Know & go
- An inside look – One, small step for DeFi: Decentralized autonomous organizations (better known as DAOs) have seen a recent resurgence in activity as blockchain-based protocols seek more decentralized governance systems. In our recap, we breakdown OpenLaw’s new proposal for a new type of DAO, called a Limited Liability Autonomous Organization, or LAO, and how it aims to overcome some of the snags in existing DAO models.
- Three things to know: (1) VanEck and SolidX are looking to sell a limited version of the group’s bitcoin exchange trade product to institutional investors under rule 144 (2) Blockchain analytics firm Elliptic raised $23 million in a Series B led by SBI Holdings (3) PoolTogether released v2.0 of its Ethereum-based no-loss lottery application.
- Market snapshot: Total crypto market capitalization is around $261.0 billion (+10.6% w/w) at press time. BTC is trading at $10,857 (+13.3% w/w), ETH is at $176 (+5.4% w/w). BVOL (the rolling 30-day annualized Bitcoin volatility as calculated by BitMEX) is 55.5%, down from 64.1% last week. (9/6 1:25PM ET)
An inside look: One, small step for DeFi
Decentralized autonomous organizations (better known as DAOs) have been viewed by some as the next evolution in economic coordination and organization structure, but they have run into snags—including regulatory headwinds. A new type of organization was proposed this week, called a Limited Liability Autonomous Organization, or LAO, that aims to overcome some of these snags and unleash the full potential of DAOs.
DAOs enable a group of participants to manage a form of internal capital (i.e. a salable asset such as a digital token) without the need for a leader or hierarchical management. Instead, these internet-based entities adhere to a predetermined set of rules encoded into smart contracts and enforced by a transparent blockchain network. DAOs still require external input (either human or another smart contract) to initiate an action, but the smart contracts at the core of a DAO allow it to function and execute collective decisions autonomously. For instance, a DAO could pool token donations from its members and automatically issue grants to certain projects or developers selected via a member vote. As a result, DAOs present a system that can align incentives among known or unknown participants and help reduce the costs related to capital management and distribution.
No DAO coverage would be complete without mentioning the now infamous hack of The DAO in 2016 that led to the ETH-ETC hard fork. While not the first attempt to create a decentralized organization, The DAO was one of the earlier Ethereum ventures aimed at establishing a decentralized venture capital fund. However, a vulnerability in The DAO’s code enabled an attacker to drain a significant portion of the capital it managed, and its failure shed a negative light on DAOs within the crypto community over the next few years. [The SEC also later ruled the tokens offered by The DAO, which would give holders the right to vote within the organization as well as a claim on investment returns, violated U.S. securities laws.]
These DAO dark ages appear to be only temporary as DAOs have seen a recent resurgence in activity. This past year has given rise to a number of similar Ethereum-based DAO ventures, and participation levels and treasuries have generally been trending up. For example, MolochDAO launched in February with only 10 founding members each contributing 100 ETH. It now boasts 76 members and manages over 7k ETH (or ~$1.2 million) in its guild bank to help fund future Ethereum development. Separately, MetaCartel DAO announced its first wave of approved funding proposals last month, distributing a total of ~$7.5k to dapp developers and various web 3.0 initiatives. All this suggests the crypto community is willing to shrug off its “PTSDAO” (coined by Ameen Soleimani) and continue to experiment with DAO development. [However, it should be noted that, even in the absence of specific SEC determinations on these newer DAOs, it is not clear that they would be deemed compliant with U.S. securities laws either.]
While new DAO entrants build upon The DAO in certain aspects (especially in terms of smart contract security), most only allocate funds to projects in the form of grants or charitable donations. According to OpenLaw, this is because existing DAO models are limited by U.S. securities laws in their ability to help members generate a return on investment. OpenLaw, a subsidiary of Ethereum development startup ConsenSys, also recognizes that providing an incentive for investors to participate in funding ecosystem development can attract and deploy more capital with greater efficiency. The company therefore decided to work towards creating a legally compliant model that would enable DAOs to be organized as traditional, for-profit entities.
