty tasks and complete them through crowdsourcing. Bounty tasks, such as article writing, promotional material design, translation, social media promotion, etc, are jobs with clear delivery and short-circle. Bounty hunters are usually looking for bounty tasks across multiple DAOs to cash in on their skills or resources. Not all jobs are suitable for crowdsourcing to bounty hunters, such as feature development and project management, which require close collaboration and are more suitable for deep contributors and full-time employees.

A portion of bounty hunters prefer the freelance lifestyle and work as bounty hunters for a long time. But they may also be a transition stage for some newbies who want to become deep contributors, they are trying to get closer to the core of the organization by completing some peripheral work to accumulate contribution value.

3.2 Potential Human Resources

• Token Holder

Whether you are a full-time employee, a deep contributor, or a peripheral contributor, if you hold some tokens of a Dao and are more willing to contribute to the organization and are more likely to become contributors, and active contributors tend to get more token rewards and thus become token holders. Token holders are an important force in the DAO, except to participating in governance voting, token holders can also provide essential resources and contributions to the organization.

• Observers

DAOs tend to be open (though not all are), anyone can access the DAO’s discord community or forums, see the organization’s documentation, browse chat logs, and meeting minutes. Observers interest in DAO and enter the community, but not ready to become a contributor and just hang out. If they are attracted to the organization’s culture or a particular project or event, they are likely to become a contributor.

• Users, Vendors and Other Stakeholders

Except internal members, there are also upstream and downstream players (as stakeholders), such as users and consumers of the products or services provided by the DAO, vendors and infrastructure developers who support the operation of the DAO services. How to include them into the community and help each other to collaborate is an important issue for DAOs.

At the end of the inventory, we found that DAOs have a better human resource endowment than traditional corporate organizations, and have the ability to mobilize a wider and more diverse human resource, which is one of the sources of the vitality of DAO organizations. A good DAO organization can continuously turn the potential human resources into explicit human resources, and turn peripheral contributors into deep contributors.

This need DAOs to guide and train the members.

4. Orientation and Training

As DAO with blurred boundaries, members join into is not one step. The journey of a DAO contributor is like playing a game and going from a rookie to a master. As the journey progresses, contributors gain not only points, medals and ranks, but also somgthing more meaningful like sense of achievement and personal influence. A well-designed game will give players guidances and instructions on key steps, telling them what to do next, how to do it, and giving feedback timely .

4.1 How DAO guides newcomers to take their first steps

There are various DAOs with complicated channels and many members in Discord, new comers need the guidance to be involved in .

The DAO in discord generally have a “Onboarding Channel” that displays documentations for newcomers to read. But this is not enough.

Firstly, it is very important to degsin a newcomers task area where they can do some simple, low-threshold contributions, which are easy to accomplish could motivated them to join the DAO.

For experience aspect, new members should be allowed to gradually unlock more channels as they explore deeper and accumulate contributions, rather than presenting all the channels at the beginning, which may create too much cognitive load for new members. However, from the perspective of openness, it is in line with the spirit of DAO to public all the content at the beginning. Different DAO organizations may make different choices.

Second, it is better to leverage part of manpower to do newcomer guidance as an addition of BOT guidance and documentation guidance. If the newcomer endors the DAO’s value and completes some contribution tasks, then the DAO has gained a new contributor.

4.2 How DAO develops deep contributors

Once newcomers are familiar with the work, all they can do at the beginning are some bounty tasks that are clearly delivered and short cycle, which will helpe contributors’ understanding of DAO’s business model and strategic goals. Once the newcomer has completed the test at this stage, the path to be a deep contributor is at the corner, they can now take more collaborative project tasks.

Project tasks have a long cycle and a high degree of collaboration, which means that if someone is not competent and does not complete the task, it will slow down the whole project. DAOs can certainly demote or even cull such people through mechanisms, but we believe that a good DAO needs to be as accountable for the growth of its contributors as a good company.

Contributors at different stages need to learn different knowledge to be competent for the task at the next stage. Meanwhile, for DAOs, the production of learning materials and training can better develop the ability of contributors. Furthermore, professional Web3 educational institutions will emerge that will provide some general training content for different DAOs, which the DAO can directly import.

5. Contribution measurement and incentive

For the company, the goal is decomposed from the head office to each department, and then to each person. Finally, the company strategy is transformed into KPI of each person. There are two ways to evaluate KPI, one is objective evaluation, which is measured by quantitative indicators that. formulated in advance, and the other is subjective evaluation, which is mainly evaluated by direct leadership.

The DAO contribution measure will not jump out of the framework of subjective and objective measurement, but will take a different form.

In most cases, the DAO will pre-define a weight value for a piece of work in terms of the contribution value to complete such work. When evaluating a work, the contribution value you accumulated is your objective contribution. Both bounty tasks and project tasks can have predefined weight values. Govrn, for example, works with several independent DAOs to create an “action model”. The community can assign weight, but more often full-time employees are appointed to assign the weight, to different contribution types based on a set priority.

This approach is incomplete, and not all jobs can be weighted or integrated, especially communication and operations jobs. This kind of work will fall on the shoulders of full-time employees, which is one of the reasons why DAOs must have full-time employees.

