How DAOs Principles Help It Survive a Bear Market (Also Works with the Zombie Apocalypse)

With the crypto bear market, all of the significant crypto assets' prices have gone down. Some people say that it has mainly happened to projects that were overhyped and didn't bring anything new to the DeFi community. But every change in an industry is a chance to do something better. Some DAOs, for instance, have used this time well to grow. But does that mean they can all survive a crisis without a scratch?

A Tale From the Crypto

Not much time is left before Halloween. The pantries are stuffed to the brim with bags full of candy for the kids' baskets. Netflix is probably already getting ready to release a bunch of bad horror movies, but who needs that when real horrors are happening right in front of us?

Since its all-time high in November 2021 when Bitcoin reached $68,000, the value of cryptocurrencies has decreased by a cumulative $2 trillion. This must be especially difficult for those who hoped that cryptocurrency could serve as a hedge against inflation, which turned out to work only until the global economy was stable.

Inflation is, by the way, precisely one of the reasons for the current crisis, but it is not the only reason. There is a lot of speculation that the current situation had an impact on cryptocurrency initiatives that had a lot of anticipation but did not provide anything novel to the community. It's possible that DAOs will be an exception to this rule.

DAOs Go Up? Yes, But

During the crypto winter, many DAO-based projects have used this time well to improve their standing in the industry. In essence, DAOs are organizations that act like banks but lack any form of central administration. On top of that, each DAO makes decisions, for instance how to spend money, collectively through votes among members.

UpLift DAO has helped projects raise more than $1 million, set up DAO voting, and grown the number of token stakes and Total Value Locked. In the interim, EarthFund helped the Chopra Foundation raise more than $116,000 for mental health and well-being through a campaign they started.

But to argue that decentralized autonomous organizations (DAOs) are miraculous organizations that are immune to the crisis would be an exaggeration.

MakerDAO is, among Uniswap and Yearn Finance, one of the most notable DAO protocols. The Maker protocol uses smart contracts on Ethereum to automate the process of putting up collateral and lending its stablecoin, DAI. MakerDAO has applied the model of central banks to the blockchain. However, this wasn't the golden recipe for the crisis.

“We have been facing some problems. Since November of last year, our sales have dropped quite a bit. During the bull market, we hired many people, grew a lot, and did other things that most businesses do during this time. Since we're kind of in a bear market now, we have to deal with things like laying people off and so on,” said Sam MacPherson of MakerDAO.

“It's never fun, but you have to do it because you have to. We have to deal with that in our kind of special situation since we're not a company but a DAO. Figuring out how to do that in a DAO is like something very new. We're running into a lot of problems, but I think we're learning from them and getting better as time goes on,” he added.

When asked what MakerDAO does in a crisis, he said, "It's important to set things up ahead of time. You should know that things won't always go well, which is why it's important to plan ahead. If you don't, it's kind of a mess and there's a lot of uncertainty, especially since these are people's jobs, ways to make a living, and other things like that. Not everything that comes from this is good for the workers."

$500 Million into TradFi

Sam spoke to the 10Clouds media team in September during the ETHWarsaw conference. It wasn’t until early October that MakerDAO announced their daring investment. The impulse for this stemmed from the desire to diversify the billions of dollars worth of funds that are now collateralizing DAI, while simultaneously searching for ways to get that money to yield returns.

The bottom line is that MakerDAO has set aside a budget of $500 million for the purchase of investment-grade corporate bonds and short-term bonds issued by the United States Treasury. In a vote that took place throughout the whole MakerDAO community over the course of several months, the concept was accepted.

At the time of launch, most protocols designate a sizeable portion of their token supply for use by the community and the treasury in order to assist future development and fund activities such as contributor rewards, grant programs, liquidity mining campaigns, and other similar endeavours. As a consequence of this, it is only logical for protocols to hold the majority of their treasury assets in the form of native protocol tokens.

TokenInsight.com found that over the summer months the vast majority of DAOs still kept their treasury assets in the form of their protocol's native tokens.

In this instance, it appears that MakerDAO has made a significant advancement. This shows that DAOs can be very flexible and respond well to crises because of a principle that has always been at the heart of crypto: no single entity should have too much power.

DAOs Have the Potential to Change the Crypto

Many of the pioneers in the field of cryptocurrency set out with the intention of developing a system that did not rely on any third party for its operation and that is permissionless, which means could be utilized by anybody. Since that time, as blockchain technology has advanced, this one principle has caused problems due to the fact that many blockchains in use today are owned and operated by a single entity.

Fortunately, decentralized autonomous organizations (DAOs) seem to be bringing cryptocurrency back to its founding ideas by instituting more democratic regulations and the opportunity to bring together people who share a love for innovation.

“If you want to show that you care about the project's community, you should give as much power as you can back to users. That's why DAOs show that you are more legitimate than your competitors. In this organization, all users are equal, there is no hierarchy, and they are all working toward the same goal,” said Dawid Walas, blockchain team lead of 10Clouds.

People from all over the world are able to participate in the project and make decisions within DAO, which eliminates the need for any one individual or group to be in charge of the overall direction the project will take in the future.

“DAOs often have a treasury, with all the crowd's investment subject to clearly specified conditions for its expenditure, which can only be changed through a referendum and are never in the hands of the board of directors, which disappears in today's decentralized society. In a crisis, users of DAO can take money from the treasury. It all comes down to voting on how much money will be used and how,” Walas added.

Bull markets in the DAO sector are all about capturing funds to create stable treasuries and working contributions that make financial sense for thousands of participants. In a similar manner, bear markets encourage individuals to contemplate how the immediate impact of their contributions will be felt by the market. This not only creates a climate in which innovation can develop, but also one in which it can flourish, leaving the door ajar to experimentation and the taking of risks.

Looking for an expert team to help you set up a DAO?

Get in touch with our Head of Sales, Dennis Van Der Vecht, for a free blockchain consultation at dennis.vandervecht@10clouds.com or +48 793 200 141.