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:
- 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.
- 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:
- We need a means to create incentive compatible passive returns. One possible approach to this is proposed here: [Staking Pool DAOs]
- 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.