The completion/non-completion is not an absolute evaluation criterion, and the quality of completion and the fluency of collaboration with others should be included in the evaluation. Therefore, subjective evaluation is indispensable. DAOs do not have the bureaucratic structure of a traditional company, and contributors do not have a clear direct supervisor. So the DAO tends to allows contributors to rate each other. SourceCred, Coordinape, Grattitude, and Common Stack are all effective tools for mutual evaluation.

Coordinape has proven its effectiveness in Bankless DAO, and at the end of each work cycle, Coordinape assigns some GIVE tokens to each project member, which are useless to keep in your own hands and must be distributed to other project members. The process of assigning GiVE tokens is how you score your collaborators, and the number of GIVE Tokens you received is your evaluation score.

Furthermore, based on contribution measurement, DAOs need to design mechanisms to distribute rewards fairly.

Rewards for full-time employees are primarily in the form of salary, supplemented by performance bonuses and dividends. It is not different from the company, so we will not go into details here. We will focus on how the DAO rewards its contributors, whose rewards can be summarized into. four levels: project layer, contribution layer, bounty layer, and participation layer.

The DAO runs multiple projects for which it allocates a budget or funds in the form of grants that are directly allocated to projects rather than individuals, which is the project layer . Within projects, rewards are then allocated to project members through the Contribution Assessment described above, which is the Contribution layer. The bounty layer rewards peripheral contributors or outsourced service providers with bounties, which may come from the project or from the DAO’s direct expenses. Finally, the DAO also sets aside a portion of flexible funds to reward the participants who may not complete bounty tasks or project tasks, but who actively participate in DAO’s meetings and online discussions and active in the Discord group, they may also receivea small percentage of the reward, which incentivizes these potential contributors to stay in the community.

6. Fractal structure and Scalability of DAO

We know that due to the scale effect, a company scales up until the boundary benefit of the scale effect is less than the boundary cost from increased internal coordination cost. Companies enhance scalability by bureaucracy, but having too many layers also bring a series of management issues. So do DAOs run into scalability problems? How will the structure of a DAO evolve as it scales up?

Practice shows that DAOs will spontaneously evolve a fractal structure. Things will start from the unbalanced development of DAO’s various guilds and projects. In DAOs, individual projects or guilds could gather a large number of contributors and grow rapidly. For example, the development guild of Bankless DAO is particularly large and exceeds the number of other guilds combined, that mean the existing projects and tasks cannot meet their work needs, resulting in the development guild creates its own projects. The Indian branch of YGG DAO, indiGG, grew much faster than the other branches, so indiGG started to operate independently, issued its own Token, and formed an investment relationship with YGG DAO, becoming a “subsidiary” structure.

DAO in DAO and project in project, this is the fractal structure of DAO. It enhances the scalability of the DAO and keeps the project team lean. According to the “team theory”, a close project team should be less than12 people, and the number of projects in a DAO should not be too many, otherwise it will lead to the internalization of resource competition

Structures adapt naturally is one of the most interesting thing about DAOs. In Frederic Laloux’s book “Reinventing Organizations”, organizations are divided into several categories, including red organizations, amber organizations, orange organizations, green organizations, and Frederic believes that cyan organizations (Teal Organization) are evolution direction of future organizations.

In a cyan organization, members are able to manage themselves and make progress contiunally according to their needs and then become “super-individuals”. The DAO organization undoubtedly conforms to the meaning of cyan organization, and the widespread application of DAO is also a large-scale practice of cyan organization.

7. DAO in future

We are pleased to see that some of the advanced management ideas, such as collegiality, gamified organization, and evolutionary organization, are fully implemented in DAO. Even though the DAO is a groundbreaking mode of coordination that is completely different from our usual perception of the organizational forms.

We also need to recognize that the DAO is still young, and there are still many problems. The coordination model of DAOs described in the previous section are all empirical based on an examination of existing DAO organizations. DAOs will continue to develop and evolve in ways that are beyond our expectations, and is still far from its end.

What excites us is that DAOs offer the possibility of enabling people to work in a friendly way. From the agricultural society to the industrial society, accompanied with the great material enrichment, we also take huge psychological and physical pressures from works but get disproportionate compensations. The emergence of DAO may put an end to this trend.

Perhaps one day we will see employees leaving companies in droves and making strides toward the Web3 native organization, the DAO.

