Web3 has brought a lot of excitement to the industry, as evidenced by the nearly $50 billion market cap of the Web3 token in recent years. The spirit of Web3 is one of its most attractive features. It’s an ecosystem without barriers or intermediaries that welcomes anyone from anywhere and is always open.
However, there is a huge problem: there is not a strong enough infrastructure in Decentralized Finance (DeFi) to execute these large orders in a fully decentralized manner, because the use of centralized exchanges is not the same as that of Decentralized Autonomous Organizations or DAOs. The decentralised nature is paradoxical. Let’s unpack the relationship between DAOs and decentralized exchanges (DEXs), and how specialized DEXs can benefit DAOs now and in the future.
Benefit the pod
While the prospect of Web3 has attracted traders of all income levels into the space, large traders or whales have developed into one of the most influential types of crypto traders.
Whales traditionally fall into one of two categories: large individual traders or entities. Recently, DAOs have become a new form of whale traders. These organizations operate completely democratically and have been executing large order transactions to generate passive income in the form of DAO members.
However, there is a big problem: there is not a strong enough infrastructure in DeFi to execute these large orders in a fully decentralized manner. Sure, they could use a centralized exchange and pay exorbitant fees, but using such a centralized platform contradicts the decentralized nature of a DAO.
DAOs require customized decentralized exchanges that can execute block order transactions in a secure, cost-effective, and decentralized manner. Let’s unpack the relationship between DAOs and DEXs, and how specialized DEXs can benefit DAOs now and in the future.
Related: How do you DAO? Can DAOs scale and other pressing issues
The ever-changing DAO
Decentralized autonomous organizations are no longer just a theoretical concept – it is becoming commonplace. And, like anything in the blockchain space, they are constantly evolving. Since its inception, DAOs and their use cases have continued to reach new iterations. The first DAO, confusingly named The DAO, was revealed in April 2016 as a crowdfunding campaign and became one of the largest in history, raising over $150 million in Ether (ETH).
Since then, these organizations have changed in every area, from member requirements and leadership structures to the way they create value for their members. While early DAOs were simple sources of crowdfunding, some have launched non-fungible token (NFT) projects or entered the mainstream in a big way, such as trying to buy the first print of the constitution or sports teams using NFTs in various ways. Others have adopted a more traditional business model, offering members a revenue share in exchange for DAO tokens.
Whale trading is increasingly 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. They are usually organizations or funds that hold large amounts of cryptocurrencies, 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 revenue.
DEXs are critical to providing the necessary infrastructure for DAOs to thrive in their newly acquired traffic and asset streams. Assets need to be kept safe and away from centralized entities, and only DEXs can provide connectivity.
As DAOs of new types of whale traders continue to emerge, they will rely on DEXs that can facilitate large orders in a safe and cost-effective manner. While most large order DeFi traders acquiesce to negatives such as impermanent losses and high fees, DAOs and their whale counterparties will benefit significantly from custom DEXs that implement tools such as time-weighted average price (TWAP) to execute large orders. Zero price impact on orders – fully on-chain.
DAOs operating as whale traders can significantly influence the development of DeFi. However, without DEXs to meet their needs, DAOs may never reach their full potential and continue to suffer from the DeFi limitations that currently plague all whale traders.
Warning: Whales are more common than they appear
Whales have become a class of traders that can include individuals, organizations and even DAOs. In fact, DAOs have quickly become a major player in the whale trade game. It is now clear that whales have evolved from solitary traders to huge groups of industry game changers.
Why are DAOs so good at whale trading? On the one hand, they are very task-oriented. Unlike traditional traders who are driven by quick profits, DAOs are driven by their organizational goals. This gives them a longer-term perspective and makes them more willing to take high-risk trades that can be very lucrative.
Also, DAOs often get better funding than individual traders. When they think the price is low, they can pool their resources and use them to buy a lot of tokens. This allows them to make a decent profit when prices eventually rise.
DAOs are also generally more transparent than traditional trader organizations. They often publish their trading strategies and results publicly, 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 whale trading – and this is just the beginning for whale DAOs. The question is: how are they going to do this? The solution is simple: a decentralized exchange built specifically for DAOs to execute their large transactions in a secure, cost-effective and decentralized manner.
Related: What is the role of Decentralized Autonomous Organizations in Web3?
As crypto trading becomes mainstream and more and more retail investors begin to dabble in the space, whales transitioning from traditional traders to DAOs will be inevitable. Instead of facing large traders alone, they turn to DAOs to transact on their behalf through governance voting. However, this migration is not without its challenges, as the current infrastructure is not conducive to DAOs. In order for DAOs to thrive, DeFi platforms must begin to meet their unique needs.
DAOs offer investors many advantages, such as retail crypto traders that are inherently incompatible with traditional centralized financial systems. This distrust is only amplified when dealing with large institutions. The DAO levels the playing field by pooling the resources of its members and coming together as a community to cobble together a multitude of institutional interests without a centralized aspect.
The biggest challenge that DAOs currently face is the lack of infrastructure to support their development. In the most obvious example, ConstitutionDAO had to wire all funds into one person’s bank account in order to pay Sotheby’s.
These limitations make it difficult for DAOs to scale, and platforms must evolve to meet the growing demands of the DeFi space and DAO infrastructure. As DAOs find their niche, they are likely to become major players in the Web3 world. This, in turn, will help bring more liquidity and capital to the field. Let’s start the migration to Web3.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk and readers should do their own research when making a decision.
The views, thoughts and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
0xDorsal is the pseudonymous co-founder of Integral, the world’s first large-order DeFi primitive. Dorsal’s background as a hedge fund manager puts him in a good position to help drive the migration from TradFi to DeFi. Dorsal has extensive experience as a business development lead for DeFi. In addition to his work at Integral, Dorsal has a particular interest in market design, liquidity, DAOs and coordination.