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Analysis
TABLE OF CONTENTS

What is Metis? A New L2 Ethereum Solution for DAOs and Other Organizations

5.0 | by Benjamin Hor

We have already written a primer on DAOs here. If you’re unfamiliar with DAOs, we strongly encourage that you read that article first before continuing.  We also recommend reading this article for better context on the current state of DAOs. 

Online social coordination is extremely difficult, and when you add anonymity and a capitalistic environment into the equation, you have the chaotic mess that is crypto. To solve this, Decentralized Autonomous Organizations (DAOs) have become a popular model of organization for crypto communities. While not all DAOs are created equal, a key characteristic is that the community should eventually be governed on-chain to promote greater transparency and remove human biases. The problem with this approach is that there are numerous tradeoffs that DAOs have to take to effectively run a community, often at the expense of important principles like accountability and decentralization. DAOs today are also heavily focused on governance voting and less so on building trust among distrustful community members. This is where the Metis team (MetisDAO) comes in.

MetisDAO aims to “revolutionize how people and businesses collaborate” through the Decentralized Autonomous Company (DAC), which is “a system entity that supports an organization’s day-to-day operations, including those of large-scale enterprises.” DACs are essentially DAOs reimagined if they had access to business management tools, and are part of a network that supported all types of businesses, including traditional companies from Web2, and Web3 organizations. However, for the DAC model to be successful, the underlying blockchain infrastructure needs to be redesigned from the ground up - which is why the team has also built a new layer 2 (L2) solution on the Ethereum network, otherwise known as the Metis chain. 

 

Unbundling the Metis Chain

Metis was originally a hard fork of the Optimism chain but has undergone numerous changes, giving rise to its own computation engine, the Metis Virtual Machine (MVM). The MVM used to be EVM-compatible but has since been re-engineered to be EVM equivalent after its Andromeda update in November 2021. We will be covering only its core features in this article, but if you are interested in deep diving further, check out this article which explains the differences between Metis and other optimistic chains like Arbitrum and Optimism. 

Optimistic Rollup 

Metis is an optimistic rollup L2 solution for Ethereum. Rollups are designed to retain the security of (or as close as possible to) the Ethereum network. Smart contracts will bundle transaction data and process it on Metis, and parties who process these transactions (known as Sequencers for Metis) will then submit highly compressed data back to Ethereum. This compressed data will be verified on Ethereum but with less information. Just imagine if instead of asking for your full details, the border control agent only asks for your name and passport number. 

Having compressed information lowers transaction costs. Optimistic rollups do not perform computation either and assume that all transactions are valid when submitted. Both these features lead to significant improvements in scalability. To minimize the risks of fraudulent transactions, however, a challenge period is included where other Sequencers will verify the transaction data. If fraud is detected, the Sequencer will execute a ‘fraud proof’ which replaces the fraudulent transaction data with an accurate backed-up version. Since Sequencers are required to stake $METIS (Metis’s native network token) to participate as a ‘miner’, the offending Sequencer will be penalized while the responsible Sequencer(s) receives $METIS as a reward, paid out of the offender's staked $METIS.

Source: Metis Whitepaper

At the end of Q2 2022, MetisDAO plans to improve the decentralization and security of its chain with the introduction of Rangers. Rangers will act as the oversight layer for Sequencers - their main purpose is to interpret the data inside the rollups and verify whether fraud has occurred or not. Rangers are also required to stake $METIS in order to participate in the network. The goal is to mitigate central points of failure and censorship by delegating fraud detection responsibilities to third parties (outside of Sequencers) that have a financial stake in the system.

Native Storage

Most of our online data are stored on centralized servers like Amazon which is a vulnerable point of censorship. Decentralized storage solutions built on top of a blockchain, on the other hand, allow users to store data in a distributed manner. There are many examples of projects that offer this as a service such as Filecoin ($FIL) and Arweave ($AR). However, MetisDAO intends to build its own native data storage solution, integrating Interplanetary File System (IPFS) codebase. IPFS principles allow DACs to store confidential data on the blockchain without being compromised through encryption. 

Utilizing an IPFS-like distributed storage solution will support all types of API frameworks for easy integration with dApps that prefer native storage on Metis. The storage feature is expected to roll out at the end of Q1 2022. In Q2 2022, community members will also be able to participate by providing their own storage and earning rewards in the form of $METIS.

Metis Token

Unlike most Ethereum L2 solutions, Metis is one of the rare few that has a native token, $METIS. $METIS has a max supply of 10M. A complete breakdown of its token distribution can be seen below:

Source: CryptoRank; Percentages for both the private/pre-sale and public sale reflect total supply.

The $METIS token has four core functions. However, it will grow over time as more revenue models are introduced in tandem with ecosystem growth.

