Relationship Between Decentralized Autonomous Organizations (DAOs) and Decentralized Finance (DeFi)

• 1 DAOs offer community-driven decision-making for DeFi protocols’ development.
• 2 DeFi tools enable transparent and growth-focused management of DAO funds.
• 3 Combining DeFi protocols empowers DAOs with versatile financial solutions.

DAOs and DeFi are expanding blockchain sectors. DAOs enable collective governance via smart contracts. DeFi provides financial services through decentralized protocols. Both favor transparency, decentralization, and community control. They shift power to users by removing central intermediaries. Consensus rules their platforms. As DAOs and DeFi grow, their shared principles and complementary abilities create synergy around governance, treasuries, and bootstrapping. Their rise highlights the potential of decentralization for empowering communities.

As DAOs and DeFi continue maturing, we will see increased synergies between them. DAOs utilize DeFi tools for treasury management and funding while also steering DeFi protocols through decentralized governance. DeFi projects are experimenting with governance tokens and DAO structures for community-driven growth.

This article will explore key ways that DAOs and DeFi protocols can interact and synergize as they develop.

DAO Governance for DeFi Protocols

One area where DAOs can provide value is decentralized governance for DeFi protocols. Most DeFi projects today are controlled by centralized teams and subject to their direction. DAOs offer a model where the community of users can have a voice in governing the development and direction of a project.

DeFi protocols can transition to a DAO model by issuing governance tokens. Users who stake the token can vote on proposals for changes, upgrades, or anything requiring community input. This decentralizes power away from centralized founders and gives users ultimate control. 

MakerDAO was one of the first DeFi projects to launch a governance token and DAO structure for its stablecoin protocol. Other DeFi projects like Uniswap and Aave have also shifted towards community governance through tokens and decentralized voting.

As governance tokens continue to emerge, we could see many prominent DeFi projects brought under DAO control in the coming years. The communities that use these products every day have a real say in steering their advancement.

Defi Tools for DAO Treasury Management 

DAOs require tools to manage any communal treasuries or funds in a transparent and decentralized manner. Here, DeFi products offer useful primitives.

DAOs can hold funds in permissionless lending protocols like Aave and Compound to earn interest while maintaining instant access for community use cases. Stablecoins like DAI also help avoid exposure to volatility.

Decentralized exchanges like Uniswap empower DAOs to swap assets, provide liquidity, and build their treasuries in a trustless manner without centralized intermediaries. Non-custodial wallets like MetaMask give signers secure and censorship-resistant access to DAO funds.

Decentralized finance (DeFi) protocols offer decentralized autonomous organizations (DAOs) valuable tools to manage communal funds and treasuries transparently without centralized intermediaries. Permissionless lending platforms such as Aave allow DAO treasuries to earn interest on holdings while maintaining instant access.

Decentralized exchanges, including Uniswap, empower DAOs to swap tokens and provide liquidity trustlessly. By composably leveraging these DeFi building blocks, DAOs can grow communal treasuries and make transactions in a decentralized manner visible on the public blockchain for full member auditability.

DAOs Investing in DeFi Protocols

DAOs can also invest capital in promising DeFi protocols, almost like decentralized venture funds. 

An example is the MetaCartel Ventures DAO, which is aimed at investing in early-stage DeFi protocols and applications. Members pool funds, which the DAO can then provide as liquidity to projects in exchange for governance power and a share of fees.

Other examples include Flamingo DAO and PSP DAO, both centered around earning yield from DeFi investments.

For retail investors, investing through a DAO provides access to deal flow they may not get individually. The transparency and democratic governance of a DAO also reduce reliance on centralized fund managers.  

Defi Protocols with DAO Governance

On the flip side, more newly launched DeFi protocols are considering DAO structures from the start. 

Rather than a team retaining control, governance tokens can be distributed to bootstrap a community DAO to steward the project’s growth. 

Examples of newer DeFi protocols taking this route include Integral Protocol, Kava Labs, Balancer, and CropperFinance. By aligning incentives between users and developers early on, DAO-based projects can unlock community contributions and reduce friction down the line.

DeFi protocols generate substantial treasuries from the fees they accumulate on platform usage. For example, Uniswap’s treasury reached over $1 billion in assets by mid-2021.

These protocol-owned treasuries are typically controlled by a centralized team today. But they could instead be managed through DAOs to decentralize control.

Uniswap is one project that has discussed moving its treasury to a DAO structure. The community could then directly use the funds for development, grants, liquidity incentives, and other purposes.

Ultimately, treasuries are funded by user fees, so shifting control of those assets to a DAO is aligned.

The Composability Between DAOs and DeFi 

One of the most exciting aspects of DeFi is its composability – the ability to mix and match protocols to create sophisticated applications. DAOs can similarly utilize composability with DeFi money legos to expand their capabilities.

A DAO could use lending markets like Aave to hold its treasury. It may leverage decentralized prediction markets from Augur for forecasting. Trades and swaps could be done via DEXs like Uniswap. Payments get issued in stablecoins like Dai.

Chaining multiple DeFi protocols together to unlock innovative DAO financial tooling.  The possibilities are vast when built on open, programmable blockchains.

Conclusion

DAOs and DeFi arose from separate origins, but their capabilities complement each other highly. DAOs offer DeFi projects transparent and democratic governance built on community consensus. DeFi provides DAOs with composable tools to manage capital and assets in a decentralized manner.

As both spaces continue maturing, we should expect to see further creative synergies emerge between them. The communities and developers building DAO and DeFi infrastructure can learn from and borrow from each other’s progress. 

The shared principles of decentralization and community-driven platforms underline DAOs and DeFi’s natural strategic alignment. Their parallel growth stands to unlock governance and financial primitives that neither could achieve in isolation. The next few years will be exciting as these decentralized technologies evolve together.