The result was a framework for a Limited Liability Autonomous Organization, or LAO, which OpenLaw announced earlier this week. OpenLaw itself is a protocol that helps bridge “traditional legal regimes” and the Ethereum network, and by leveraging its system, the company believes it can tie the execution of smart contracts (e.g. the creation or transfer of tokens) to binding legal agreements. Through this approach, the LAO will supposedly be able to provide a suitable legal structure for members to fund blockchain-based projects in ETH (and possibly DAI) with the potential to generate a profit in return. Further, OpenLaw intends to set up the LAO as a limited liability entity, organized in Delaware – though the company does not plan to exercise control over the organization. However, OpenLaw will charge members a fee (not from investor profits) for ongoing assistance with any legal requirements or software maintenance.
Legal aspirations aside, the LAO’s design still bears a resemblance to existing DAO models, in particular MolochDAO’s. In order to join, members will need to purchase interests in the LAO. The proceeds from “these purchases will be pooled and allocated by members to startups” selected via a voting system similar to MolochDAO. One notable difference is that LAO membership will only be available to accredited investors, which may be an additional effort to comply with U.S. law. The LAO will also permits members to “ragequit”, a feature popularized by MolochDAO, which allows investors to instantaneously retrieve their unallocated funds “based on their economic contribution.” Therefore, members should have the opportunity to opt-out of the LAO without having to sacrifice their financial contributions should any disagreements arise.
Despite the effort, the LAO proposal has been met with some skepticism, especially among a few members of the crypto legal community. Preston Byrne was quick to point out “LLCs are operated by managers…who [have] the authority to act on behalf of the LLC and also [are] liable for discharging certain duties, both to the LLC members and third parties with which it deals on their behalf.” Since OpenLaw intends to relinquish LAO control over to its members, Byrne states a single member may need to step forward and assume the responsibilities on behalf of the organization’s other members in order for proposed entity to work. Byrne also mentions the LAO’s lack of a third party management adds an extra layer of complexity for shareholders as executing a ragequit or calculating a member’s proportional share of profits and losses becomes a manual process. An additional challenge is the LAO assumes the risks associated with any underlying protocols – in this case, OpenLaw’s protocol for linking smart contracts to legally binding agreements. Many protocols similar to OpenLaw are still relatively centralized, and are therefore reliant on the team building it. This has led to some concerns regarding the viability of a single entity possibly acting in multiple roles (legal, venture capital, transfer agent), particularly with a project as complex as the LAO.
The LAO remains a concept at the moment, and the details presented were only a part of the proposal’s press release. More documentation on the smart contracts, legal agreements, technical specifications, and governance mechanisms, in addition to community feedback, are needed to get a better understanding of the potential value adds and challenges. It is too early to tell if the LAO proposal is the next evolution in DAO development. But experimenting with DAO frameworks is increasing in importance as numerous Ethereum-based protocols (0x, Gnosis/dxDAO, Kyber, Aragon, Compound to name a few) are seeking decentralized, community-centric governance solutions.
Weekly market snapshot
In other news
Pool DAI launched on the Ethereum mainnet. It is a no-loss donation protocol that enables users to pool tokens together, lend the grouped assets out on Compound, and donate any earned interest to a cause. The dapp uses Compound to earn interest, Kyber to support for multiple tokens, The Graph to provide a GraphAL API, and Blocknative for onboarding and transaction notifications. Source
Semaphore, a new privacy protocol built on Ethereum that uses zk-SNARKs, was integrated into MicroMix, an ETH and ERC-20 token mixer. Semaphore reportedly enables MicroMixer to provide on-chain transaction anonymity in a non-custodial manner. This blog post gives a detailed technical explanation as to how Semaphore and MicroMix work together to enhance Ethereum transaction privacy. For a primer on cryptocurrency mixing services, check out our recap from last week.
MakerDAO announced the next generation of its oracle price feeds, dubbed Oracles V2. Pricing data will be sourced from other DeFi applications, and may include information from 0x dYdX, Set Protocol, and Gnosis, pending a vote from the Maker community. Oracles V2 will also feature a more community-centric governance system and restructured incentives to enable data providers to monetize their feeds. Source.
