What Is a SubDAO? A Way To Keep Governance Decentralized

Heavyweight DeFi protocols MakerDAO and dYdX are thinking about changing their governance structures.

Blockchain protocols are frequently governed by decentralized autonomous organizations (DAOs), a group of individuals who manage the group's treasury in order to decentralize decision-making. However, as a protocol grows in size and more money is at stake, DAOs are being forced to incorporate bureaucracy.

MakerDAO and dYdX, for example, have both been actively experimenting with the concept of subDAOs.

What is a SubDAO？

A subDAO is a novel solution to the operational challenge of delegating responsibility within a DAO while maintaining decentralization.

The setup is similar to a startup starting to divide employees into different divisions as the company grows.

SubDAOs have their own foundation and ownership structure but are mission-bound to the parent DAO.

The goal of moving to a subDAO structure, according to David Gogel, head of growth and operations at dYdX, is to “drive progressive decentralization over the protocol.”

An example of a subDAO following the Guernsey purpose trust model

dYdX is not unfamiliar with subDAOs.

Its first subDAO, the dYdX grants program (DPG), was established in March through a Guernsey non-charitable purpose trust, with an eight-person multi-signature committee receiving $752,000 in DYDX tokens from the DAO's treasury to oversee grant distribution.

Why is the Guernsey model used？ It reduces liability for the DAO and, in particular, its committee, while allowing the collective to engage in off-chain transactions. In addition, the arrangement satisfies US payments tax and reporting requirements.

Gogel stated that the proposal for the subDAO was compiled by the company Reverie, which now oversees the DPG as the trust's enforcer.

How it all works

“At the end of the day,” Gogel said, “they're all accountable to token holders who vote to allocate a percentage of the community treasury to fund a grant program.” “If they so choose, [token holders] can change the trustees or enforcers or refuse to provide additional funding.”

In a blog post, the dYdX foundation proposed establishing several subDAOs in order to position itself favorably ahead of the launch of the dYdX v4 mainnet.

“The Guernsey trust structure is widely circulated in the crypto legal scene, and I believe it is viewed as a positive contribution to attempting to be legally compliant while still maintaining the ethos of a DAO,” Gogel said.

MakerDAOs endgame plan through metaDAOs

MakerDAO, meanwhile, has been navigating intricate governance restructures as it strives to align incentives as one of the leading DeFi protocols.

Rune Christensen, the MakerDAO founder, has advocated splitting the DAO into smaller teams, or metaDAOs, each with its own governance token in his “endgame” concept.

According to Asad Khan, a MakerDAO member and DeFi politician at Centrifuge, as a DAO grows in size, things can become problematic quickly, and metaDAOs could help to alleviate these tensions.

The idea of having some sort of metaDAO or subDAO with its own governance mechanisms, its own community of interested experts and participants [who] are divorced from the everyday but [who] are nevertheless tethered back through sound economics...

“With something like real-world assets, [can] unleash the scale that Rune and others would like to see realized,” Khan said.

Although Khan is skeptical about the tokenomics of the metaDAO tokens, he has stated that an initial AirDrop to the existing Maker community is possible.

“There would be some kind of initial distribution method — not sold like an ICO or anything — and then I assume you could exchange the tokens with others to transfer your stake over time,” he explained. “From a governance sense, it would appear nearly like a derivative token of Maker.”

However, not everyone is as upbeat.

A MakerDAO delegate using the pseudonym Park Y tweeted, “MetaDAOs are financially and politically linked to Maker through ownership and incentives.” As a result, it is impossible to truly [separate] them from the parent organization, and the risks faced by these entities persist throughout the ecosystem.

The slow path to decentralization

Of course, the risks associated with innovation should come as no surprise.

“DAOs are still trying to figure out how to coordinate together and identify goals,” said Centrifuge CEO Lucas Vogelsang.

“We haven't figured out all of the challenges yet,” Vogelsang said, “but one of the most fascinating and significant aspects of decentralization is that we can coordinate beyond just the code as communities about what we do.”

Decentralized protocols are still following the DAO playbook as they develop their businesses, according to Gogel, and a one-size-fits-all solution is unlikely.

“I believe the entire sector is still in the experimenting phase,” Gogel added. “We're committed to progressive decentralization, being realistic and not moving too quickly, but rather thinking about sequence and how to make it as fair, inclusive, and transparent as possible.”