Reference

Nichanan Kesonpat | Organization Legos: The State of DAO Tooling

https://medium.com/1kxnetwork/organization-legos-the-state-of-dao-tooling-866b6879e93e

Kassen Qian | DAO Essentials: 6 Key Onboarding Practices

https://mirror.xyz/daomstr.eth/YNr-PuwUgp9LoK6xlrHhLlfKKo2GHzR8g00wBnfhQbc

Ben Schecter | The Future of Work is Not Corporate — It’s DAOs and Crypto Networks

https://future.a16z.com/the-future-of-work-daos-crypto-networks/

王超 | DAO的生产力

https://www.bilibili.com/video/BV1RF411a7Z7

王超 | Bankless DAO:去中心化协作的宝贵样本

https://mp.weixin.qq.com/s/elW0QClGlJs5Mj0Z6k18uQ

SeeDAO | 自下而上的薪资发放工具 Coordinape

https://mp.weixin.qq.com/s/ZNZ2RKOULdkMujJliO6NBQ

Frederic Laloux | Reinventing Organizations：A Guide to Creating Organizations Inspired by the Next Stage in Human Consciousness

https://www.amazon.com/dp/2960133501

Brian J. Robertson | Holacracy: The New Management System for a Rapidly Changing World

https://www.amazon.com/dp/162779428X/

Kevin Werbach & Dan Hunter | For the Win, Revised and Updated Edition: The Power of Gamification and Game Thinking in Business, Education, Government, and Social Impact

https://www.amazon.com.dp/B08JQTH2MN/

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

Written by MIDDLE.X @ Paka Labs

Reviewed by Owen @ Paka Labs; Shawn Lin @ 1PAR Research

In most DAOs, tokens carry a role similar to that of shares in a joint-stock company, including ownership, governance decision-making, usufructs, and so on. For a long time, the main form of voting rights in DAOs was one token one vote (1T1V). However, it has many drawbacks, as users with a small percentage of token holdings adopt a “rational indifference” attitude towards participation in governance, as to refuse to be involved in, further leads the voting power in DAOs to be centralized and serves the interests of the few. Even for DAOs with a very decentralized token holding form and a good participation culture, the lack of a healthy voting mechanism will lead to a “rabble” of short-sightedness and stupidity.

The crypto industry rewards those who make even small innovations. With DAO, we are exploring various coordination mechanisms for governance. DAOs have already contributed a wealth of solutions to governance issues in just a few years of their birth, and the lower trial and error cost of DAO promotes continuous exploration with different governance mechanisms.

DAOs are a fascinating form of organization that has unparalleled advantages in achieving ownership-in-common of public goods, eliminating the risk of corruption in the voluntary sectors, and achieving nonprofit goals somewhere. However, these advantages can only be realized if they are coupled with sound decision-making mechanisms, fair contribution measurement standards, and reward mechanisms, and strong governance scalability. In this paper, we present what we believe are typical and interesting voting mechanisms that have positive implications for governance ideas and initiatives, but they are not the silver bullet.

1. Vote delegation/Liquid democracy

Every decision takes up the bandwidth of our minds, a better alternative is that delegating voting power to the few (experts), not ourselves, and this could make a more effective and efficient decision-making process in public governance. But the few are not always reliable, so oversight is essential in the principal-agent relationship.

Power needs to be centralized, but not always controlled by the same group, needs to be mobile. Liquid Democracy is similar to Representative Democracy as a whole but more mobile. Voters with choose to delegate their voting power to someone they trust and consider as a professional, but they can also withdraw their delegation to exercise the voting power in person or transfer it to someone else at any time. Furthermore, the delegation is multi-layer, the votes you have delegated could be then redelegated to others.

Liquid Democracy was first adopted in Aragon, which increases the participation rate of token holders, thus improving the legitimacy of voting decisions. Although it still suffers from problems such as vote-buying and collusion, Liquid Democracy increases the election right of each individual and enhances the supervisory role of the delegation parties by a more responsive and multi-layered proxy mechanism.

2. Quadratic Voting

This is a voting mechanism proposed by Vitalik Buterlin, which is between 1T1V (one token one vote) and 1P1V (one person one vote). The key function of this voting mechanism is to allow individual voters to make multi-voting for the same option in order to express the strong will, at the same time, the marginal cost of repeated votes for the same option tends to decrease ao as to avoid monopolization of voice by giant whales, which means the cost of the n+1th vote is higher than that of the nth vote. For example, for the same option, 1 vote 1 token, 2 votes 4 tokens, 3 votes 9 tokens, and so on, 10 votes 100 tokens. The utility of voting is the square root of the number of tokens needed.

Quadratic voting can be used to vote on the allocation of public resources, as exemplified by Gitcoin, a Grant DAO that uses quadratic voting to decide which projects to be funded by Ether Foundation. Before that, it was a centralized committee that decided which projects the Ether Foundation would sponsor. Gitcoin provides an avenue for community users to express their opinions. Community users could vote by “donating” to the projects they supported, and the sum of the square root of each donation a project received ultimately determined the amount of sponsorship is received.

Gitcoin’s quadratic voting mechanism eliminates the need for a centralized committee evaluation process, making the distribution of funds more efficient while creating a multiple accommodated culture for community engagement. It has effectively funded many high-quality Ethereum projects.

The weakness of quadratic voting is that it relies on a strict identity proofing mechanism to ensure its fairness, and it would operate no differently than 1T1V if falsified identities were allowed. Gitcoin tying social accounts, connect DID services, and many other approaches for identification. Users can earn a certain number of points for each item they complete and achieve an identity after reaching 150 points.

3. Holographic Consensus

Holographic Consensus is a solution provided by DAOstack to increase governance scalability. Governance scalability can be understood as the adaptability of a governance mechanism to a DAO that is being extended. We know that as a DAO scales, the cost of coordination increases dramatically, and it is impractical to have everyone vote for every proposal, and participants’ attention becomes the scarcest resource inevitably.

