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Jan 25, 2023
Sandi Fatic
  • Use Cases

Introduction to DAOs and multi-sig contracts

Most of the users of Web3 are very familiar with both terms DAOs and Multi-sig contracts, but for people not familiar with the Web3 space I believe it is worth unwrapping both of the terms.

What is a DAO?

A “Decentralized Autonomous Organization” (DAO) is a community-led entity with no central authority. It is fully autonomous and transparent: smart contracts are used to govern decision-making and distributed ownership of assets. The voting process for DAOs is posted on a blockchain, and users must often select between mutually-exclusive options. Voting power is often distributed across users based on the voting weight they have inside the DAO (weight number of tokens they hold, one member - one vote and others). All votes and activity through the DAO are posted on a blockchain, making all actions of users publicly viewable.

To make decisions for the DAOs they are leveraging a multisig wallet (contract).

What is a multisig wallet?

Multisig wallet is a special type of crypto contract for securely storing cryptocurrency. It requires two or more private keys (DAO parties) to sign and send a transaction, and is often used to add an extra layer of security to wallet transactions by ensuring that multiple key holders are involved in approving the transaction.

Multisig contracts can also be configured to allow each in the set of private keys to generate a signature, making them a great option for those looking to store their cryptocurrency in a secure and trustless manner.

How are DAOs currently leveraging multi-sig contracts?

DAOs are using multisig to store their funds securely and manage them efficiently. Multi-sig contracts provide multiple stakeholders the ability to sign off on a transaction, allowing for secure and diversified management of funds and decisions. Multisigs also provide an additional layer of security by requiring multiple private keys to access the funds.

DAOs using Private Shards to vote

Additionally, DAOs can use multi-sig contracts to implement a voting and governance system that is more complex than the average multisig contract. This allows for decision-making to be decentralized and secure.

The most common DAO voting structures are token-weighted quorum voting, quadratic voting, liquid democracy or vote delegation or vote locking, and token-based quorum voting.

  • Token-weighted quorum voting
  • It requires a certain threshold of voters in order for a proposal to pass. For example: 60% quorum, which would mean that 60% of token holders must vote in favor of a proposal for it to pass.
  • 1 token = 1 vote governance
  • An individual's voting power is directly proportional to the number of tokens they hold.
  • Quadratic voting
  • It’s a system that balances the interests of minority groups while still maintaining a majority decision-making process. Liquid democracy or vote delegation. It allows people to delegate their vote to a representative.
  • Vote locking
  • It’s a mechanism that allows participants to exit a vote without penalty.
  • Token-based quorum voting
  • It’s a system which requires a certain threshold of tokens to be held by voters for a proposal to pass.

Main challenges DAOs are facing

The main issues DAOs are facing include a lack of recognized legal status and potential unlimited liability of members, lack of regulation, and inadequate security measures. In addition, DAOs can be vulnerable to governance attacks, bad configuration, and spam. These issues can create a number of risks, including inadequate safeguards for personal data, vulnerable smart contracts, and unauthorized access to funds.

Most of the technical problems mentioned above can be solved and the rest mitigated using a Private shard, but let’s first unwrap what a Private Shard is.

Private Shards for DAOs: a multisig wallet on steroids

Private Shards connected with other Private Shards

A Private Shard is a customizable sidechain (a blockchain network running alongside the public blockchain with ability to transfer assets and execute cross contract calls) which allows you to protect your data while leveraging all the business benefits of open-source blockchains. It allows Private Shard owners to get full control over their blockchain while keeping private information between them and allow only certain public parties to access this information.

DAO members get a network run by them based on their needs. It can be customized to the proposed voting structures above mentioned where validators (nodes validating the blockchain blocks) are owned by DAO members similar to how inside a multisig they would own a private key with a certain voting power. Think of it as a “Multisig on steroids”, as all the basic multi-sig properties are the same, while getting the benefits of all the information being only stored inside the private shard and not leaked to the public.

On top of that DAO members are able to deploy custom smart contracts inside the Shard with “infinite scalability” providing them with the ability to have:

  • private voting
  • accounting and contractor payroll
  • implement transaction-heavy mechanics like auctions (which may be too expensive on Mainnet)
  • treasury management departments inside the DAO and much more.

The Private Shards bridge has a permissions contract which allows them to set rules on which public and private contracts/accounts are able to interact and to what extent. This provides the ability to limit access to certain parties or contracts to move assets from and to the Private shards, on top of that it provides access to certain smart contracts to execute contract calls from the shard or mainnet.

For example: A DAO can have a private voting contract inside the shard which initiates a call when the vote has ended and that only the result of the voting gets published on Mainnet without revealing specific member votes. This call can be only executed from inside that shard and no other party can publish it except this specific contract. This provides the ability for DAO members to ensure the security of the vote like they would using a multisig, while the actual votes are hidden from the public.

On top of that the Calimero Gateway provides additional permissions management for the DAO members to specify policies on which public users/wallets are able to interact with the Private Shard. While the DAO members run the validators and have admin access to the shard, they can invite external members/wallets to be able to read certain data or interact with certain contracts.

For example: A DAO can have a private contract inside the shard for external parties to submit proposals on which the DAO can vote. This can allow only the submitters and DAO members of the proposal to see their information about the status of the proposal. Submitting the proposal can be limited to a whitelist of wallets added by the DAO or to the general public.

We believe that Private Shards are the next natural evolution for DAOs and are looking to work with more DAOs in this next transformation in Web3. Feel free to contact us if you have any questions or are looking to book a demo.

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