Thanks to Rafa and Gerardo for helping write this.

Today, I’d like to discuss a pressing issue in the web3 domain — what I’ve coined as “the middle smart contract problem.” While the name might be of my own creation, it refers to smart contracts that act as intermediaries, bridging other smart contracts or forming a component — big or small — of a Dapp.

Introduction and Fundamental Assumptions:

It’s undeniable that economics propels our world forward. But what transpires when we invest time and resources into creating something and don’t derive any economic benefit in return? Some might argue that many developers work altruistically for the greater good. However, there’s a downside: the potential stagnation in development, which impacts the entire system. Sometimes, these intermediary smart contracts could even evolve into standalone companies specializing in this niche function.

The Unspoken Consensus:

There exists a silent consensus surrounding the inception of smart contracts. Certain functions don’t levy fees, possibly because on-chain actions inherently involve gas costs, covering essential operations like transfers, voting, and signatures. However, as time has progressed, actions like swapping, lending, borrowing, minting, buying, and selling have evolved, they are one of the ways to take fees of using the protocol.

While this model might make sense in the web2 universe, where products often have a subscription-based or one-time purchase pricing structure, it seems misaligned with the web3 paradigm. Several reasons could account for this disconnect, one being the legal intricacies differentiating securities from assets, or equating governance power with actual monetary value. But I’ll delve deeper into that in a potential future article.

Defining the Middle Smart Contract:

These contracts can manifest in various forms, such as governance contracts. For instance, Uniswap’s governance doesn’t charge fees for voting but uses it to give utility to their tokens, with revenue primarily from app-associated fees. However, the real discussion is about “Controller” or “Router” contracts. These don’t handle fees but connect different smart contracts within DApps, working in the project’s best interest. Their lack of direct economic incentive makes development challenging, akin to a missing puzzle piece.

Multisig wallets are another example. They don’t generate revenue but safeguard assets by requiring multiple approvals for transactions, indirectly saving potential financial losses. The decentralized world’s evolving economic models necessitate sustainable incentives for these middle contracts. Solutions include protocol funding, community grants, token incentives, and open-source collaboration.

In essence, while middle contracts face economic challenges in Web3, the community seeks innovative solutions, emphasizing their value for a secure decentralized ecosystem

Solutions and Ideas:

We’ve identified challenges in the Web3 space, particularly concerning middle contracts. By delving deeper, we aim to understand the nature of these challenges and their implications. To address these issues, I present several solutions that could shape a brighter future for decentralized applications:

• Archway Blockchain: Archway, an integral part of the Cosmos ecosystem, is a Layer 1 blockchain crafted using the Cosmos SDK. It leverages the Inter Blockchain Communication Protocol (IBC) to ensure smooth interactions with other applications within the Cosmos Ecosystem. Archway streamlines development by integrating technologies like CosmWasm, Wasm, and Rust, accommodating a range of high-level programming languages. What sets Archway apart are its rewards and tracking modules, which empower developers to monetize their dapps from inception. This strategy fosters rapid innovation and paves the way for novel business models. With robust security features in place, Archway strikes a balance between scalability and risk management. Archway presents a revolutionary solution poised to reduce fees and provide the much-needed “fuel” to address the middle contract challenges.

• L2 for Governance: This concept, inspired by Rafa, had been lingering in my thoughts, awaiting articulation. The idea revolves around implementing a Layer 2 (L2) rollup on top of Ethereum, which could be either ZK or optimistic. Gas fees would be shared between the smart contract creator and the validators. By leveraging platforms like Eigenlayer, all governance tools and mechanisms could reside on this layer. This would catalyze the development of advanced governance systems, encompassing features like CRM, treasury management, voting mechanisms, proposal drafting, and stakeholder communication. Furthermore, this solution could potentially address the dual governance challenge and other related issues. The protocol would interface with a messaging bridge, linking the coin balance in your wallet to decisions made in the L2. These decisions would then be relayed to the governance protocol in Layer 1 (L1). However, a notable challenge is the inherent complexity of bridges, especially messaging ones. Additionally, Dapps would need to modify their existing governance code to accommodate this new structure.

• Microtransaction Fees on Basic Functions: Introducing microtransaction fees for fundamental operations could be another avenue to explore. Actions like transfers, deposits, voting, and others could incur minimal charges. This approach could generate a steady revenue stream, ensuring the sustainability of the platform while keeping costs low for users.

