Collateralized DAO Proxy Services as an Aragon Network use case

A significant barrier for DAO adoption is the inability to interact outside of the blockchain world. Its impossible for a DAO to possess FIAT currencies because DAO’s don’t have associated legal entities and therefore cannot open bank accounts. They can’t own stocks or other traditional securities because regulatory compliance requires legal entities.

So how do we bridge this divide between the traditional financial system and DAOs without compromising on the censorship resistant and privacy preserving qualities of DAO interactions?

One possible way is by creating DAO Proxies Services. These services would be traditional legal entities that possess assets and perform actions in the “real world” on behalf of DAO based entities in exchange for service fees.

Unfortunately, since these legal entities would need to own significant assets and the traditional legal system doesn’t recognize DAOs, there must be a means of keeping proxies accountable on-chain.

In order to do this the proxy must have assets of equal or greater value of the traditional assets in their custody in some sort of escrow on-chain (like an Aragon Network agreement!). So for example if the proxy wanted to provide custody service for 100,000$ worth of assets to DAOs, they would need to put >100,000$ worth of native digital assets at risk on-chain. The DAO must compensate the proxy not only for the service they are providing but also for the opportunity cost incurred by the proxy of locking up capital.

This poses some challenges, but I think the following are the two most critical to address:

  1. If the collateral held in escrow does not generate meaningful passive returns then opportunity costs for the proxy will be high, and that cost will be passed on to the DAO. This would effectively more that half the investment efficiency compared to investing in the traditional security directly.
  2. if the collateral held in escrow is significantly more volatile than the assets held by the proxy, then the DAO will likely require the proxy to be significantly over-collateralized, further reducing investment efficiency.

This is the core challenge faced by any sort of collateralized agreement, which means that the work we are doing with the Aragon Network may help address these issues in order to make these types of proxy services viable, and even fairly efficient.

What needs to happen:

  1. We need a means to create incentive compatible passive returns. One possible approach to this is proposed here: [Staking Pool DAOs]
  2. We need a low-volatility asset, some discussion as that related to ANT here: [Constructing ANT to enable low volatility]

If we are able to imbue ANT with those properties then we can increase the efficiency and viability of DAO proxies significantly. If ANT earns a stable risk-adjusted return, proxy services would have little to no opportunity cost of capital since they would likely want to hold a portion of their overall portfolio in ANT anyways, and could charge only a minimal custodian service fee to DAOs.


Hi! I am working on a project that uses these ideas to overcome similar issues faced by small cryptobusinesses - their bank accounts were discretionally shut down by banks. After talking to Luke and Maria at Decentralized Web Summit, it occurred that DAOs have the same problem, but for different reasons. Anyways, I talked with Maria about pivoting our project to focus on DAOs (or be more general in terms of user segments). Here is the idea in short, we are preparing and application for Aragon Nest, but before submitting I would appreciate any comments and suggestions.

DAOs face issues interacting with world beyond blockchain, eg. transacting with fiat currency. The reason lies in the general incompatibility of two systems, blockchains and the physical world. This incompatibility extends to virtually all cases. Fiat transactions are the simplest and most impactful example of operating with physical world. None of the established interfaces on either side are sufficient for the interaction of DAOs and traditional financial institutions without either of them losing some of their key properties. Finding a solution which doesn’t break the rules of how these systems operate would unlock the huge potential of DAOs.

Here we explore the possibility of such solution - called bridge DAO. It is a concept of a DAO whose sole purpose is ability to reliably interact with physical world. Rather than being premissioned and legally entrenched (and thus breaking the core of it being a DAO), bridge DAO uses tools of decentralization, cryptography and economics for achieving this goal. The idea is that DAO can reliably enforce its decisions over any sufficiently collateralized physical actor. These actors can be final users, but they can also serve as proxy services.

Any DAO can easily use any established Bridge DAO to interact with physical world. Any developer can use the original Bridge DAO code to deploy their own special-use bridge DAO to meet the needs of the market. This lack of barriers of entry creates opportunities for entrepreneurs on many sides, but also enables market efficiency, exactly what Aragon Network stands for.

We propose building the first implementation of Bridge DAO. It would explore the viability of the concept within a narrow use case of fiat transactions. Tackling this problem would have the biggest impact and is the easiest to overcome, but the problem is basically the same with any other use case. Solution built for this problem should be applicable (with certain adjustments) with other physical assets.

The ability to reliably operate with fiat is important for Ethereum mass adoption because most users and businesses earn, transact and save in fiat. Besides Ethereum growth, DAOs and cryptocurrency transacting businesses present significant opportunities for entrepreneurs and should be kept out of reach of governments and banks with conflicted interests.

Paperclip - the first Bridge DAO implementation used for the specific purpose of prototyping, is built for providing trustless, cheap, fast, and real-time interface for managing fiat currency. Paperclip can be described as a 2nd layer solution on top of the traditional banking system. It provides an incentive mechanism for anyone to perform fiat transactions on behalf of its users.

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Hey @tomislavmamic good to see you posting on here! :slight_smile:

Strongly agree with this statement!

Eager to understand a bit more about the scope and details of what this first implementation looks like. What constitutes the MVP, and what do the interactions look like from the perspective of a DAO or pseudonymous entity on the blockchain side, and what are the managerial/logistical/liability issues (and how are they overcome) for the agent operating on the traditional side?

I’m wondering if you have done a comparison of the feasibility/difficulty of trying to solve the issue of providing cheap/fast management of fiat currency compared to say management of other assets which may not require the same velocity/low transaction fees to be useful, e.g. securities, commodities (gold/silver/oil), etc.

Hey @lkngtn, thanks for questions! Sorry for the late reply.

I have submitted a proposal for Aragon Nest grant:

I hope you’ll find answers there, but you are welcome to comment and post additional questions as it helps us to develop the idea further.

We haven’t. I have some assumptions about it but it’s all very vague since we don’t have any grounds for comparison yet.