DAOstack argues that an efficient governance system must be accompanied by a mechanism to manage collective attention that ensures the most important proposals receive community attention and the small group of participants who join vote tend to act in the interests of the majority. The term “holographic” originally means a technical that records all information about a three-dimensional object on a two-dimensional plane, so as make sense of the Holographic Consensus, it allows the few people’s decisions to accurately express the will of the majority. This is achieved by the attention token, GEN.

GEN is the marker for monetizing attention in the DAOstack ecosystem. With GEN, you cannot vote but can bet on any proposal, and if the proposal you bet on is approved, you will gain more GEN, and vice-versa, if not, you lose GEN. This betting way creates a prediction market parallel to the voting mechanism.

The governance process of Holographic Consensus can be divided into four steps.

(1) Proposal initiation: Any user who meets the reputation threshold could initiate a proposal.

(2) Proposal enhancement: GEN holders select proposals that they believe with a high probability of approving and bet on them; proposals that receive insufficient GEN bets will be ignored and will not proceed to the next stage.

(3) Voting decision: the group with voting rights votes on the proposal, and if the proposal is approved, the user who bets on it will be rewarded with GEN, and loses GEN if it is not.

(4) Execution: The approved proposal take effect and is executed on the chain.

Promises are the governance voting framework of Holographic Consensus by DAOstack, which has strong governance scalability and provides a practical governance scheme for larger DAOs.

They’re focused on two main objections to the framework.

• Does it filter the proposals that deserve the most attention, or does it just filter popular proposals with propagation effects?
• Do bettors, whose judgment is based on whether a proposal will be approved rather than whether a proposal should be approved, and who are bound to participate in the voting with voting eligibility, end up distorting the outcome?

These defects have yet to be tested and fixed in practice. In any case, DAOstack has provided a useful practice of combining prediction markets and DAO governance. DXdao, NecDAO, and Prime DAO have implemented Holographic Consensus by using DAOstack framework.

4. Conviction Voting

Conviction Voting is a dynamic voting mechanism based on voter beliefs and proposed by Aragon. The voting utility of the votes will increase over time but the process is decelerated not uniform until reaching a maximum value and no longer increasing. Votes can be withdrawn or moved to another proposal by the users anytime, but the voting utility on the previous proposal will disappear gradually not immediately and this disappear process is an accelerated process. In order to make the formulation more descriptive, Aragon creates the concept of “conviction” to refer to voting utility.

Conviction Voting is a novel decision-making process that has been used by the 1HIVE community for community decision-making on funding allocation. Conviction Voting has the following features.

- The user could allocate his votes among multiple ongoing proposals at any time, with no clear deadlines

- The voting utility is not only related to the number of votes cast but also adds a time function that grows over time.

- The user can withdraw his votes at any time, and its voting utility is not immediately removed, but gradually diminishes over time

- Each proposal has a “conviction” threshold based on the amount of funding applied, and once the “conviction” gathered by the proposal meets the threshold, the proposal and the funds will be approved and disbursed respectively.

Conviction Voting fundamentally changes the format of voting, as community users will not be asked to vote within a limited time, nor will they be asked to vote for a proposal they do not understand. Instead of always having to “decide”, users can fully express their preferences and vote for proposals they know about and are interested in. Rather than requiring users to reach a majority consensus on the same issue, Conviction Voting instead takes advantage of the diversity of user will and allows multiple paths to run in parallel.

Of course, it is not applicable to all decision scenarios but very suitable for budgetary decision-making. It allows organizations to effectively collect community preferences and respond to group will.

5. Rage Quitting

Rage Quitting comes from Moloch and is now widely used in several DAO platforms or DAO organizations that use the Moloch framework, including DAOhaus.

Theoretically, there is a risk that an organization that relies on a majority vote to decide funds arrangement, such as a small group of people who control 70% voting power with the ability to vote to approve a proposal, this proposal would embezzle funds bElong to the other 30% voting power owner. Although such an extreme situation has not yet arisen, it is common in joint-stock companies that larger shareholders use their decision-making power and information advantage to reap the interests of minority shareholders. For Venture DAOs, it is necessary to prevent small groups with decision-making power from undermining the interests of other owners. A rage quitting mechanism can do this effectively

For a DAO using the Moloch framework, anyone could quit from the DAO at any time, destroy his or her Share or Loot (Share is a voting share, Loot is a non-voting share), and withdraw the funds corresponding to the share/loot. While the term “rage quitting” specifically refers to the quit act in the voting process.

In the case of DAOhaus, the governance process has the following steps.

• Submitting a proposal: Anyone (who is not a DAO organization member) could submit a proposal.
• Sponsoring a proposal: The proposal must receive sufficient sponsorship to proceed to the voting stage. Sponsorship means that the Shareholders vote in favor of the proposal. This stage filters out frivolous or unimportant proposals.
• Queuing: After reaching the sponsorship threshold, the proposal is in the queue and awaits voting.
• Voting: sufficient support votes to pass is needed before the deadline.
• Grace period: after the proposal is approved, there is a seven-day grace period before executing the proposal, shareholders could do rage quitting during this time.
• Execution: The proposal is marked as completed and is executed on the chain.

