Decentralized Autonomous Organizations (DAOs) And What They Do

| November 17, 2023

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Decentralized Autonomous Organizations (DAOs)

The concept of decentralization introduced to the world by blockchain is breeding ingenuity in several fields. By replacing centralized systems and processes, decentralization solves various pain points that have been prevalent in centralized operations. To most observers, blockchain technology might only seem like an alternate way to transact or indulge in finance. While this is far from the truth, the immense popularity of cryptocurrencies like Bitcoin can make it seem like the blockchain is just a facilitator for storing and moving value.

The Ethereum network, an innovative fintech advancement in its own right, is responsible for expanding the blockchain’s use case beyond simple finance. The network functions as a massive, decentralized computer for the world to use. The ability to automate processes on a decentralized network brings the possibility of creating several trailblazing applications and structures. While there exist plenty of blockchain-based creations creating waves out there, one is gaining large traction. Decentralized Autonomous Organizations are a popular by-product of blockchain ingenuity.

What Are Decentralized Autonomous Organizations?

Decentralized Autonomous Organizations, or DAOs for short, are organizations leveraging blockchain decentralization to bring democratic business practices, replacing the top-down corporate structures that exist today. In addition to decentralization, DAOs are present on programmable blockchains like Ethereum, making use of the smart contract capabilities.

Smart contracts bring automation to the execution of processes, removing the need for excess human intervention. The Smart contract codes execute desired functions programmed into them when the necessary conditions are met. A simplistic understanding would be to picture them as “if-then” statements deployed on a programmable blockchain.

Together, decentralization and automation are the underlying factors allowing DAOs to exist and function. DAOs can be thought of as an alternative organizational structure that contains individuals who are aligned in achieving certain goals. Instead of functioning like a traditional organization or a corporate boardroom, DAOs lack hierarchical structures. There is an absence of leadership and, further, the absence of power concentrated in the hands of a few. Therefore, they operate in an autonomous fashion where nobody exhibits control over their functioning.

What DAOs Do Differently

An issue that traditional decision-making structures arouse is the lack of representation of the opinions of entire organizations or communities. Instead, a select few like the CXOs of organizations are fully entrusted with decision-making powers. This leads to an imbalance where the few with the ability to make decisions do so without considering how it could affect everyone else.

DAOs eliminate power-centric structures, allowing all their members to become part of the decision-making process. Members are financially invested in the DAO projects they are a part of. They acquire the DAO’s governance token to be a part of the decision-making.

Token Implementation and Usage

The amount of governance tokens held by a member is proportional to the power their vote holds in the decision-making process. For instance, a member with fifty governance tokens could cast fifty votes, a member with twenty governance tokens could cast twenty votes, and so on.

The implementation of governance tokens serves a few purposes. The acquisition of the tokens needs the members to exchange it for value like fiat or other cryptocurrencies. Since the members buy into being a part of the DAO, they are highly likely to make decisions that help the DAO thrive. Obviously, the larger the sum on the line, the more inclined the members are toward making the right calls. Therefore, DAO members with larger amounts of tokens possess greater voting power than those with lesser numbers of tokens.

Additionally, the value of the DAO tokens incentivizes good behavior amongst the members. As the DAO succeeds in meeting its objectives, gains popularity, and attracts more members, the value of the governance token increases. Thus, the members holding the tokens profit because of the appreciated value. It then becomes logical to exhibit good behavior within the DAO’s governance structure.

DAOs are increasingly being implemented to manage all sorts of operations, leading to increased adoption by communities revolving around blockchain projects. Many DeFi projects are issuing governance tokens for its users to acquire and participate in critical decision-making processes that shape its future. In most cases, the governance token holders also get to enjoy additional benefits through participation in yield farming and staking protocols.

‘The DAO’ – Infamous Origin Of All DAOs

Although DeFi is propagating the popularity of DAOs, the original one was created for slightly different purposes. ‘The DAO’, for example, was the first ever DAO created and deployed on the Ethereum chain in 2016. It was to function as a decentralized venture fund, enabling those staked into the project’s growth to decide what kind of blockchain projects to fund and grow using the funds in reserve.