PoolTogether released the second generation of its Ethereum-based no-loss lottery application (we covered v1.0 in greater detail when it first launched in June). Version 2.0 includes a few new features aimed at improving user experience, including automatic re-entry following the close of a lottery, the ability to pre-purchase tickets, and the option to withdraw tokens at any time. Source.
Binance acquired crypto derivatives exchange JEX for an undisclosed amount as it aims to enter the crypto futures market. JEX will be rebranded to Binance JEX with the plan to eventually offer various derivatives products, including futures, options, and perpetual contracts. Binance has also been working internally to build a trading platform that supports bitcoin perpetual swaps paired with tether. Source. (h/t @MessariNews)
Crypto payments startup Eligma raised $4.4 million from Roger Ver and Pangea Blockchain Fund (also backed by Roger Ver). The startup is developing a blockchain-based payments network that reportedly features a payments processor for “real-time” crypto-to-fiat transactions. Eligma’s utility token (Eli) will shift from an ERC-20 to being supported by the Bitcoin Cash blockchain. Source.
Blockchain analytics firm Elliptic raised $23 million in a Series B led by financial institution SBI Holdings. The funding will be used to help Elliptic expand into Asia by setting up offices in Singapore and Japan. Source.
Offchain Labs announced it has secured an investment from Coinbase Ventures. The new funding comes recently after its $3.7 million seed round raised in April. The blockchain development startup also released an alpha version of its product, which aims to support enterprise-grade blockchain applications without compromising transaction speed and privacy. Source.
Dapix Inc. has raised $5.7 million in a Series A led by Binance Labs. Additional participation included crypto investment firms Blockwall Capital, NGC Ventures and LuneX Ventures. The Denver-based startup is building a delegated PoS network that provides a connection between crypto wallets, exchanges, and other applications. Source.
Global regulatory roundup
VanEck and SolidX are planning to start selling a limited version of the group’s bitcoin exchange trade product under the SEC’s Rule 144. As a result, the offering will only be available to qualified institutions. This arrangement has drawn comparisons to the Grayscale Bitcoin Investment Trust, which allows accredited investors to purchase shares in a bitcoin-only fund. VanEck-SolidX’s ETF proposal is still under review by the SEC, and a final decision is scheduled for October 18. Source.
What we’re reading
- On DeFi and OpFi by Rocco (Alpine Intel)
- Bitcoin Fixes This by Parker Lewis (Unchained Capital)
- Hedera Hashgraph — Time for some FUD by Eric Wall
- Ethereum And The Seven Dwarfs by Joel Monegro (Placeholder)
- What You Should Know Before Putting Half a Million DAI in Compound by Ameen Soleimani
- Layers (not eras) of blockchain computing by Jesse Walden (a16z)
- Futures & Crypto by Jordan Clifford (Scalar Capital)
- Some Thoughts On Crypto by Fred Wilson
- Is Ethereum the AOL of Crypto? by Albert Wenger
- Bitcoin: The First Blockchain by OpenNode
- Brave uncovers Google’s GDPR workaround by Johnny Ryan
- Information Asymmetry in Crypto by Jonathan Joseph
What we’re listening to
- What Bitcoin Did: Jameson Lopp & Peter Todd on Libra: Technical Analysis
- Unchained: How Aragon Hopes to Improve on Democracy
- Chain Reaction: Ren’s Loong Wang and Co-Host Medio Demarco: Unchaining Liquidity with Private Interoperability
- Epicenter: Bolt Labs – Zcash on Lightning
- Into the Ether: Camila Russo: Telling the Story of Ethereum
- Blockchain Insider: Should crypto stay decentralised?
- Tales from the Crypt: Gleb Naumenko
Circle in the news
Poloniex has distributed more than 2.1 million Stellar Lumens to customers
Where we’ll be in September
- Invest: Asia, Singapore, 9/11-12
- Trading Show New York, 9/25
- Korea Blockchain Week – D.FINE, Seoul, 9/30 – 10/1