By rage quitting, no one can control the funds of others, it protects the interests of members and improves the unity of the organization in terms of ideas, and increases the efficiency of organizational coordination.

6. Weighted Voting & Reputation-based Voting

Governance Token often has to perform a dual function, with a governance function and a value circulation function. The token must be sufficiently liquid in order to capture the financial value and this necessarily financialize the token in some sense. This means that governance tokens may be found in trading markets, lending markets, and may even generate derivative assets.

An attacker can borrow from the lending market, or rent proxies from the possible proxy bribery market, and can obtain a large portion of vote rights for a short time and launch a governance attack on a DAO.

Weighted voting is a good way to circumvent such problems, Some DAOs make the voting utility linked to the holding length(token age), the longer the holding time, the more voting power, and some DAOs, make the voting utility linked to the lockup length, such as Polkadot: users with the choice not to lockup but the voting utility is extremely small, or, take a longer lockup length can increase the voting utility.

Weighted voting increases the financial cost of governance attacks.

A more radical solution would be to completely decouple the financial value token and governance token, the governance ability of a token we can call ‘reputation’.

Reputation, a non-transferable, non-circulating credit, could be earned by holding/locking tokens or by contributing to the organization, and the voting power is accompanied by reputation rather than a token. It is important to note that the reputation you had earned can be destroyed through code rules or governance. For example, reputation can be deducted when a reputation holder commits an act that is detrimental to the organization’s interests, or it can be deducted over time or expired in order to avoid the continued influence of an early reputation that may undermine fairness.

While reputation is not completely resistant to malicious bribery (you can still sell your private key to indirectly transfer reputation, for example), but it is very difficult to form an efficient market for buying and selling reputation, or to financialize it.

Starting with DAOstack, Reputation Voting has been accepted gradually by others. Reputation voting gives DAO organizations the ability to adjust voting weights based on community ecological distribution and token distribution and avoids the governance attacks and fairness issues associated with token-based voting. By customizing the rules for calculating and obtaining reputation values, DAO organizations can practice what they understand and recognize as “democracy”.

7. Knowledge-extractable Voting (KEV)

It needs to know the concept “Furtachy”, a governance theory proposed by Robin Hanson in 2000, a model that combines governance voting with prediction markets, which core idea is to give the act of voting a betting nature, rewarding those who vote for the right option and punishing those who votes for the wrong option. The holographic consensus mentioned above can be understood as a variant of Furtachy.

This section introduces another variant of Furtachy: Knowledge-extractable Voting, or KEV for short.

KEV is about giving knowledgeable ones more power to vote. It introduces a new type of knowledge token, which is somewhat similar to reputation token, is non-tradable and can be issued and forfeited through established rules, but it couldn’t be used for voting directly, but works by influencing voting weights.

In the KEV mechanism, proposals are divided into different topics, and different topics are associated with different knowledge tokens, and having a certain type of knowledge token gives you more voting power in the proposals of that type of topic. If Alice has many tax tokens, Alice’s votes will have more weight when she votes on tax proposals. If Alice votes in accordance with the final voting result, Alice will be rewarded with more knowledge tokens corresponding to the topic, otherwise, will be deducted. The KEV mechanism encourages people with more expertise on a proposal to vote and who do not have enough information and knowledge on a proposal not to vote.

The idea of “knowledge influencing power” of KEV is certainly positive, but whether an “expert’s” choice is correct or not depends on the final outcome of the vote, it is not the voting decision itself has a positive impact, which is not outside of Furtachy’s framework.

KEV has currently been used only by Dit protocol, and the reasonable setting of KEV-related parameters has been explored.

Conclusion

What is a good governance voting mechanism? For private companies, efficiency is probably the first priority, and corporate leaders with absolute power and a rigid hierarchy are the standard, but for DAO organizations, although they also need community leaders with appeal and efficient execution, we think “democracy” should be considered first.

The democracy in the DAO context should be accurately described as decision-making is generated by a wide range of stakeholders who are broadly and fairly involved in, which can help DAO organizations (1) involving as many as possible members to work together to create the value for the community rather than “hitchhiking”, so as to effectively explore group wisdom and resources to serve the organization’s goals. It will take much more costs for a traditional centralized organization. And (2) DAOs are almost the ideal form of organization for operating public goods in some sense, to avoid the detriment of interests if the most of the others in return for the benefit of shareholders, even with the ability to create more public goods. One might ask, won’t DAO owners contradict the interests of other stakeholders, but it is better to question that how can DAOs convert a broader range of stakeholders into owners?

The development of DAOs not only overcomes endogenous alienation and promotes a better achievement of organizational goals but also generates an exploration of the governance mechanism that should be found in some DaaS service platforms like Aragon, Moloch, DAOstack, SubDAO.

