Protocol DAOs
Note: Data in this section last updated July 3rd, 2022
What is a Protocol DAO?
“Protocol” DAO is a bit of a nebulous term, but it’s generally used to refer to a for-profit, operating businesses organized under a DAO structure. In short, it’s a decentralized version of a traditional corporation.
While protocol DAOs can theoretically govern any type of business, in practice they are generally used for crypto-focused projects such as decentralized exchanges and borrowing / lending protocols.
They are currently the largest category in the space and represent 7 out of the top 10 DAOs.
How does a Protocol DAO Work?
To understand how a protocol DAO functions, let’s take a look at Uniswap DAO – the organization responsible for managing Uniswap, the largest decentralized cryptocurrency exchange.
Decentralized exchanges (or DEXs) are peer-to-peer marketplaces where users can directly trade with one another without the need for banks, brokers or any other financial intermediaries. Unlike centralized exchanges such as Coinbase, they can’t restrict users or decide what tokens are traded. In fact, they don’t even require KYC, meaning that anyone can use a DEX from anywhere in the world and trade anonymously (provided they have a VPN).
Launched in 2018, Uniswap has become the largest DeX, and is currently generating nearly $1 billion in volume per day.
Uniswap is the Largest DEX with Nearly $1 Billion in Volume Per Day
The protocol became a DAO in September 2020 when it issued 1 billion UNI tokens to its users, effectively transitioning management from the founders to the community. With the Uni governance token, users have full control over the project and are responsible for all decisions including how much it will charge and how it will spend its treasury
To wit, any UNI holder can submit a proposal to change the protocol or introduce new features and have it approved by other DAO members. For instance, let’s say that a member wanted to increase Uniswap’s fee from 0.3% to 1.0%. She would follow a three-step proposal process that includes:
Temperature Check: In the first phase, known as a “temperature check”, members ask a simple question to the community on gov.uniswap.org and submit it to a vote in Snapshot. For example, a member may ask “should we increase our fee from 0.3% to 1.0%”. If the proposal gets a majority vote with a 25K threshold, it proceeds to the next stage.
Consensus Check: The second phase – the “consensus check” – requires members to create a more formalized proposal, incorporating any feedback from the first stage and submit it for a vote. This new proposal requires a minimum of 50K yes votes to proceed.
Governance Proposal: In the last phase, known as the “governance proposal”, members must submit a finalized pitch which includes the actual code. The code must be reviewed by a professional auditor, and members must have a minimum of 2.5 million UNI to submit.
After a proposal reaches the final stage it is put to a vote. Any proposal that passes is ratified and the code is automatically updated.
Uniswap has been very successful under the DAO structure, it holds over $2 billion in assets and is the largest DAO today.
Notable Protocol DAOs
In addition to Uniswap, other notable Protocol DAOs include Gnosis, UXD, Polkadot and MangoDAO.
Source: DeepDao as of 7.2.22
Note: The above list is not exhaustive. Although generally ranked by size, some smaller projects may be included for illustrative purposes. In addition, while DAOs often span multiple categories, they were only included once in the vertical that is believed to represent the best fit
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