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Monthly Market Review - December 2021

Updated: Mar 8

In this note, we look at DAO’s, what they are and how capital formation is changing around them.


As we delve further into web3, one of the key concepts is a DAO, short for Decentralised Autonomous Organisation. A DAO is the first iteration of the organisational structure for web3. In a DAO, token holders exert control through smart contracts that codify rules. Web3 pundits believe that the DAO is the natural extension of the limited liability stock company. Tokens fulfil a quasi-equity role, but with controlling rights and access rights built-in too. In theory, a token holder of a DAO can have any combination of unique rights. There is a lot of uncertainty about the legal rights of token holders as core DAO team members defer control and decisions to token holders and only serve as an implementation partner, so control is difficult to determine. The lack of traditional roles leaves legal ambiguity for DAO token holders.


The first well-known DAO was called "The DAO" and is almost as old as Ethereum. The DAO launched in April 2016 as a venture capital fund with a token issued to participants. This token lets holders vote to fund different Ethereum based projects, where they would share in the profit like a classic Limited Partner in a venture capital firm. The DAO raised over $100 million or 14% of all the Ethereum at that time. However, there was an issue as the smart contracts had a bug and didn't act as intended. The bug allowed a hacker to attempt to withdraw $50 mil of the DAO's funds. The decision on how to respond divided the Ethereum community. As the 'hack' was using the open-source smart contract, some believed the hack was unethical but valid, while others felt the owners should have their funds returned. Eventually, the majority of the network participants decided to return the funds by performing a hard fork and redistributing the stolen funds. A smaller group remained serving the older chain known as Ethereum Classic (ticker ETC).


DAO's have also been used to change the economics of a market, such as the automated market maker (AMM) market. Uniswap was the first and largest AMM. An AMM allows a trader to swap two tokens at a fair market price (with a small swap fee going to Uniswap).


Uniswap, launched in 2018 as a venture-backed company, has become a foundational product of DeFi, and it has volumes that exceed $2 billion per day. By early 2020, it was making millions of dollars in revenue per day from fees. Uniswap completely open-sourced its core software on the blockchain as all smart contracts are visible on the Ethereum blockchain. For the company, this was a necessity to operate, but as it had the majority of liquidity, which served as a strong barrier to entry, the company looked in a solid position against competitors.


In response to Uniswap and its success, an anonymous founder called ChefNomi on Twitter created Sushiswap. It was a direct copy of Uniswap's core code with one minor change. It had a token, and traders paid all earned fees to SUSHI token holders instead of a centralised company. To emphasise its fairness, Sushi had a 'fair token launch' where any current user of Uniswap could claim SUSHI for two weeks. This launch served as a strong start for Sushiswap, and it quickly grew to become a strong competitor of Uniswap. SUSHI token holders could also make all decisions for the product and team, and in early 2020, it was out-innovating Uniswap. In response, Uniswap felt pressured to launch a token (UNI), which would initially share ±15% of fees with token holders1, and Uniswap committed to becoming a DAO. The dev team would implement approved proposals.


Over time, Uniswap's token and form of DAO has been more successful than SuhsiSwap. Its DAO is less involved in the details when compared to SushiSwap. For example, the SUSHI holders determine the team's compensation and structure, which has caused multiple issues, leadership changes and caused general stagnation of the product. This is compared to Uniswap, where the company has remained and generates fees as before, with the community debating major strategic decisions via proposals. In terms of market share, Uniswap now has c. 60% of AMM volume, with SushiSwap having c. 14%, with the rest of the AMM share split among other competitors.

Comparison of generated fees across different AMMs. Source: CryptoFees