Looking Ahead:

The middle smart contract dilemma is just one of the many challenges the Web3 space will face. However, it serves as a testament to the community’s resilience and innovative spirit. As we forge ahead, solutions like the ones proposed will not only address current challenges but also lay the foundation for a more robust, sustainable, and decentralized future.

In conclusion, while the road ahead is filled with challenges, it’s also brimming with opportunities. It’s up to us, the pioneers of the Web3 domain, to seize these opportunities, address challenges head-on, and shape a future where decentralization isn’t just a buzzword, but a tangible reality.

Meanwhile for more information you can find it on our:

• Website

• Twitter

• Docs

• Discord

If you are interested in collaborating with us, please reach out at → hello@chelo.fi

Co-authored by the Chelo Team: Ohad Bachner, Ophir Cohen, Rafael Contreras and Jose Valdovinos.

If you have an interest in the world of blockchain and cryptocurrency, you have probably heard of decentralized autonomous organizations (DAOs). DAOs are digital organizations run by smart contracts on the blockchain, where decisions are made by voting and members can participate without any central authority.

While DAOs have many benefits, they can also be slow and inefficient when it comes to decision-making.

We identified 3 main issues that arise as DAO grow:

• Rigidity : the initial set of rules becomes a straight jacket to the further development of the DAO

• Non-scalability : As membership of DAOs increase, the iron rule of oligarchy [source] arises (where “larger and more productive groups switch to hierarchy* where a few [ed: whales] individuals possess most of the political power, resources and influence*”)

• Security: Usually treasury management is done with a shared wallet or Gnosis safe, which may seem like a convenient option for delegating funds to a group of developers within an organization. However, it can present several problems.

These 3 issues lead to multiple damaging consequences:

• Membership lack of engagement (as some members lack incentives to vote in some proposals that are not directly related to their own goals / experiences)

• Lack of individual accountability and transparency, as it becomes challenging to trace the flow of funds and pinpoint responsibility in case of any discrepancies.

• Any security breach or vulnerability in the shared wallet or Gnosis safe can lead to the entire pool of funds being compromised, putting the organization at significant financial risk.

• Managing the access and permissions for each developer can be challenging and time-consuming, especially when changes need to be made.

• Not operating as a DAO and more like a console with a side company that develops and controls most of it.

• Treasury idleness (as a direct result of the inaction caused by the lack of engagement)

Therefore, finding a secure way to delegate funds to groups within the organization while maintaining individual accountability and transparency is crucial to mitigate these problems.

When Chelo was founded we wrote:

The DAO abilities are locked*.*

Our mission is to solve the community lack of involvement problem*.*

The Chelo Team is very bullish on DAOs — we believe they will ultimately overcome the ‘iron rule’ of oligarchy descending by addressing head on the scalar stress, and we are working towards providing the technical and legal tools for that.

Our technical approach involves the use of Mini DAOs to create specialized internal subgroups within a DAO to perform specialist roles (e.g. treasury management). However, we noticed the current set of tools available did not allow us to fully exploit the advantages of modularizing the technology:

That’s where Mini DAO v2 comes in.

Introduction to Mini DAO v2

As we wrote in Chelo: the tech guide (1) a “Mini DAO is a sub DAO of the main DAO”. For the initial concept we successfully used the existing Aragon stack, but over time we realized that many of our desired functions were missing. Considering alternatives, we also decided to move beyond the use of SAFE multisig tech stack as it also lacked some of the flexibility we required.

Every DAO (from DeFi, DeSci to Gaming Guild and more) has their own intrinsic needs and better framework, and which can change over time. We must recognize that the “one size fits all” method of static governance for all sectors is no longer sufficient, and we need to explore the full spectrum of possibilities.

To achieve our goal, we need to create a modular governance structure. This is why we are building a modular DAO stack.

We decided to develop and implement a new protocol that will incorporate all the desired functions: Mini DAO v2.

Mini DAO v2 is a series of smart contracts that allows DAOs to create and customize their own mini DAOs. These mini DAOs are designed to provide better decision-making mechanisms for DAOs, allowing them to make decisions faster and more efficiently. With Mini DAO v2, users can customize their mini DAO according to their specific needs and preferences, giving them the flexibility to create a unique and powerful decision-making system.

