Case Study Overview
Decentralized Autonomous Organizations employ blockchain technology to enable decentralized decision-making. Human coordination depends on two elements: trust and incentives. Blockchains strengthen trust through trustless mechanisms while enabling novel incentive structures via tokens. This examination compares Aave and Sky (formerly MakerDAO) as successful DeFi protocols.
Aave
Background
Aave launched in 2017 as ETHLend, rebranded in 2018, and released version 1 in January 2020. In October 2020, control transferred from Aave Limited to the Aave DAO. The protocol expanded beyond lending and borrowing to include flashloans and GHO, a decentralized stablecoin generating revenue directly to the DAO rather than lenders.
Governance
Voting Process
The protocol uses “Aavenomics,” a four-step process typically requiring five days for routine changes. Ideas begin in governance forums, proceed through informal Temp Check votes, then formal ARFC scrutiny before becoming onchain Aave Improvement Proposals (AIPs). Voting requires proposition power through AAVE tokens and must satisfy quorum and majority requirements.
Major Initiatives
Aave v3 enhanced protocol features including cross-chain liquidity and improved risk management. GHO offers a decentralized stablecoin alternative to USDC or USDT. The Aavenomics Overhaul proposed weekly token buybacks and Safety Module modifications replacing staked AAVE with slashable staked aTokens.
Aave ARC attempted institutional adoption through permissioned, KYC-compliant access but failed to gain traction, reaching only $6–8 million in TVL before collapsing in November 2022.
Segmentation
The DAO engages eight service providers across five categories:
- Risk: Chaos Labs & Llama Risk
- Finance: Karpatkey & Tokenlogic
- Security: Certora
- Development: BGD Labs & Aave Labs
- Growth: Aave Chan Initiative
Four policy frameworks organize governance: Risk Policies, Improvement Policies, Incentive Policies, and Market Policies. Contributors participate through delegates, delegators, or grant-funded working groups.
Sky
Background
Maker launched in 2017 with ETH collateral, expanded to multi-collateral in 2019, and decentralized in 2021. Sky now represents the most intricate DAO coordination model, targeting decentralized banking infrastructure.
Governance
Voting Process
Sky Improvement Proposals follow a monthly six-week cycle with formal submission, ratification polls lasting two weeks, and governance review. Weekly governance cycles address urgent changes, while Core Units manage specialized functions across ten operational areas.
Major Initiatives
MIP 101 established the Sky Constitution outlining governance structures and introduced twelve scopes guiding protocol evolution. The Endgame MIP Set created MetaDAOs emphasizing specialization and enabled SkyDAO to operate vaults itself.
The Smart Burn Engine shifted from token burning to depositing acquired MKR into Uniswap pools, generating deeper liquidity at $15 million compared to typical blue-chip pairs.
Real World Assets integration began with Treasury Bills as collateral in May 2023, generating $50 million in offchain revenue.
Segmentation
The Constitution introduced twelve scopes with five core scopes separating initiatives. Five Alignment Conservers participate: Aligned Voter Committees producing quarterly reports, Aligned Delegates operating as Prime or Reserve delegates, FacilitatorDAOs managing scopes, Facilitators serving as liaisons, and Professional Ecosystem Actors including the Governance Advisory Council.
Key Insights on DAO Structure
One Step Removed
Successful DAOs create systems enabling participation rather than directing operations. The Support Scope emphasizes infrastructure enabling SubDAO incubation rather than directly incubating them. Aave similarly creates conditions attracting companies like the ACI through incentive structures rather than formal mandates.
This approach builds resilience: if core contributors depart, protocols continue generating revenue while new participants fill vacancies for token compensation.
Token Bailout
The Aavenomics proposal removes AAVE as the collateral shortfall backstop. Rather than using tokens as emergency fixes, they should create behavioral incentives. Aave’s redesign eliminates governance token exposure to insolvency risk, contrasting Sky’s architecture where MKR minting still addresses bad debt exceeding the surplus buffer.
Deep Liquidity
Sky’s Smart Burn Engine generated $15 million MKR liquidity through token acquisition, while Aave maintained $140 million AAVE liquidity via LP incentives. A volatility analysis using the Parkinson Volatility Estimator found no meaningful volatility decrease post-implementation, though liquidity benefits likely manifest at smaller timescales affecting arbitrage and slippage.
Token Buyback
Both protocols distribute protocol income through buybacks, with Aave’s Aavenomics proposal representing its first holder redistribution. However, declining token supplies favor established participants while raising entry costs for newcomers, potentially entrenching governance power.
Further Research Areas
- Voting arbitrage mechanisms
- Futarchy versus traditional governance
- Market convergence between competing products
- Product ecosystem expansion
- SubDAO governance dynamics
- Emergency proposal governance concerns
Appendix A details volatility analysis methodology using comparable tokens (LDO, IMX, INJ) and Uniswap v3 pools, finding no clear trends supporting volatility reduction from deeper liquidity.