How a DAO is funding the Ukraine defence

When the Ukraine government announced on Twitter that it was accepting donations for its defence effort, it wasn’t just another milestone for crypto adoption but a watershed moment for a new form of decentralised governance.

Imagine a manner of organising people worldwide for a common purpose with predetermined rules established through the use of smart contracts and an autonomous decision-making procedure encoded on a blockchain. “Code is Constitution” for, decentralised autonomous organisations (DAOs), defined as entities represented by rules encoded as a computer program controlled by all members. With rules embedded into computer code, there is no need for hierarchy and bureaucracy.  

DAOs rapidly found their way into practical use and today is even found at the centre of an ongoing conflict. Like-minded people around the world are connected thanks to the use of the internet and blockchain to create a special-purpose financing that cannot be controlled or influenced by any central authority.

In this article, we explore the concept of DAOs in practice, using the case study of the Ukraine government’s UkraineDAO, launched in early 2022 to raise funds for its defence efforts. We’ll discuss: 

From the emergence of blockchain technology to its present-day utility, we have been caught in a whirlwind of innovative solutions. The foundational technology introduced a number of benefits such as improved security, a greater degree of transparency, decentralisation, immutability, speed, and user empowerment. But blockchain’s initial fame was rooted in its promise as an alternative solution to the traditional system of centralised finance.  

A different use case is now emerging in the shape of an alternative structure to organisations. Traditional organisations are defined by traits such as hierarchical structure and decision-making procedure controlled by one or a few people at the top as central authorities. The typical corporate scheme is rooted in all legal systems. 

The decentralised autonomous organisation (DAO) is challenging that norm.

DAOs stem from the concept of blockchain governance. In a broader sense, blockchain technology relies on the principles of decentralisation, auditability, immutability, and cryptography. Governance can be further divided into two modalities: off-chain and on-chain. 

While off-chain governance refers to decision-making procedures with indirectly encoded rules, on-chain governance can be described as a set of decision-making processes, voting powers, and rules being directly encoded into the blockchain.

Examining the aspect of on-chain governance, it can be added that blockchain technology first revived the formula ‘Code is Law’ from which the mere concept of DAOs emerged, giving a central position to smart contracts instead of a particular person or a group of board members. The subsequent phrase ‘Code is Constitution’ stems from the technical aspect of such decentralised organisations focusing more closely on the concept of on-chain governance. 

Therefore, a DAO can be described as an entity that has no central governing body and whose community members, namely token holders, share a common purpose. The decision-making procedure is featured by a bottoms-up approach since power is distributed across token holders. 

The technical side of DAOs relies broadly on the use of smart contracts that dictate the decision-making procedure encoded in the blockchain. Once a smart contract has been created and put into motion, its trait of self-execution dismisses the founder or founders of the organisation from the power equation and distributes voting rights across community members that acquired the DAO’s native token.

In simpler terms, smart contracts represent a form of encoded control over pre-determined business logic that substitutes humans with algorithmic agency.

DAOs rely on decentralisation, collaboration, internal control, and automation. By incorporating innovative technology enabling a simple structure for voting and adherence to rules, DAO makes a step forward in ensuring democracy and direct participation.

As a novel concept, academic resources and research on DAOs are of limited capacity, but their practical use has been proposed in a number of white papers encompassing cryptocurrency governance, DeFi community foundation, charity funds, venture capital funds, liquidity pools, and lending.

To understand why the Ukraine government went the route of a DAO, it helps to look at the manner in which DAOs might influence economics and society. This can be approached by discussing three significant segments of such organisations.

DAOs operate through the active participation of peer-to-peer (P2P) community members using direct voting processes founded on token incentives and transparency instead of hierarchical and bureaucratic procedures. This type of governance may be described as a combination of human and machine governance that uses a form of incentives typically associated with blockchain technology and Web3. 

DAO’s type of governance relies on the use of tokens. Each DAO has a native token. Tokens are used as a proof of rights or interests. The structure doesn’t differ a lot from proofs of rights in standard organisations. For example, holding equity in a traditional organisation can be translated as holding tokens in a DAO.

In simple terms, they both give you voting rights. Thus, the incentive mechanism determines the organisational form. The word “tokenomics” is used to describe the combination of tokens and economics, referring to an encrypted type of economy founded on the mechanism of acquiring tokens in the terms of monetary finance.  