The DAO is devoted to reducing the cost of organizational coordination through technology. Quadratic voting, for example, is not only used in DAOs, Colorado Democrats also experimented with it. This is a new attempt to reform the social governance methods, which could provide important references for the decision-making of public issues. Moreover, the idea of monetizing attention in the holographic consensus, the knowledge amplifying power in KEV, the voting weight pluralism in belief voting, and the fairness concept of the rage quitting mechanism and reputation voting are all important to us.

References：

[1] Vitalik Buterin：Moving beyond coin voting governance

https://vitalik.ca/general/2021/08/16/voting3.html

[2] Eric Arsenault：Voting Options in DAOs

https://medium.com/daostack/voting-options-in-daos-b86e5c69a3e3

[3] DAOrayaki ：DAO民主投票系列：民主投票机制综述

https://daorayaki.org/daorayaki-3/amp/

[4] 火币研究院： DAO哪里了 — — 简析DAO的发展进程及治理机制

https://www.wikibit.us/202107297824142328.html

[5] Aragon：Choice Architecture & DAOs

https://blog.aragon.org/choice-architecture-and-daos-part-1/

[6] Vitalik Buterin：Ethereum Community Governance and Gitcoin Quadratic Funding

https://www.caa-ins.org/archives/7182

[7] Josh Zemel：An Explanation of DAOstack in Fairly Simple Terms

https://medium.com/daostack/an-explanation-of-daostack-in-fairly-simple-terms-d0e034739c5a

[8] Conviction Voting TL;DR

https://forum.tecommons.org/t/conviction-voting-tl-dr/308

[9] DAOhans documents

https://daohaus.club/docs/proposals/

[10] Adam Levi：Reputation vs Tokens

https://medium.com/daostack/reputation-vs-tokens-6d7642c7a538

[11] Marvin Kruse, Sebastian Gajek, and Yannik Goldgräbe：The dit Protocol: Knowledge over Wealth to Sustain Open Source Development

https://www.ditcraft.io/dl/ditcraft_whitepaper.pd

[12] Nathan Schneider：Startups Need a New Option: Exit to Community

https://www.caa-ins.org/archives/6104

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

Reviewed by Shawn Lin

Translated by Eunice Feng

Note: The initial publish date of this page was 08/08/2021

Since the DeFi boom in 2020, the concept of NFT has taken off. With rapid development of technology of NFT in 2021, related token prices soaring, individuals and institutions rush into the market. Accompany with a pure digital artwork created by Beeple sold for a surprising $69 million on March 11 , the technical form of NFT received mainstream media attention by the first time.

On June 1, Clive Thompson, a reporter for the New York Times, wrote an article titled “The Untold Story Behind NFT’s Rise” after interviewing several crypto artists, detailing the process of NFT’s rise. By July, as market sentiment dropped, the irrational fanaticism of NFTs began into a rational way.

As features with provable owner, provable issuer, and provable scarcity (limited number), NFT widely used on in the art and collectibles so soon, also in the game props, digital tickets as well.

NFTs solve the problem of creating irreproducibility in a network world where everything can be copied, enriching virtual assets types and showing people the possibility of creating an on-chain world as thriving as the off-chain world. At the same time, it as an asset mapping method is expected to bridge assets off-chain to on-chain. However, there still has some inescapable problems need to solve, including: insecure storage of resources, lack of display scenarios, unclear description of rights & interest, and piracy and plagiarism problems.

1. Insecure resource storage

Humans build pyramids, Mayan temples and the Great Wall in stone, believing they can travel through longer spans of time, also build sculptures for heroes, burn inscriptions on stele, compile biographies and ballads to ensure the eternal survival of the sparkling spirit.

Interestingly, the popularity of NFT artworks is partly due to their “eternity” attribute. Supported by secure, permanent storage technology, the content carried by NFTs can be valued. If Beeple’s artwork “Everyday: The First 5000 Days” cannot be securely stored, a hard drive crash could result the artwork vanish into nothing, then, is it still worth the price?

Simple images with small resource size, like Avastars and Aavegotchis, can be minted and stored on-chain, which means NFTs eternity could be guaranteed as long as the chain existence. However, for NFTs with large resource sizes, storing them on-chain is impractical.

Some NFT issuers store resources on their native or cloud servers and index them to the NFT with a URL address, which puts NFTs eternity attribute at great risk, as the issuer can tamper with or delete NFTs resources at any time, and with the possibility of servers failure and resources loss.

A great majority of NFT issuers choose to store resources on IPFS. IPFS is a file storage system addressed by a hash that is functionally equal to a fingerprint of a file, it allows the stored files to be tamper-evident, which is an advantage over URL addressing via HTTP format. A well-know project Filecoin is the incentive layer of IPFS, and NFT.Storage is one of the application layers of IPFS. IPFS is free for the time being, and Filecoin pays for the storage cost by inflation, like a subsidy model.

But the NFT resources also at risk if the specific IPFS node responsible for storing it goes offline or malfunction. For higher controllability, NFTs issuers often choose to become an IPFS node themselves and store the resources of the issued NFTs to their own nodes. However, regardless of the node to which they are stored, NFT resources are at risk of going offline and being lost as long as they are stored on a single node. Here’s an example: the resource that is an NFT album issued by musician 3LAU sold on NiftyGateway for $11 million in March has lost, which was stored in IPFS.

