Learn on SubDAO: Distinguishing Between DAOs and Multi-Signature Wallets

Like Traditional organizations, Decentralized Autonomous Organizations (DAOs) are made up of individuals who pool physical, mental, and, most importantly, financial resources to attain a common goal.

Traditional organizations involve a hierarchy, such as a Chief Executive Officer (CEO), a Chief Operating Officer (COO), and a Chief Financial Officer (CFO), who can make crucial decisions about the organizations’ activities and finances; however, DAOs work differently.

Decentralized Autonomous Organizations (DAOs) involve a democratic organizational structure where all members have a fair right to:

• Governance (decision-making), and
• Control of community assets powered by cryptocurrency.

Unfortunately, most DAO founders make a common error by focusing majorly on the decision-making aspect of the DAO, forgetting that the function of a DAO is not limited to decision-making but encompasses storage and asset control via crypto wallets, smart contracts, and blockchain technology at large.

At its most basic form, a DAO’s treasury can be likened to a multi-signature wallet, but make no mistake, they are not the same. A multisig wallet involves the communal use of a wallet by several parties to store crypto assets. However, unlike regular wallets, all co-owners of a multisig wallet have individual private keys, which must be signed before the mutual assets can be spent for any purpose; hence, it is imperative that the majority of its members agree with the purpose for which they intend to touch the treasury.

Asset Management in a Multisig Wallet

As its name implies, a multi-sig wallet is one that needs multiple signatures to approve a transaction. Think of it as a contractual agreement that wouldn’t be complete unless a certain number of people have appended their signatures.

To better understand how multi-sig wallets work, it is important to understand the types of accounts present on blockchains, which are:

• Externally owned accounts (EOAs)
• Contract accounts

If you have ever owned a crypto wallet, at least one with an Ethereum address, then you most likely had an Externally owned Account (EOA). EOAs consist of a single private key, which implies that anyone in possession of the private key can single-handedly make decisions on the assets in that account.

Like EOAs, smart contract accounts (or contract accounts for short) can accept funds from anywhere and make transactions; you can hardly tell their differences by merely looking at their public addresses. However, contract accounts aren’t controlled by a single private key; they have a more complex logic, which is determined by the content of the smart contract on the blockchain.

In its basic definition, a contract is an agreement between two or more parties; hence, before transactions can be fulfilled on a contract account, the preset conditions in the contractual agreement must be fulfilled.

A multisig wallet is a type of contract account that requires multiple parties to sign a transaction before it is executed. Hence, we can say that the logic behind a multi-sig wallet’s operation involves a contractual agreement that requires a predefined number of wallet co-owners to sign a transaction before it can be executed. For example, in a multi-sig wallet with 10 co-owners, which has a smart contract agreement to execute transactions when 70% of the signatures are reached, we can easily tell that when 7 co-owners sign the transaction, then it will be executed.

The main purpose of multi-sig wallets was to create security, as EOAs had a single point of failure; once the sole private key is compromised, the assets are as good as gone. However, a single key being compromised in a multi-sig wallet changes nothing, as the attacker cannot execute any transaction.

Asset Management in a DAO

To maintain distinction from traditional organizations, A Decentralized Autonomous Organization must be decentralized in all aspects; hence, unlike traditional organizations where a CEO or CFO can singlehandedly access the organization’s treasury, access to assets in a DAO must be decentralized.

Hence, you, as a DAO member, have a responsibility to understand your organization’s dynamics before you join and commit funds. It is important to ensure that the funds in the DAO aren’t controlled and managed by the developer or some other organization’s pioneer. Instead, a smart contract for asset management must clearly state the terms and agreement for spending DAO assets; this will help maintain mutual trust in the organization since no one has ultimate influence over assets.

At the very least, a DAO’s treasury should have multiple key holders, such as a multisig or some other smart contract, as explained above. Furthermore, a DAO can add an extra layer of security by ensuring that all transactions are approved by another organizational entity that audits the transaction before signing off (as with Decentraland DAO).

DAO vs. Multisig

From the above explanations, we can conclude that DAOs and Multi-sig wallets are similar in terms of account type since they both require smart contract agreements to access the treasury; however, most times, DAO treasury logic is more complex than multisig wallets.

The SubDAO protocol allows the creation of DAOs with a unique smart contract that allocates on-chain voting rights to managers. All DAO members can participate in off-chain voting to delegate managers who can initiate and vote in proposals (on-chain).

For example, intending managers can make a manifesto on why they should be considered for decision-making on the DAO’s Discord server, allowing the members to choose the managers that will best suit their interests. After the members have elected their preferred managers, the DAO creator will add them to the smart contract by signing an on-chain transaction.

Afterward, the elected DAO managers can initiate and vote on proposals (on-chain) to determine how to manage assets in the DAO’s treasury in a democratic system. Like a multi-sig wallet, where executing a transaction requires a preset minimum number of co-owners, the SubDAO protocol utilizes a democratic system where the managers can agree or disagree with a proposal. If more managers agree to the proposal, then it will pass; if not, the proposal will fail.

Finally,

When creating or joining a DAO, it is important to carefully examine all parameters and contracts involved in treasury management and decision-making.

The good news? SubDAO facilitates decentralized decision-making, eliminating a single point of failure and allowing multiple elected managers to manage assets in a DAO treasury. That way, DAO decentralization remains uncompromised.

About SubDAO

SubDAO is a DAO infrastructure that helps manage digital assets through middleware, multi-sig, and other decentralized features. SubDAO has completed multi-million dollar financing from dozens of institutions, including Messari founder Ryan Selkis, Hypersphere Ventures, OKX Ventures, Huobi Ventures, CMS Holdings, Divergence Ventures, FBG, Signum Capital, NGC Ventures, Kenetic Capital, Gate.io Labs, etc.

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