The lack of hierarchy in a decentralised P2P environment transforms labour and working patterns since the system is based on voluntary work. On the other hand, the main benefits of DAOs are associated with cryptocurrency investments and a rewarding tokenomics structure. 

Encoded rules of DAOs produce new tasks and roles assumed by community members. The outcome is that labour equals working towards a common goal by the means of collective intelligence. The old system of top-down leadership vanishes with a DAO. 

While many aspects of traditional economics have survived the emergence of blockchain, game theory found its way into DAO’s approach as well. People become incentivised in such a manner that they always try to find a way to sub-optimise the system since they naturally prefer to ‘game’ the system for their own advantage.

When incentives and purposes are well designed, the gaming of the system would result in the organisation receiving the biggest gains. The idea underlying DAOs is that it assumes the principle that people would like to ‘game’ the system to their benefit is true. But it uses this principle to design the rules, purposes, and transactions that constitute its basic working function.

As mentioned earlier, there are many research gaps regarding DAOs since the concept is merely new. It can be stated that DAOs have a dual nature. On one hand, they are a tool kit for achieving common good and collective actions, and on the other hand, their self-regulating nature may be used for potential criminal activities. One of the current challenges for each DAO is to look after its own accountability. The bottom-up structure and voting system, along with the use of code, makes a leap forward in achieving democracy in legal entities.

UkraineDAO provides a real-time case study of the DAO, one that emerged in the midst of a war as a more efficient manner of fundraising in comparison to traditional systems. Russia’s “special operation” in Ukraine has prompted millions of dollars in donations worldwide with crypto taking centre stage as a more effective and faster alternative to standard crowdfunding platforms.

UkraineDAO was founded by NFT marketplace SuperRare curator Trippy Labs, Pussy Riot’s Nadya Tolokonnikova, and members of PleasrDAO. The organisation is collecting direct donations via means of crypto, along with auctioning NFTs of the Ukrainian flag. Raised funds go then directly to civilian organisations in Ukraine. Set up when it was clear that Russian incursion was imminent, UkraineDAO managed to act rapidly to gather up a community of helpers.

UkraineDAO states that the use of Web3 and community action is a more convenient and faster manner to monetary support Ukraine. Its community members work towards achieving these common purposes: 

Each DAO has values that all community members share. In the case of UkraineDAO, the founders and members made a list of common values such as genuine empathy, awareness, passion, transparency, and decentralisation. The organisation welcomes members that care deeply about the Ukraine issue and are prepared to passionately make the action productive. Since the inactivity of members has been mentioned as a possible drawback, the passion value serves to remind community members that in case of war-related fundraising, there is no time to make mistakes.

The values of decentralisation and transparency are especially interesting. In this case, the perk of decentralisation refers to bringing in members with a broad range of knowledge and expertise to support participation, and continually including the community in the decision-making process. Further, the value of transparency is evident from publications of progress and actions to provide open channels of communication with the community.

The organisation’s manifesto doesn’t give away much about the operation of the DAO and specific missions so here is where it might differ from the understanding of a DAO that provides full transparency in its activities.

The entire fundraising was done in cryptocurrency, with the team of founders using a multi-signature crypto wallet on the Ethereum blockchain to receive donations. A multi-signature wallet makes sure that nobody has any kind of power over the funds since multiple people have to sign off before releasing them. The distribution of funds worked fairly efficiently owing to community members with direct connections on the ground. While the DAO’s treasury remained online, the governance of that has been taken partially offline by creating a net of contributors and supporters. 

UkraineDAO doesn’t give away the system they are using, stating simply that the initiative of distributing is solid and credible. This is another aspect where self-verification hasn’t worked in practice.

What of the native token trait?

Although the multi-signature wallet accepts direct donations, the majority of funds came from auctions of a Ukraine flag NFT. Everyone who made a donation collectively acquired the NFT through the ownership of a certain amount of LOVE tokens. The amount of LOVE tokens owned was proportional to the donation and to the fraction of the NFT-related ownership.

The NFT was auctioned for 2173.6 ETH – blockchain explorers show that collected funds were distributed to 4 addresses:

There are other things we don’t know about the project such as how the community members decide on the recipients and amounts of donations. This is probably a major issue with UkraineDAO since a true DAO would come up with proposals that its community votes on to approve. UkraineDAO’s native LOVE tokens have been issued, but haven’t been used as governance tokens with voting rights. 