As a modular stack for DAOs we can connect to any framework out there:

• Modules for custom made governance — such as a compound governance fork, Aragon or DaoHouse

• Time-limited modules that allow the division of tasks for a limited period of time.

• To enhance the security of the DAO, we can establish a secure method for delegating funds to specific groups within the organization, without setting up a communal wallet or safe. This approach allows the primary DAO to maintain control of the funds and revoke access to mini DAO pools at any time.

Benefits of Mini DAOs

The decision-making process in a traditional DAO can take too much time.

Additionally, decisions with transactions attached need to be fully reviewed because it exposes the treasury wallet.

Mini DAOs can help solve these problems by splitting the treasury into smaller units that are fully controlled by the main organization. This way, members can delegate specific actions and treasury without having to trust that anonymous members won’t create harmful proposals.

Currently, DAO structures limit decision-making to a single level. Proposals must be published on the main interface and approved by a partial majority (quorum, support, and voting power) set at the time of DAO creation. This creates two problems: it leaves no room for management changes, and it treats every vote equally, even in cases where voting power should be allocated based on areas of expertise.

With Mini DAO v2, existing DAOs can create mini DAOs that are specialized for specific areas of expertise without changing the original roles. This evolution allows us to move beyond a binary proposal world to a more sophisticated organization.

When a proposal is created, it is verified that its transactions are approved by the allowers. This validation occurs during the creation transaction to prevent any malicious or unauthorized transactions from being included in the proposal. Once validated, members can then vote for or against the proposal.

The main dao can specify exactly what the mini dao is permitted or prohibited from doing in a highly specific manner.

Creating a Modular Mini DAO

A Mini DAO can be proposed on any DAO framework (Compound, Aragon, Gnosis, etc) with no friction. To create a Mini DAO, we need to specify several settings during the creation process, such as the name, lifetime, voting period, quorum, and proposal threshold. We can also choose to deploy our own token or use the factory’s token.

Making a Proposal

To make a proposal, we need to call the “propose” function on the Core contract of the Mini DAO. The proposal must contain valid transactions that are accepted by at least one allower. It’s important to note that a main DAO proposal should also be made. Additionally, we can attach a URL or description to the proposal.

Voting

To vote for a proposal, we need to call the “castVote” function on the Core contract of the Mini DAO. The three available support states are: Against, For, and Abstain.

Allowers

An Allower is a smart contract that restricts the actions a Mini Dao can take. An example is the transfer of funds, if a Mini Dao wants to transfer funds to a wallet, this has to be allowed by the Allower. And the allower is controlled by the owner of the Mini Dao (the main DAO or a normal user).

Allowers play a vital role in deciding which proposals are passed. They receive a transaction object and determine whether it should be added to the proposal queue of the Mini DAO. Anyone can create their own Allowers, provided that they comply with the interface.

By creating a modular Mini DAO, we can customize it according to our needs, making the decision-making process more efficient and effective.

Key Features of Mini DAO v2

Mini DAO v2 offers a variety of key features that make it a powerful tool for DAOs, including:

• Master key: DAO and Mini DAO owners can withdraw funds at any time. The wallet that owns a Mini DAO can also fully customize its behavior and restrictions. Our components are modular and can be changed to allow more members to configure features.

• Lifetime: Each Mini DAO has an optional “lifetime limit”. This limit determines if the members can create more proposals or not. The owner can also withdraw all the funds from this Mini DAO after its limit has been reached.

• Revokecall: the main DAO can call any time by voting to send mini DAO treasury back to the main DAO if the mini DAO didn’t achieve his KPI.

• Compatible with various Token standards: Common ERC20 tokens, NFTs (ERC721), and soulbound tokens can be used on the Mini DAO. Not only can these tokens be deposited, but they can also be used as voting tokens. Our voting token is standard for voting and is modular and can be changed/modified by our users.

• Reputation bag: Mini DAOs’ voting tokens are compatible with various ERC20 standards. The membership of these organizations can be used by reputation protocols. The owner of the Mini DAO or the Mini DAO itself can issue new tokens and add members.

• Connecting to other Chelo tools: Mini DAOs are specifically designed to be able to use any protocol as a modular controlled/restricted account. Mini DAOs are compatible with all existing and future Chelo tools, such as the Chelo’s lending protocol.

