by Sumana Bhattacharya
August 31, 2021
DAOs (Decentralized Autonomous Organizations) are reshaping the Decentralized Finance (DeFi) Industry.
Traditional financing institutions are frequently hierarchical, elitist, regional, and opaque. DAOs are the polar opposite of this, consisting of informal grassroots networks with anywhere from a few to thousands of members. The norm is extreme openness and anonymity. DAOs lack a corporate headquarters or formal organization at their core and hence have no single point of failure. The decision-making procedures are recorded in smart contracts that run independently on a blockchain, and the rules are documented in open-source code. Importantly, DAOs are meant to operate as global communities, resulting in a far larger and more diverse playing field. DAOs in the finance industry are playing a vital role.
Decentralized autonomous organizations are non-hierarchical organizations managed by goal-oriented communities bound together by a common purpose and operating under cryptographic rules. DAOs in finance industry use blockchain technology to give the public access to their networks, based on voluntary contributions from internal stakeholders. As a result, DAOs’ operations are based on the community. DeFi, on the other hand, is a decentralized financial system made up of decentralized apps (DApps) running on public blockchain infrastructures such as Ethereum and Eos. On the other hand, Centralized Finance (CeFi) typically operates in an environment where openness is lacking. People must trust institutions to manage and execute services without being able to see the behind-the-scenes operations required to complete a task. Given the extensive value chains that define the organization of centralized institutions and the numerous levels of intermediation required to accomplish activities, these acts create expenses that translate into high transaction fees.
Furthermore, there is a significant market that is not served by current centralized institutions, consisting of unbanked people who are denied access to the most basic financial services for a variety of reasons, including ethnicity, financial circumstances, and geopolitical locations. Since a result, in centralized settings, the conventional financial sector has produced an environment in which the incentives of the three primary stakeholders involved (i.e., shareholders, workers, and consumers) are heavily mismatched, as their interests frequently diverge. Decentralization allows decentralized finance to give permissionless access to a variety of financial services, which are carried out through the execution of smart contracts, removing or decreasing intermediation, and enabling transparency. Decentralized autonomous organizations are new commercial endeavors structured with automation at the center and people at the margins, defined by internal money used to reward particular persons’ efforts, all inside the same framework. As a result, while DAOs in finance industry exhibit cutting-edge organizational attitudes, they rely largely on recruiting people to accomplish jobs that automation cannot.
Decentralized autonomous organizations provide access to a decentralized environment where incentives are aligned among the many stakeholders from governance and organizational viewpoint. Simultaneously, conventional institutions’ hierarchical systems are partially or completely replaced by a system of incentives that directs users’ interests toward the benefit of the community, ensuring that stakeholders’ behavior is aligned with the desired outcome. As a result, an ecosystem of decentralized organizations has emerged that can give access to a wide range of financial services while removing the majority of entry barriers and so promoting financial inclusion.
The following analysis looks at three DAOs: MakerDAO, Swissborg, and Uniswap. When it comes to implementing the DAO paradigm, each company takes a different approach. MakerDAO provides a borrowing and lending solution based on the DAI stable coin and a set of digital assets as collateral, which is achieved through the over-collateralization of digital assets (e.g., BTC, ETH). Swissborg, on the other hand, provides a wealth management solution that optimizes transaction rates while also facilitating access to a variety of decentralized finance platforms. Finally, Uniswap offers ERC20 token exchange services (i.e., Ethereum-based tokens that adhere to the same set of rules).
MakerDAO and Uniswap are two decentralized apps (DApps) that use blockchain technology to provide various financial services (i.e., borrowing & lending and exchanging, respectively). Swissborg, on the other hand, has developed an “extended organization” made up of core staff and a community of contributors that can be used for marketing, community management, new product development, and testing. This organization enables people to manage their own money (in the form of digital assets) while adhering to the blockchain’s core values of fairness, accessibility, transparency, and trust. Indeed, it is not a decentralized application (DApp), but rather a platform that uses a hybrid method to give access to financial services based on blockchain technology, combining the benefits of both DeFi and CeFi.
The three solutions extract significant value drivers that emphasize CeFi and DeFi’s distinctions. Decentralized ecosystems, in particular, improve actor alignment in terms of incentives. Because all three solutions employ the same technology (although in different ways), the following value drivers are shared by all three: near-zero rent extraction, cost efficiency, transparency, and ease of use enabling universal accessibility. As a result of the various governance rules used, each use case achieves distinct outcomes in terms of the financial services supplied. The three use cases are united by a common principle: to disrupt the existing financial industry by building an ecosystem built on trust, fulfillment, and inclusion.
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