Since DAOs are characterised by a transparent and democratic decision-making procedure, it is unclear how the UkraineDAO community came to these decisions in a timely manner.

It might help to understand why UkraineDAO, in some aspects, did not operate as a typical DAO should. This seemed to be the case especially when it came to the transparency of decision-making and the engagement of the community to vote for proposals or determine eventual activities.

As is the case with any type of organisation, DAOs include particular limitations and drawbacks that should be taken into account.

The DAO’s main advantages such as bottom-up decision-making and voting procedures can lead to possible coordination inefficiencies.

For instance, the fact that every single decision needs to be voted on by all community members could make the entire process more time-consuming, specifically in relation to time-critical decisions and life-saving measures. With several thousand members, UkraineDAO going the true DAO route of collective voting might have resulted in long, drawn-out processes.

Another potential drawback includes community members becoming inactive in relation to the voting process. That could lead to a small number of members becoming actively involved in management issues, reversing the democratic bottom-up decision-making to a hidden top-down procedure. 

DAOs do have a solution for these, with inactive members allowed to delegate their votes to trusted members, though understandably, it might be difficult to identify such trusted members in UkraineDAO so soon.

Even in normal times, military activity and intelligence are highly classified information, shared within a small circle of trust – often even excluding people in power within an organisation.

UkraineDAO’s primary motive possibly means that almost all operational details are classified, preventing them from being shared with members in the public domain.

Even so, DAOs could vote on access levels, and use blockchain’s cryptography to protect and encrypt highly-sensitive information. It may be that UkraineDAO could provide enough experience and findings to guide future iterations of military-focused DAOs. 

While the concept of decentralisation implies that there shouldn’t be a central authority holding the reins, it also means that safeguards have not been put in place. Most jurisdictions haven’t dealt with the legal status of DAOs, along with the fact that a broad number of such organisations have not been registered.

To act fast, jurisdictions such as the US and Switzerland focused on embedding DAOs into existing regulations. Another problem caused by institutional voids is that novel forms of criminal organisations may emerge, relying on the structure of DAOs such as illicit markets, assassination markets, or blockchain-enabled political revolutions.

A stable Ukraine government might want to prevent a DAO from growing out of its monitoring reaches and control, and curb some of its decentralised features.

If fundraising were the main goal of a non-profit, then the UkraineDAO makes for an effective model. In only five days, UkraineDAO managed to raise $7 million in crypto donations from more than 3,000 people worldwide, with the electronic money trail of these clearly and unalterably recorded.

With regards to public fundraising, UkraineDAO is an example of good practice that demonstrated how members with a common purpose and shared values managed to quickly distribute funds. This new model of non-profits is attractive in a sector where existing models of humanitarian organisations and charities use hugely time-consuming and financially inefficient models. The use of crypto is also a key component of the DAO model, proving digital assets to be a more convenient and efficient means of transferring funds. Also of significance is the use of smart contracts to collect and distribute funds.

Whether or not charities and non-profits can simply switch to crypto will depend on just how far regulations and central bank limitations will prevent that.

But one issue to confront is that non-profits generally require a form of legal status in their operational jurisdictions to enjoy the benefits afforded, such as tax relief, perpetual existence, access to grants, and exemptions from restrictions placed on corporate entities.

The DAO, however, as an organisation, exists only in the virtual environment and doesn’t have legal status, bank accounts, managers, and office space. Such a structure bears no resemblance at all to a typical charity organisation. The lack of a central authority, bank account, and bottom-up leadership are standard characteristics each DAO shares, along with the use of blockchain and Web3 technology.

In any case, UkraineDAO is a success story in the practical application of the DAO.

The likelihood is that a broader adoption of blockchain technology will lead to a supranational economy where the concept of an incorporated legal entity will become inefficient and will face pressure from the main advantages of DAOs. Owing to its basic traits, DAOs have a good chance of becoming central to a diverse network of cross-border economies.

While traditional organisations require a lot of trust in people set in a corporate environment, with a DAO, you only need to trust a code that is publicly available. The UkraineDAO case study demonstrates blockchain as an important enabling technology in practice – public fundraising can be rapid and efficient when bringing together passionate people under a common cause.

The DAO concept will have kinks to fix, shortcomings to overcome, and even unforeseen problems to solve, and UkraineDAO may very well be the living case study to source further lessons.