Key Insights
- With the launch of dYdX V4, protocol operations will be transferred to the dYdX DAO, which will divide responsibilities amongst multiple subDAOs.
- The subDAOs will allow the DAO to easily divide work amongst contributors, but will require proper checks and balances to avoid subDAOs operating in a centralized capacity.
- The Operations subDAO will be the next subDAO to launch and will provide a structured framework for future subDAOs to follow.
Introduction
On Nov. 2, 2022, the dYdX Foundation made an announcement to initiate community discussions surrounding the near- and long-term goals of the dYdX DAO. This announcement detailed the possible structure for the future dYdX DAO, which would comprise a number of autonomous working groups referred to as subDAOs. Before making this announcement, the dYdX Foundation took several steps to strategically organize the dYdX DAO in preparation for the launch of V4 and the full decentralization of the protocol.
dYdX V4
On Dec. 31, 2021, the dYdX team announced plans for the next version of the protocol, dYdX V4. The major hurdle in this transition was to decentralize the matching engine and order book. As a result, the dYdX team announced the dYdX Chain in June, a standalone Cosmos-based blockchain tailored to the specific needs of the dYdX protocol. By launching V4 on Cosmos, dYdX will enable validators to run an in-memory (off-chain) order book allowing for high throughput, with orders being matched by the network in real time and trades being committed on-chain in each block.
Another fundamental change will be to the DYDX governance token, which will gain additional utility as the Layer-1 token of the dYdX chain. V4 Mainnet is set to release in Q2 2023, according to the recent V4 milestones update. With the V4 milestones released, the next step towards full decentralization is to lay the foundation for the protocol to effectively operate under the DAO.
A Protocol Run by the DAO
V4 will emphasize the transfer of ownership of the dYdX protocol to the DAO. The DAO will be tasked with ensuring the growth and success of the dYdX protocol, so it is important for the foundation to be set up for success upon launch. The recent blog post by the foundation outlines the subDAO model, which will divide work amongst DAO contributors.
Often, communities advocate for decentralization while ignoring the underlying responsibilities implied by the model. Many DAO contributors contribute by offering opinions on forum posts and voting on proposals only as they arise. In most cases, the contributors depend on the project team or large stakeholders to run operations and provide community guidance by initiating the proposals. This structure can introduce asymmetry between the community’s information and that of larger stakeholders. This leaves communities and contributors without a clear understanding of the overall mission. As a result, DAOs struggle to attract mission-aligned contributors, rendering protocols ineffective in decentralizing operations.
dYdX has excelled in its documentation of the DAO’s mission and the contributors needed to achieve it, as exemplified by Antonio Juliano, Founder of dYdX, in The dYdX Community Values blog post. The post identifies Juliano’s thoughts on the dYdX community values and, more importantly, on what types of contributors the DAO should consider funding. Instead of compensating a large number of contributors with a small amount, Juliano suggests it would be better to pay a large amount to a small number of highly talented contributors.
SubDAOs
To divide internal operations, the DAO will comprise several autonomous subDAOs. Each subDAO will work on core functions of the protocol and will be accountable to the dYdX community. A recent research piece funded by dYdX Grants, “The Organizational Transformation for dYdX,” dives into the logistics of decentralization via autonomous subDAOs.
Grants subDAO
The dYdX Grants subDAO was the first subDAO launched by dYdX. It is tasked with accelerating dYdX Protocol growth by empowering community contributors to work on specific tasks. The program was launched in December 2021 and has since completed 15 rounds across numerous grant categories.
The Grants Program is structured under an independent legal wrapper known as a Guernsey Purpose Trust. This allows for the Grants Program multisig signers to act as Trustees and DYDX tokenholders to be beneficiaries.
Operations subDAO
With the dYdX Grants Program up and running, dYdX recently announced its intention to roll out its second subDAO, the Operations subDAO. On November 9, Reverie published a dYdX Request for Comments (DRC) outlining the details of an Operations subDAO.
The operations subDAO, also referred to as the “Ops Trust,” will establish the dYdX playbook along with a structure for future dYdX subDAOs to successfully operate upon. The operational structure will include establishing banking capabilities to pay fiat-based expenses (i.e., legal expenses, service provider contracts, etc.), and managing a DAO communication channel. The Ops Trust will also publish the dYdX DAO playbook consisting of the steps required to launch future subDAOs. These steps include legal entity options, operational procedures, legal agreements and templates, DAO tool recommendations, and tips for transparency and community engagement.
Operations subDAO Structure
The Ops Trust will be launched as a Guernsey Purpose Trust, similar to the Grants Trust. The Guernsey law permits a trust to be established with a non-charitable purpose, that acts on behalf of a trustee or a particular group of trusts.
The Trust will comprise three Trustees and one Enforcer. The Enforcer role will fall on George Beall, head of business and operations at Commonwealth, and the Trustees will include Reverie, Joanna Pope, and an additional Trustee yet to be named. The Operations subDAO expenses come to a total of $372,000 for six months of work. The expenses include Trustee and Enforcer Compensation ($210,000), legal and operational expenses ($100,000), and a 20% market buffer.
Future subDAOs
Once the operational framework has been established, dYdX intends to empower the community to launch additional subDAOs as needed — including, but not limited to, subDAOs for finance and treasury management, growth, risk management, and community.
(Source: dYdX Foundation)
Analyzing the subDAO Model
The subDAO model has gained popularity amongst DAOs that have fully decentralized or are on the path to doing so. As DAOs became more popular, it was quickly discovered that having a large group of contributors working asynchronously was very difficult to manage.
The subDAO model enables the DAO to outsource work as needed, with flexibility to emphasize pain points as they arise. The model also allows contributors to coordinate better, as subDAOs can specialize for specific goals. Additionally, there will be inherent checks and balances as the subDAO (in theory) will report directly to the DAO. However, without the DAO enforcing proper checks and balances, subDAOs could operate in a centralized capacity, with a few parties maintaining control of DAO assets, decision-making, and operations.
Next Steps
In the coming weeks, the dYdX DAO will discuss the current state of the DAO, where it needs to be when V4 is launched, and what needs to be done to successfully launch V4 and decentralize the protocol. The only subDAO that will launch prior to V4 in Q2 2023 is the Operations subDAO, with future subDAOs expected to launch in Q3 2023.
The next step for Reverie’s Operations subDAO proposal will be a Snapshot vote. If the vote passes, the entity will be created, including a Gnosis Safe multisig composed of Trustees, the Trust Agreement, and an on-chain short-timelock proposal. The proposal will then be voted for on-chain, and if passed, the requested funds will be sent to the Ops Trust multisig, officially launching the Operations subDAO.
Conclusion
The path towards dYdX’s decentralization includes operations and large responsibilities being handed off to the DAO. The efforts will ensure that the DAO is composed of mission-aligned contributors willing to take on these responsibilities and an avenue for outsourcing tasks as needed.
With many DAOs struggling to operate independently, it is reassuring to see the dYdX DAO mitigate the risk of these inefficiencies via the meticulous planning of their organizational structure. If approved by the community, dYdX subDAOs will be at the core of operations as the protocol moves towards the vision of a fully decentralized protocol.