However, the plans fell through when an attack led to the attacker walking away with USD 60 million worth of Ether. The attacker took advantage of a vulnerability present in the application’s smart contracts, ultimately resulting in the forking of the Ethereum chain to mitigate the damage and recover lost funds.  However, let’s not dwell on that for now.

DAOs’ Reliance on Smart Contracts

DAOs establish reliance on smart contracts for all their functions, governance included. When proposals are brought to a DAO’s members, they cast their votes for what they find favorable out of the available scenarios. The smart contracts are set to execute based on what the majority votes for. While there are nuances to how different DAOs work, they follow a similar approach.

For instance, a DAO is created for users to collectively purchase NFTs. Of course, the intent is to buy the right NFTs so the community can profit together when the NFTs go up in value. While communication can take place off-chain on messaging applications, the proposals are brought on-chain at decided times. The members then vote through the DAO smart contract on whether a particular NFT should be purchased. If a majority is reached for it to be purchased, the contract executes the purchase with the funds in the DAO treasury. If the members collectively decide against purchasing it, the smart contract does not execute the purchase.

The use of smart contracts makes DAOs truly decentralized in their operations. It eliminates the corruption arising from human presence in the execution of tasks like tallying votes, storing and transferring DAO funds, and more. The open-source nature of smart contracts, further, allows members to audit and verify the legitimacy and claims of the DAO developers before they join it. Moreover, all the DAO’s governance proposals, because of smart contract execution, will be stored on the blockchain – making governance processes highly transparent.

Where DAOs Are Presently Lacking

Smart contracts come with downsides too. Blockchain immutability makes rolling out updates to DAO projects a severely complicated process. So, if the smart contract code gets deployed with bugs or vulnerabilities, it could mean disaster to the members. Since fixing the bugs may not be feasible, attackers can find ways to break into the treasury funds stored in the smart contracts and drain the treasury dry while the members look helplessly. ‘The DAO’ attack was executed the same way.

Moreover, DAOs also get criticized for not being able to make decisions in real-time. Since they aim to replace corporate boardrooms, their inefficiency and slow decision-making processes may prove to be a block to their adoption. It takes plenty of time to come up with proposals, inform members of them, and execute the voting process. CXOs of centralized companies can make decisions much faster, sometimes in a split-second. Such action cannot be executed by DAOs yet.

DAOs Are Making Decision-Making Democratic and Profitable

DAOs are a novel breed of blockchain use cases making their mark in the world of decentralization and beyond. They are revolutionizing the way businesses and organizations function by decentralizing an important component of all organizations – the decision-makers. DAOs can make their processes highly democratic and remove any corruption that is present in them today. With that, DAOs also allow users from all over the world to become stakeholders in organizations they find a calling towards, help with their objectives, and profit because of their participation – all thanks to blockchain technology.

More on Crypto

As we continue constructing a fully regulated digital asset custody platform, ensuring secure storage for both crypto and fiat assets remains a critical priority. 

To facilitate the last checkpoint of enabling institutions to convert their digital asset treasury into fiat currency, we’re expanding beyond pure wallet infrastructure and integrating seamless fiat off-ramp capabilities for our partners.

We’re thrilled to announce our partnership with Encryptus, licensed and compliant off-ramp solutions tailored for institutional clients. This collaboration elevates Liminal’s service offerings by empowering our partners to convert their digital asset treasuries into fiat currencies efficiently.

Integrating A Seamless Off-Ramp Solution

The digital asset ecosystem historically faced friction points when transitioning between fiat and cryptocurrencies. Off-ramp solutions address this pain point by enabling efficient and streamlined conversion between asset classes, minimising value loss and simplifying compliance processes.

Here’s how off-ramp changes the game:

  • Reduced Friction: Frictionless conversion minimises delays and operational complexities associated with traditional fiat-crypto exchange methods.
  • Enhanced Efficiency: Streamlined workflows expedite asset conversion, increasing speed and cost-effectiveness for institutional and individual users.
  • Optimised Value Preservation: Advanced off-ramp solutions prioritise minimising price slippage and value loss during conversion, protecting user portfolios.
  • Simplified Compliance: Integrated compliance features navigate regulatory complexities, ensuring adherence to relevant financial regulations.

