Working of DAO in AMM

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DAO

A Decentralized Autonomous Organization (DAO) is a new form of legal structure with no central governing body and whose members share a common goal of acting in the company's best interests. Popularized by cryptocurrency enthusiasts and blockchain technology, DAOs are used to make decisions with a bottom-up management approach.

How DAO Work

DAOs rely heavily on smart contracts. These logically coded contracts make decisions based on fundamental activities on the blockchain. For example, based on the outcome of decisions, a specific code could be implemented to increase the circulating supply, burn a selected amount of reserve tokens, or issue a selected reward to existing token holders.
The DAO voting process will be published on the blockchain. Users often have to choose from mutually exclusive options. Voting power is often divided among users based on the number of tokens they own. For example, a user who owns 100 tokens in the DAO has twice as many votes as a user who owns 50 tokens. The theory behind this practice is that users who invest more money in DAOs are encouraged to act with integrity. Imagine a user who owns 25% of the total voting rights. This user can be malicious. However, by doing something wrong, the user is risking the value of her 25% interest.

Automated Market Maker

An automated market maker (AMM) is a tool for providing liquidity in decentralized finance (DeFi). They are used to enable the automated trading of digital assets. They do so by using liquidity pools instead of the traditional buyer and seller markets. AMM can be thought of as a program that helps a trader switch between her two assets at fair market prices. Before AMM, a user had to use an order book to trade. Traditional exchange platforms allowed people to offer different prices for buying and selling assets. 

How AMM Works

AMM is a DeFi technology that allows users to trade anytime. This system rejects traditional trading systems. Usually, an individual does not have to create an account in this system with no gatekeeper. AMM is designed to provide liquidity for DeFi. Moreover, liquidity is the ability to convert one asset into another without changing the market price.

Role of AMM In DAO

DAO is a natural evolution of DeFi applications. They have revolutionized governance through a community-driven voting mechanism involving native token holders. This autonomy model makes these DAOs truly autonomous, granting native token holders full rights over the decision-making process, ensuring their fair share of distribution fees, and allowing new investors to invest in these networks. The overall offer to participate is further strengthened.
 

Often perceived as complex, DAOs differ slightly from each other in terms of the crypto-assets they process. But they embody the core principles of blockchain technology to provide access to assets and autonomous financial instruments. 
 

Only about 2.5% of the total cryptocurrency market capitalization is contributed by DAO-related projects, which is expected to increase significantly in the future. An exchange to attract investors and liquidity to be used to further develop the crypto ecosystem.
 

Additionally, these token holders are rewarded with a percentage of trading volume on the exchange. It encourages the creation of a more stable token user base with a long-term investment mindset. This reward mechanism distinguishes these tokens from tokens initiated by other non-DAO projects. It ultimately leads to more capital shifts to DAO-led projects.

DAOifying Uniswap AMM Pools

Over the past two years, Uniswap has grown to become one of the most popular decentralized exchanges on Ethereum. Now that simple instantiation has proven itself in the market, working like Balancer and Curve Finance indicates a desire to iterate on this design for more specialized use cases.

Uniswap DAO

Liquidity share token holders can use governance to parameterize and customize their “Uniswap instances” to best serve their users.
So what areas of governance can we vote on? There are two main things that benefit from Uniswap's customizability-automated market-making curve functionality and pricing model.

AMM Curve

Presently, Uniswap utilizes a standard x*y=k curve for all pairs. However, there have been a series of studies suggesting that this may not be the ideal curve. Especially for more specialized pairs like stablecoin-to-stablecoin, where projects such as Curve Finance's Stableswap and Maker's Stablematic are optimized. Meanwhile, other projects like Future Swap are working to fix the curve and enable a more leverage-like trading experience.

Pricing Model

It has been mathematically proven that holding shares in a liquidity pool is always less profitable without fees than holding the underlying asset. In the future, Uniswap's fee model could be any function of these variables, starting with fixed fee = 0.003 * trade size.

Uniswap Network

Uniswap network is a model in which multiple Uniswap DAOs can compete with each other. This model can have multiple liquidity pools for a single trading pair rather than a single liquidity pool per trading pair.

Dividing Liquidity

There are two possible mitigations for dividing liquidity. The first is to split your trades into several liquidity pools. When trading, the user rarely interacts directly with a particular liquidity pool, he uses the Uniswap network's aggregator services (such as Kyber) that route order requests to the optimal liquidity pool. Doing so can automatically split orders into multiple smaller orders and distribute different parts to different pools, often resulting in less slippage than running against a single curve.
 

The second mitigation utilizes surfaces whose curves are parameterizable. It is now possible to create curves with low slippage even with low fluidity.