Arweave is also a decentralized file storage system, unlike IPFS, Arweave encourages users to store NFT resources in perpetuity through a specific blockchain structure and a special incentive model. Arweave stores files within blocks, and each node must store previous blocks if it wants to get block-ouput opportunities and rewards. One node store more amount and greater variability of blocks than other nodes do, the greater chance of getting block-output opportunities and rewards. Arweave claims that pay once then store forever.

Nevertheless, this “probabilistic storage” approach has been questioned as it is against the laws of economics. For Arweave nodes, as the amount of data increases the expected revenue of per unit for storage decreases, and when touching the threshold to make ends meet is reached such an economic model cannot be maintained, and eventually let some blocks unstored. While this is based on the assumption of static storage costs existence, if Moore’s Law can continue to work in the future, it may not be a necessarily.

To make the storage of NFT resources more secure, the following two aspects should be considered in our point of view.

One is Redundant Storage

Issuers could choose to store multiple copies of a file in IPFS. Storj could be one of the choices. It is a distributed storage platform that automatically maintains 2.7x redundancy, but the downside is that Storj is established in enterprise services and only supports private storage, which means that the resources stored therein must be accessed through private keys and cannot be accessed by the public. If this point can be improved, Storj will be able to become a secure platform for storing NFT resources. Moreover, issuers could store NFT resources on multiple platforms, such as IPFS, Arweave, Crust, Sia, and other platforms to achieve redundancy that greatly increasing the security of the resource storage. In fact, the storage platform Sukhavati already support users to back up files stored on it to IPFS and Arweave. The more redundancy means more secure storage but increases the cost of storage. There need some trade-offs.

Another one is diversified the storage rights

Generally speaking, NFT issuers bear the obligation and the cost of storage, but what if the issuer is unwilling or unable to store the resource? Could the storage rights be surrendered to the owner of the NFT or other third parties, or let the NFT owner always have the right to store a copy of the resource? Pinta has taken this line of thinking into practice, arguing that the ultimate custodian responsibility for NFT resources lies not with the publisher or the platform, but with the holder himself. As Pinta explained in a blog post in April, with Pinta, the owner of NFTs can place copies of resources into IPFS nodes under his control and keep a copy even if the publisher deletes it.

2. Lack of display scenes

Although NFTs provides provability for ownership, no one will go out of his/her way to access your wallet address to appreciate the artwork you own. an NFT artwork are more important to be used as a social currency to express collectors’ preferences and ideas not just for self-appreciation and edify sentiment, resulting in NFT needs various social arenas.

Metaverse would be a good use for NFTs. While the widespread utilization of Metaverse still need time to break through the technology singularity to led Metaverse to be a highly immersive platform that appeals to a wide range of people and make strong social ties, not just like a “virtual exhibition hall” for showcasing NFTs.

On the view of the present situation, excepting Metaverse, some gameplay can be designed with the help of existing social platforms to realize the display and social interaction of NFT. Bored Apes is a good example. Someone on Twitter claimed to follow all the people with ape avatars, and others compiled an inventory of all the ape avatar users for others to follow.

What is more interesting is that a portion of users are also grouped by different apes appearance, for example, all apes with leopard grain appearance could join “BAYC Cheetah Gang” community in Discord.

The spread of Bored Apes makes good use of Twitter, Facebook, and Discord to achieve a high level of community activities. The popularity of Bored Apes is also related to many other factors, including the affordable initial price, the boredom but inducing emojis, the celebrities in the community, etc.

Although there are someone who don’t own Bored Apes NFTs but with Twitter apes avatars to blend in with the community, which is innocuous. There are also with expectations that social platforms will support accessing to an Ethereum or other blockchain address to support displaying one’s own NFTs as exclusive avatars, or even building communities for users who have the same series of NFTs. Before Metaverse, we need a “Twitter or Facebook” that devote to the crypto era.

SubSocial is an encrypted social platform that does not require users to register with their phone number or email address, but to log in with their Kusama address, then they can post articles, follow others, and “liked” articles, which is correspond to an encrypted version of Medium. Now, SubSocail support the display of NFT in RMRK format, like RMRK 2.0.

If existing social platforms don’t began to take their actions to follow crypto trends, there will be increasing pressures from new rivals continuously. In addition, Twitter CEO Jack Dorsey is a big fan of crypto assets, and it’s possible that Twitter will support the NFT display one day.

3. Piracy and plagiarism

Pirated NFTs can be searched on Opensea. In addition to blatant piracy and identity impersonation, it is even more difficult to guard against plagiarizing other’s ideas and image elements to generate a slightly tweaked version. On January 25, 2021, a case of plagiarism was reported on CyberVein’s newly developed platform called CROSS, where a total of 58 plagiarized works from the BCAEX platform appeared. Complaints also on Twitter about people who did not know each other making NFTs of their own tweets and putting them up for sale.