With our partnership with Encryptus, we have embedded their institutional-grade APIs, connecting their off-ramp solution within Liminal’s wallet and custody platform. 

This integration simplifies our clients’ liquidation requirements while keeping their assets secure and more:

  • Effortless Digital Asset to Fiat Conversion: Our partners will be able to access treasury management and facilitate business payments in 54 countries and individual payments in an extensive network of 80+ countries.
  • Streamlined Compliance and Regulation: Our partners will be able to leverage Encryptus’s rigorous licensing and compliance framework, ensuring adherence to stringent financial regulations.
  • Enhanced Platform Value: We will be able to expand the functionality of the Liminal custody solution, attracting institutional users seeking comprehensive digital asset management capabilities.

Moving Towards A Robust Off-Ramp Partnership With Encryptus

The partnership between Liminal and Encryptus earmarks a significant step forward in secure digital asset custody, representing a shared commitment to pushing compliant practices while supplying institutions with easy access to convert their digital assets to fiat. 

For Encryptus, the opportunity to integrate with Liminal’s established platform presents a chance to reach a wider audience and scale their innovative off-ramp solutions to new heights. By streamlining fiat conversion within Liminal’s secure custody infrastructure, Encryptus gains access to a trusted network of institutional users seeking seamless and compliant treasury management.

For Liminal, this collaboration reinforces our dedication to partnering with companies that demonstrably prioritise clear governance and robust policy frameworks. By aligning with Encryptus’s stringent compliance standards, we reaffirm our commitment to building a secure and sustainable future for digital assets, where trust and regulatory certainty go hand-in-hand.

January 22, 2024

Hello world, it’s that time of the month when we share the biggest security breaches in the world of Web3 through our Security and Regulatory Newsletter. 

Liminal believes in optimizing security and custody practices globally across the Web3 industry. Through our Newsletter, we highlight security, regulations, and compliance incidents that have happened in the past month and how one can follow better Security practices to safeguard their digital assets. 

We will also highlight regulatory changes that might have happened globally, which were significant to the overall ecosystem.

Dive in and get a detailed analysis of everything security and regulation in the domain of web3 with Liminal’s Monthly Security and Regulatory Newsletter.

Web3 Security Compromises in January

Abracadabra exploited for almost $6.5 million, Magic Internet Money stablecoin depegs

The Magic Internet Money ($MIM) stablecoin has lost its dollar peg again, dipping all the way below $0.77 in a flash crash before returning to around $0.95.

The depeg appears to be related to an exploit of the Abracadabra lending protocol, which allows people to borrow $MIM. An attacker exploited an apparent flaw in the platform’s smart contracts to drain around $6.5 million.

Goledo Finance hacked for $1.7 million

Goledo Finance, an Aave-based lending protocol, was exploited through a flash loan attack. The attacker stole assets estimated by CertiK to be around $1.7 million.

Goledo Finance contacted the attacker to offer a 10% “bounty” for the return of the remaining assets. In a message on January 29, the attacker wrote: “I hacked Goledo and want to negotiate.”

Socket service and its Bungee bridge suffer $3.3 million theft

The Socket cross-chain infrastructure protocol was hacked for around $3.3 million in an attack that exploited its Bungee bridge. The thieves were able to exploit a bug that allowed them to take assets from those who had approved a portion of the system called SocketGateway.

A little over 700 victims were affected, and the highest loss from a single wallet was around $657,000. 121 wallets lost assets priced at more than $10,000.

On January 23, the protocol announced they had recovered 1,032 ETH (~$2.23 million) of the stolen funds.

Web3 Regulatory Practices for January

The EU Imposes Stricter Due Diligence Rules for Crypto Firms

On Jan. 17, the European Council and the Parliament came to a provisional agreement on parts of the Anti-Money Laundering Regulation (AMLR) that now extends to the crypto sector.

Under the new rules, cryptocurrency firms will be required to run due diligence on their customers involving a transaction amounting to €1,000 ($1,090) or more. 

However, the agreement isn’t final yet as it has to be first officially adopted by the Council and Parliament before the rules can be applied.

