Web3 has generated a lot of excitement in the industry, as evidenced by the nearly $50 billion market capitalization that Web3 tokens have grown in recent years. Web3’s very philosophy is one of its most appealing features. It is an ecosystem without barriers or intermediaries, welcoming to everyone from anywhere and open at all times.
However, there is a huge problem: there is no infrastructure within decentralized finance (DeFi) robust enough to execute these large orders in a fully decentralized way, as the use of centralized exchanges contradicts the nature decentralized autonomous organization, or DAO. Let’s explore the relationship between DAOs and decentralized exchanges (DEXs) and how a specialized DEX could benefit DAOs now and in the future.
For the benefit of the pod
While the promise of Web3 has attracted traders of all income levels to the space, large traders, or whales, have become one of the most influential types of crypto traders.
Traditionally, whales fall into one of two categories: large individual traders or entities. Recently, DAOs have emerged as a new form of whaler. Operating in a fully democratic fashion, these organizations carried out large orders to generate forms of passive income for DAO members.
But there is a huge problem: there is no infrastructure within DeFi robust enough to execute these large orders in a fully decentralized way. Of course, they can use centralized exchanges and pay exorbitant fees, but the use of such centralized platforms contradicts the decentralized nature of the DAO.
DAOs need bespoke decentralized exchanges that can execute large orders in a secure, cost-effective, and decentralized manner. Let’s explore the relationship between DAOs and DEXs, and how a specialized DEX could benefit DAOs now and in the future.
Related: How do you do DAO? Can DAOs scale and other burning questions
The change of CAD
Decentralized autonomous organization is no longer just a theoretical concept, it is becoming commonplace. And, as with everything in the blockchain space, they are evolving. DAOs and their use cases have continued to reach new iterations since their inception. The first DAO, confusingly named The DAO, started in April 2016 as a crowdfunding campaign and became one of the largest in history, raising over $150 million in funding. ‘Ether (ETH).
Since then, organizations have evolved in everything from membership requirements and leadership structures to how they generate value for their members. While early DAOs were simple sources of crowdfunding, some have since launched non-fungible token (NFT) projects or made major mainstream inroads, such as attempting to purchase the first printed edition of the Constitution or sports teams using NFTs in various ways. Others have adopted a more traditional business model, offering revenue shares to members in exchange for DAO tokens.
Increasingly, the whale trade is one of the lesser-known ways in which DAOs operate. These whales are defined as large traders who can move the market with a single trade. These are often organizations or funds that hold large amounts of crypto, which makes them extremely influential in the space. And, as we have seen with traditional whales, they often trade with other large traders, or counterparties, to generate income.
DEXs can be crucial in providing the necessary infrastructure for DAOs to thrive among their streams of traffic and newly acquired assets. Assets should be kept safe and out of centralized entities, and only DEXs can provide the connection.
As DAOs continue to emerge for the new breed of whaler, they will depend on DEXs that can facilitate large orders in a safe and cost-effective way. While most large-order DeFi traders accept negative factors such as impermanent loss and exorbitant fees, DAOs and their whale trading counterparts would benefit massively from custom-built DEXs that implement tools like average price time-weighted (TWAP) to fulfill large orders with zero price impact – fully on-chain.
DAOs, operating as whalers, can significantly influence the future of DeFi. Without a DEX to serve their needs, however, DAOs may never realize their full potential and continue to suffer from the current DeFi limitations plaguing all whalers.
Beware: whales are more common than they appear
Whales have become a class of traders that can include individuals, organizations, or even DAOs. In fact, the DAOs have quickly become major players in the whale trade game. It is now clear that whales have grown from solitary traders to huge groups of industry changers.
Why are DAOs so good at the whale trade? On the one hand, they are very mission-oriented. Unlike traditional marketers driven by a quick profit, DAOs are driven by their organizational goals. This gives them a longer term perspective and makes them more willing to take on risky trades that could turn out to be very profitable.
Additionally, DAOs are often better funded than individual traders. They can pool their resources and use them to buy large amounts of tokens when they feel the price is low. This allows them to earn significant profits when the price eventually rises.
DAOs are also generally more transparent than traditional business organizations. They often openly publish their trading strategies and results, building trust among their members and allowing others to learn from their successes and failures.
All of these factors have made DAOs extremely successful in the whale trade – this is just the beginning for Whale DAOs. The question is: how are they going to do it? The solution is simple: a decentralized exchange designed specifically for DAOs to execute their important transactions in a secure, profitable and decentralized way.
Related: What is the role of a decentralized autonomous organization in Web3?
As crypto trading becomes mainstream, more retail investors are getting involved in the space, and whales shifting from traditional traders to DAOs will become inevitable. Rather than taking on the big traders alone, they turn to the DAOs to negotiate on their behalf through governance votes. This migration is not without challenges, however, as current infrastructures are not conducive to DAOs. For DAOs to thrive, DeFi platforms need to start catering to their unique needs.
DAOs offer a number of advantages to investors such as retail crypto traders having an inherent incompatibility with traditional centralized financial systems. This mistrust only increases when it comes to large institutions. DAOs level the playing field by bringing together great institutional benefits without the centralized aspect of pooling member resources and coming together as a community.
The biggest challenge currently facing DAOs is the lack of infrastructure to support their growth. The most egregious example of this is that ConstitutionDAO must wire all money to an individual’s bank account in order to make payment to Sotheby’s.
Such limitations make it difficult to scale DAOs, and platforms need to grow to meet the growing needs of the DeFi space and DAO infrastructure. There is a slim chance that as DAOs find their niche, they will become a major player in the Web3 world. This, in turn, will help bring more liquidity and capital into the space. Let’s start this great migration to Web3.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.
The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of TNZT.
0xBackbone is the pseudonymous co-founder of Integral, the world’s first DeFi primitive for large orders. Dorsal’s experience as a hedge fund manager has positioned him well to help drive the migration from TradFi to DeFi. Dorsal has extensive experience as a business development manager within DeFi. In addition to his work at Integral, Dorsal has a particular interest in market design, liquidity, DAOs and coordination.