Participating as a Sequencer

As discussed above, Sequencers (and eventually Rangers) are required to stake $METIS to verify transactions. Effectively, it replicates the Proof of Stake model where a random Sequencer is selected from a pool of Sequencers to submit a recorded transaction to the Ethereum chain. The minimum number of $METIS tokens required to participate is an amount greater than the Dynamic Bond Threshold (DBT). The DBT is the value of the total transactions in the sequence blocks, meaning that if a block has $100 worth of transactions, a Sequencer would need a minimum of $100 worth of $METIS staked. If they do not have enough, another Sequencer with enough staked $METIS will be selected.

Carrying out their duties diligently will reward them with $METIS tokens, much like how miners on Ethereum earn $ETH.

Gas Fees

Like all network tokens, $METIS is used for gas to execute transactions. It is difficult to estimate the costs but according to the team, most transactions will only cost a few cents once the new distributed storage system kicks in. This is because a larger number of transactions can be rolled up at once, resulting in a significant reduction in transaction costs.

Rewards

Aside from sequencing rewards, $METIS is also used as a financial incentive to facilitate network growth effects. Currently, there is a Builder Incentive Program where 30% of all transactions generated by a dApp are given back to the team. Diverting revenue streams from MetisDAO to builders is meant to stimulate protocol growth on Metis.

Certain protocols on Metis also have staking rewards or liquidity mining incentives, paid out in the form of $METIS. Examples include Netswap ($NETT), AgoraDeFi, and Tethys Finance ($TETHYS). More economic incentives are also planned for the future such as their decentralized storage solutions.

Creating/Participating in a DAC

Anyone who wants to create or participate in a DAC must stake a minimum number of 10 $METIS tokens into the DAC itself. There is a maximum limit of 2000 per DAC.

 

Addressing the Organizational Gap 

Infrastructure-wise, there are meaningful differences that separate Metis from other L2 solutions. However, the main value proposition lies in its two key products, POLIS, and the DAC framework.

POLIS

Source: POLIS Portal

POLIS is a middleware layer that aims to make lives easier for all users. Currently, users have the option of registering for an account either through an email address or MetaMask; however, more third-party registration methods will be introduced in the future. 

Here are some of its features:

  1. Dashboard for transactions conducted across all dApps on METIS

  2. Allow developers to manage domains, smart contracts, user authentication, and APIs

  3. Allow users to make transactions through integrated apps and their built-in digital wallet

  4. Manage multi-chain transactions within Metis ecosystem (planned for the future)

Another way of looking at POLIS is a more user-friendly Etherscan. However, unlike Etherscan (which can be very intimidating for non-crypto users), POLIS is expected to bridge the gap for blockchain beginners. By embedding smart contract templates into the system, users do not need to worry about the underlying hood and how the blockchain works. For example, making changes to a smart contract (which is based on Metis’s templates) can be as straightforward as clicking a button, rather than changing the code directly. At the same time, the dashboard functionality (which is expected to become more comprehensive) will allow organizations to easily monitor and control their blockchain activity.

DAC Framework

Source: DAC Portal

The DAC framework is the system that supports the DAC business model. An easy analogy for the DAC framework is a global company registrar, accompanied by online tools that facilitate both the creation and management of a DAC. Being situated on an L2 will also allow on-chain transactions to be conducted in a fast, low-cost way. 

At the time of writing, there is limited functionality. Users may join or create DACs and own their own Vault (treasury address), but there is very little else to do. In the future, however, the team plans to leverage open-source software and incorporate all sorts of tools like payrolls, messaging platforms, etc. On top of that, they intend to integrate them into templates to accommodate different businesses. A community-oriented DAC template will be launched at the beginning of Q2 2022.

Source: DAC Portal

Beyond the atypical company management tools, however, is a planned Reputation Power (RP) System, though there are not many details about how it will operate for now. According to the team, it will be a “continuous, programmable NFT-based system that records each user’s on-chain track record.” Essentially, it will serve as business credentials, providing a summary of the business conduct and dealings that each DAC possesses. Metis has stated that this could potentially penalize bad actors while rewarding reliable ones. There are also talks about how the RP System can be integrated with Metis’s planned future DAC App store for reward programs. 

 

The Case for Metis 

Metis is unique in the sense that it has two value proposition states. On one hand, Metis is an L2 Ethereum solution that offers cheap and fast transactions. On the other hand, it is a decentralized company database, designed to support the management of online businesses through the blockchain. We can therefore look at how Metis can potentially attract users from two broad use cases: 

  • Metis Ecosystem - Participants looking to enter Metis’s ecosystem which offers cheap and fast transactions 

  • Organizational Platform - Participants looking to build their own organization on the blockchain through the DAC model while leveraging Metis’s organizational tools

Both categories are not mutually exclusive as there will be participants who fall under both. However, for the most part, there is a clear distinction between customer segments.