So, after the EU passed its landmark MiCA regulation last year, which clarified rules about cryptocurrencies, regulators are now targeting the space with tighter controls. 

While these regulations bolster security and trust in the crypto market, potentially attracting more cautious investors and combating financial crimes, they also present challenges. 

The US State of Virginia Introduces Digital Assets Mining Rights

Recently, the Virginia State Senate introduced Bill No. 339, which outlines regulations for the transactions and mining of digital assets and their treatment under tax laws. 

The legislation exempts individuals and businesses engaged in crypto mining activities from obtaining money transmitter licenses. Additionally, it protects miners from any discrimination. 

Issuers and sellers of crypto are also exempted from securities registration requirements if certain conditions are met. Moreover, those offering mining or staking services are not to be classified as “financial investment” but must file a notice to qualify for the exemption.

The bill further incentivizes crypto’s use for everyday transactions by offering tax benefits. Under this, up to $200 per transaction can be excluded from an individual’s net capital gains or gains derived from using crypto to purchase goods or services, starting from Jan. 1, 2024.

Key Takeaways:

  • Hackers continue to exploit vulnerabilities in DeFi protocols and cross-chain bridges, highlighting the need for robust security measures.
  • Regulatory frameworks are evolving rapidly, with stricter AML rules and supportive legislation for emerging technologies like crypto mining.
  • Staying informed about these developments is crucial for navigating the digital assets market safely and responsibly.

Stay #LiminalSecure

These events highlight the constant evolution of Web3 security and regulation. You can confidently navigate this dynamic landscape by staying informed and prioritizing security best practices. 

At Liminal, we’re committed to empowering institutions to unlock the full potential of digital assets without compromising security or compliance norms with our robust custody and wallet infrastructure solutions. Join us on this journey towards a safer, more accessible future for digital assets.

January 15, 2024

Buckle up as we’re about to take a trip down memory lane. 

The year 2023 was a wild ride that showed signs of a plummeting market, groundbreaking innovation and regulatory hurdles. 

Contrastingly, in the same year, we saw no market-shattering crashes. Financial institutions extending an olive branch, key jurisdictions unlocking the doors to blockchain technology. 

Simultaneously, at Liminal, we experienced significant breakthroughs, re-engineering our positioning and becoming a pioneer in digital asset security with bank-grade custody. 

We took major strides this year, right from building comprehensive products to becoming a qualified custodian, from revamping our brand design to expanding our offices in newer locations, from partnering with hyper-local communities to onboarding a diverse set of clients,  we did it all. 

So, let us take you through everything we accomplished in 2023 and what the future holds.  

Liminal Became A Qualified Custodian

One of the prominent moves we made this year was to change our positioning as a regulated custodian from being a wallet infrastructure platform. 

We got two licenses in key jurisdictions to operate as a regulated custodian. 

The first one came from Hong Kong, where we acquired the TCSP license issued by the SFC, which oversees and regulates financial activities to ensure compliance with legal and regulatory obligations. 

Our next license came in the MENA region, where we got In-Principle Approval for the FSP license granted by the FSRA, a governing body in ADGM, to establish a progressive financial services environment. 

Both these licenses paved the way for Liminal to push its wallet infrastructure and offer bank-grade custody to institutions looking to operate in these particular regions. 

Liminal Introduced A Suite of Products & Features

Continuing our building spree, we launched new products and integrations to broaden the existing infrastructure and added more parameters of security, scalability and sustainability. 

Staking-as-a-Service

Liminal launched staking for institutions to eliminate the risks involved in running staking nodes and the vulnerabilities in hot wallet transfer. 

Hence, we introduced an industry-first mechanism of cold wallet staking to ease staking for institutions and secure assets explicitly.  

Whitelabel Solution

Accelerating the go-to-market time for organisations looking to build a secure and customisable application, Liminal launched its whitelabel solutions

Targeted to help organisations meet security standards, manage assets with maximum control, and add their custom branding to give it a personal touch. Our whitelabel solution is a first-in-class custodian-developed solution for institutional grade custody.

Smart Consolidation

We are building not just secure custody but also automation-based features to eliminate manual errors, increase the throughput of transactions and scale institutional wallets. 