Artist Derek Laufman has been involved in such. An account with certification mark masqueraded him on Rarable and shelved his NFTs artwork. It wasn’t until a fan reported it that he found out and then complained to Rarible to pull the artwork off. But before that, the pirated artwork posted by the impostor had been sold out. The up-raising star RMRK also pays a lot of attention on plagiarism.

This leaves the NFT art market with only a small number of active head artists going to be trustworthy and worth investing in, Which creating a Matthew effect that need to be avoided by the efforts from both platforms and issuers.

For platforms, mark out the NFTs with copyrights unauthenticated and prompt users to verify the copyrights by themselves when they place orders. Furthermore, incentive mechanism may play a role on motivate users to report plagiarism, and a real-name mechanism could be introduced for issuers that expose those who publish pirated and plagiarized works to legal risks.

For issuers, publish the address they use to release NFTs in a timely manner and place it prominently on their social platform pages for ease of verification by users. On the other hand, it is user’s obligation to check whether the publishing address is copyrighted when placing orders.

4. Unclear description of rights & interests.

What does owning NFTs actually mean to own what? If I buy an NFT of a piece of music, for example, does it means I own the copyright? Obviously not. The NFT neither a specific physical object nor a digital file, but a string of code that implicate the unique connection between me and this work of art.

Descriptions of an NFT should be clear with the rights & interests accompany with the NFT, if not so lead to misunderstandings. Each NFT should have a specific description, which means the rights and interests adjoint one NFT to another are not necessarily same and need to be carefully understood by the buyer.

Institutional issuers generally give clear descriptions when issuing NFTs, such as the Bored Apes Yacht Club series NFTs, which states on its Terms&Conditions page that the NFT allows the holders to develop peripherals for Bored Apes.

For individual issuers (artists), it is necessary for the platform to help them to make clear descriptions of the rights & interests the NFT offering.

We have listed four typical problems that plague the development of NFTs, of course these are not all, its technical standards and the public chain it used could be more perfect and environmentally friendly respectively, and use-cases should be more extensive, etc.. Those problems are “engineering problems”, which will be solved gradually over time by the technological development.

Conclusion: greater NFTs use-cases

on a conservative estimate, NFTs market may account for 5%-10% of the total market capitalization of crypto assets in the future. Radicals believe it will eventually exceed that of FT (fungible token). However, given the current situation, it is even less than 0.5%, maybe there is a huge space for growth.

NFT’s future comes with the influx of money and talents, it will not only overcome the current shortcomings, but is also expected to develop richer application scenarios and bring changes to more industries.

We believe that NFTs can be even used for greater things, such as preserving the world’s cultural heritage, encouraging public donations, storing important documents of human civilization and the gene database of endangered species, and bringing some public issues to attention through NFT deals, and NFT’s royalty revenue with potential to be used to fund these public causes as mentioned above. For example, NFTmart gives a help on inheriting the culture of Beijing Opera Facial Masks in the form of NFTs.

References

[ Victor Alexiev ] NFTs And The Dawn of The Metaverse

https://www.citi.com/ventures/perspectives/opinion/nfts-metaverse.html

[ Jacob Kastrenakes ] Your Million-Dollar NFT Can Break Tomorrow If You’re Not Careful

https://www.theverge.com/2021/3/25/22349242/nft-metadata-explained-art-crypto-urls-links-ipfs

[ Brady Dale ] It’s an NFT Boom. Do You Know Where Your Digital Art Lives?

https://www.coindesk.com/its-an-nft-boom-do-you-know-where-your-digital-art-lives

[ Jacob Kastrenakes ] Beeple Sold An NFT For $69 Million

https://www.theverge.com/2021/3/11/22325054/beeple-christies-nft-sale-cost-everydays-69-million

[ New York Times ] The Untold Story of the NFT Boom

https://www.nytimes.com/2021/05/12/magazine/nft-art-crypto.html

[ Jeff Benson ] Yes, Your NFTs Can Go Missing — Here’s What You Can Do About It

https://decrypt.co/62037/missing-or-stolen-nfts-how-to-protect

Storj Whitepaper V3

https://www.storj.io/whitepaper

[ Bijan Stephen ] NFT Mania is Here, And So Are The Scammers

https://www.theverge.com/2021/3/20/22334527/nft-scams-artists-opensea-rarible-marble-cards-fraud-art

[ Justine Calma ] The Climate Controversy Swirling Around NFTs

https://www.theverge.com/2021/3/15/22328203/nft-cryptoart-ethereum-blockchain-climate-change

[ 腾讯研究院 ] NFT是数字资产的开端吗？

https://www.bilibili.com/video/BV1SU4y1G7EH?from=search&seid=4638122519121861977

[ 区块律动 ] 日交易额达 NBA Top Shot 两倍，这些「猿猴」为什么火了？

https://www.chainnews.com/articles/715979367136.htm

[ BCA区块链艺术中心 ] BCA 平台 NFT 作品遭大规模剽窃，去中心化治理路在何方？

https://www.chainnews.com/articles/068717085337.htm

[ 21财经 ] 解密NFT：看不懂的艺术收藏与投资新神话

https://m.21jingji.com/article/20210410/ec32018fe6c51810134b1082e44aa878.html