Use Cases

Mini DAO v2 is a unique and flexible solution that can be tailored to specific needs, making it useful in a variety of use cases.

As an example of how Mini DAOs can be used, let’s consider a payment system for DAOs. If we need to make payments to a group of employees or developers, we can do so using Mini DAOs. This is especially helpful when dealing with DAOs that have many members, as actions can be slow. By delegating payment responsibilities to a few active members and configuring their actions, we can streamline the process.

Here are a few other examples:

Splitting into professional working groups:

If you are part of a rapidly growing organization, you may want to split into different working groups to better manage projects. With Mini DAO v2, you can easily deploy a Mini DAO with your own settings and still remain in control by the main DAO.

Releasing unused liquidity:

Many DAOs have liquid treasury that remains unused due to a lack of governance and understanding by community members. However, some DAO members may understand external services, such as on-chain hedge funds. With Mini DAO v2, you can create a Mini DAO that will not risk the entire fund but still can yield some of the treasury, opening a new space for the DAO treasury trading ecosystem.

Limited Company:

DAOs can be used to form a Limited Company, which can provide unique benefits to the members. Members can use the Mini DAO to make decisions about budgets and team appointments. This frees the main DAO to serve as a management platform.

Meanwhile for more information you can find it on our:

• Website

• Twitter

• Docs

• Discord

• If you are interested in collaborating with us, please reach out at → hello@chelo.fi

Now, we are happy to go public.

The DAO abilities are locked.

Our mission is to solve the community lack of involvement problem. The power we (as a community) have voting is not enough: Communities also need to share all the resources (financial, values, intellectual) we have.

DAOs are the new companies, and no company offers only a paycheck to their employees.

With Web3, we have the power to create plug-and-play solutions for any DAO to provide additional services for the benefit to their members while engaging them to give back their time.

In other words, we develop ready-to-deploy tools that help DAOs attract, retain, and support their community.

The idea is to use the web3 power as Lego bricks that you can connect and disconnect, offering different tools to enhance your DAO.

As typical for academic people, we like to look at the numbers, and right to this date, there are 8.3b TVL in DAOs treasury, and from this, 2.5b on uniswap. We are asking: How are the end-user objectives met ? Are we using the power of DAO correctly, or is it another Ponzi scheme? Will those who build it take everything, leaving the holders with nothing ?

We believe that is not the truth. We want to empower the users to enhance the DAO abilities with our tools.

Two tools and more on the way-

We will give here a (very) short taster of how it will work and, in the following weeks, will publish more technical articles on each tool we build.

COLLATERALIZED LOANS -

WE built a collateralized loans protocol that can offer the community members with a better borrowing interest and deeper liquidity by allowing the option to use illiquid collateral like NFTs, voting tokens, and more…

UNCOLLATERALIZED LOANS -

These loans are trust-based and thus targeted to the most active and influential members.

However, uncollateralized lending is a challenge, as written by Vitalik in his paper ‘Decentralized Society’ (published exactly while we were working on uncollateralized lending in our HackMoney 2022 project):

“Perhaps the largest financial value built directly on reputation is credit and uncollateralized lending. Currently, the web3 ecosystem cannot replicate simple forms of uncollateralized lending*, because all assets are transferable and saleable — thus simply forms of collateral”*

To solve the problem,Vitalik proposes Soul Bounded Tokens, and hopes that

“ Whereas commercial lending is a “lend-it-and-forget-it” until repayment model, community lending might take a “lend-it-and-help-it” approach — combining working capital with human capital with greater rates of return.”

We fundamentally agree, and believe that we will also need additional measures of reputation on-chain, so if you are building any DID or reputation on-chain tool, we would like to work with you!

Looking Forward -

Our main goal right now is to work with more DAOs that want to use the tools that we are building to help us improve the ecosystem, so if you are up there, DM is open.

Let’s unleash the power of DAOs.

We will keep you posted on more technical articles that explain how we will achieve our goals.

Take a look at our previous hackathon participation:

• QuickLend DaoHacks 2022: Winner of Superfluid — Best application for DAO finance

• ChainScore HackMoney 2022: Superfluid Honorable Mention

Meanwhile for more information you can find it on our:

• Website

• Twitter

• Docs

• Discord

• Reaching out at → hello@chelo.fi