Taking this ahead, we launched the Smart Consolidation feature to automatically calculate all the active addresses and consolidate them into a single address. With this level of automation, managing multiple addresses becomes uber easy for wallet teams. 

Travel Rule 

To limit the use of cryptocurrencies for activities like money laundering and terror financing by regulatory bodies, travel rule was mandated for institutions to follow. 

Continuing the latest compliance integration policy, Liminal partnered with Notabene to introduce Travel Rule, enabling institutions to manage counter-party risk and extend the process of due diligence right from the Vaults dashboard.   

Liminal Accured List Of Security Certifications

Following our ISO certification for data privacy and risk management, we added two new security certifications to fortify our systems and build trust for our clients. 

Liminal Achieves Crypto’s Highest Security Mark: CCSS Level-3 Certified

Cryptocurrency security lacked a gold standard, creating a vulnerable ecosystem. Enter the CryptoCurrency Security Standard (CCSS), setting the bar for auditing and certifying custodian infrastructure and establishing levels of trust and confidence for investors. 

Liminal became only the second wallet infra platform and the first regulated custodian to be accredited with Level-3 certification, deeming wallets, transfer environments, workflows and engines safe and secure. 

Liminal Reciueved SOC 2 Type II Certification

To tackle threats in institutional-grade security, organisations’ SOC has been identified as the primitive compliance standard for service organisations to handle customer data.

Liminal successfully attained SOC 2 Type II certification, validating its setup of security controls & compliance processes to be industry standard. 

Liminal Level Up

Liminal unveiled its most significant platform upgrade ever, revolutionising the future design standard of a qualified custodian. This level-up activity included revamping our website and product UI, giving a completely new look and feel to not “Liminal” but “Liminal Custody”. 

The Liminal level-up activity was a strategic step and the biggest one for us this year to create an intuitive, inviting and tailored experience for our clients. 

Liminal Reached New Borders

We spread out our operations this year, reaching new borders and onboarding a new wave of institutions across gaming, DeFi, HNI wealth, treasuries, and exchanges! From Indonesia and Africa to India, UAE, and Korea, we are setting up custody operations worldwide. 

This isn’t just a roster of clients; it’s a network ready to spark connections, collaborations, and shared success to further the definition of secure assets. 

Liminal Collaborated With Law Enforcement Agencies

The best and the proudest moment of Liminal for this year was when we collaborated with CBI & Himachal Prashesh police department to aid them in seizing digital assets. 

This partnership put us on the map, as we became the first point of contact for LEAs in India, and we standardised the process of secure seizure of digital assets. Leveraging our expertise, we enabled a safe space for officers to learn the basics of custody, contributing to a safer digital landscape.

Team Liminal Grew Bigger

Building such a massive infrastructure, prioritising security and compliance over everything else, we had to grow the team to build at pace and expand at an even higher level. Not only did we grow in team numbers, but we also elongated our footprint to new destinations. 

Team Liminal went from 32 to 70 with 5 new offices in Mumbai, Ahmedabad, Hong Kong, Singapore and ADGM, setting up our custody operations steadfastly. 

What’s To Look Out For In 2024

We are excited to announce that our commitment to integrating the most secure digital asset wallets with a cutting-edge custody platform is swiftly becoming a reality. 

The upcoming year, 2024, will serve as a testament to this transformative journey. Moving beyond self-custody, we are constructing a comprehensive infrastructure encompassing both custodial and non-custodial wallets. Exciting products are set to launch starting from the first week of January, some of which are: 

  • Official Custody Platform Launch
  • Liminal’s Off-Exchange Settlement Hub
  • Secure Custody of Real-World ‘Tokenised’ Asset

The Web3 space has evolved explicitly this year, pushing the narrative of secure digital asset custody and security, introducing new regulations and compliance standards, licensing VASP providers and standardising the use of custodians as a trusted third party. 

At Liminal, we took major strides this year, from building comprehensive products to becoming a regulated custodian, from revamping our brand design to building the full infrastructure of custodial and non-custodial wallets.

January 5, 2024

Find Out How You Can Benefit From A Fully Self-Custodial Wallet Architecture