Building the Metis Ecosystem

In the first scenario, we are mostly looking at crypto natives who are looking for Ethereum scalability solutions. Crypto is full of mercenary capital looking for the next yield farm. Over the past few months, the standard play has been for capital to move into new alt chains and farm the native dApp tokens/network tokens, regardless of how good the underlying chain technology is. The real question is how sticky is the capital?

Source: DeFi Llama

As of 4 March 2022, the top L2 Ethereum contender is still Arbitrum with just shy of over $3B TVL. Although it does not have a native token (at least not yet), it is home to multiple ‘blue chip’ DeFi projects such as Sushi ($SUSHI) and Curve ($CRV). It also has its own set of upcoming powerhouses like Dopex ($DPX) for options trading, GMX ($GMX) for perpetual trading, and TreasureDAO ($MAGIC) for a NFT/Metaverse ecosystem. These protocols help generate economic activity and thus increase the overall TVL of the chain.

Outside of Arbitrum, most rollup solutions are hovering at or below the $350M TVL mark. Metis is the second highest with $349.4M TVL while Optimism is slightly below at $344.4M.1 Boba Network ($BOBA), had reached $630M TVL at one point but has quickly dwindled down to less than $60M TVL after its initial airdrop in late November 2021.

What the data tells shows us is that priorities differ across timelines which are as follows:

  1. Economic Incentives (until it runs out)

  2. dApp ecosystem (medium-term)

  3. Technology and infrastructure (medium - long-term)

Technically speaking, Metis has certain advantages compared to other L2s such as possessing native storage solutions and quicker validation times. Other qualitative factors such as cult community following and marketing strategies also play a role e.g. Vitalik’s mum’s involvement might count for some people. Metis also has an edge with the existence of $METIS which can be used to bootstrap liquidity and attract network participants. However, building an ecosystem with genuine economic activity requires more than just that; it requires useful dApps which leads to strong network effects. 

Metis needs to capitalize on its unique token model to attract dApps. We have already seen several incentive programs like the Builder Incentive Program (30% of transaction revenue is given back to the developing team) which is a good first step. One example of an upcoming project launch is Binary DAO

Another focus should also be on soliciting blue-chip projects which are usually financial primitives that have successfully operated for a long period of time. Blue chips are generally kingmakers for alt chains as they bring users and dominate the TVL charts. As of 4 March 2022, the top protocol on Arbitrum is Sushi with $630M TVL. On Polygon ($MATIC), the top protocol is Aave ($AAVE) with $1.7B TVL. On Optimism, the top protocol is Synthetix ($SNX) with $112M TVL. You get the idea. Making the shift towards EVM Equivalence which makes it easier to transpose Ethereum contracts to Metis helps a lot here too. MetisDAO understands this and is proactively looking for such projects. The most recent example is Aave.

Building a Platform for Organizations

It is wholly possible that DAOs and other companies will eventually decide to ‘incorporate’ on Metis for its network effects alone, and use the DAC framework as a secondary perk. However, it should be clear by now that MetisDAO’s primary goal is to build a decentralized online social coordination platform for businesses. Everything discussed so far leads back to the DAC framework. 

The pains of decentralized business management cannot be understated as many DAOs would attest to. Communication largely occurs over disparate third-party platforms like Discord and Telegram. Salaries are distributed through inefficient gnosis/voting systems. Google Docs and email are also widely used to handle all sorts of matters like hiring.

Source: TreasureDAO Jobs Page

Using all these freemium tools may be practical for short-term purposes but is probably not sustainable if you want to scale a business on the blockchain. It is also worth noting that all of these platforms are permissioned and centralized which makes it difficult to collaborate with anonymous individuals. The DAC framework may not be an end-all-be-all solution, but it will at least try and alleviate some of the common management issues in the crypto space. 

If we expand our view, however, the scope of the solution could apply to more than just DAOs. Web2 companies, SMEs, tokenless communities, and even NGOs can benefit from a DAC model. Organizations can leverage blockchain technology to collaborate and self-organize within a global decentralized framework.

It is important to highlight here just how cumbersome and inefficient traditional company structures are in the real world. According to the World Bank’s Doing Business Index 2019, the average time it takes for a man to set up a company in a high-income OECD country is 9.2 days.2 It is even worst for other regions where it can take up to a month. 

Source: World Bank

Furthermore, there are other requirements like submission of documents, registration costs, and identity verification. Contrast this with the DAC model which literally takes a few minutes and some $METIS tokens (which can be reclaimed to be sold if the DAC is dissolved).

Of course, there are multiple reasons why someone might decide to incorporate a real company. Legal recognition, physical requirements, and national infrastructure are important, depending on the type of business. However, for truly internet native companies, a DAC can be a viable alternative. Moreover, there is nothing stopping existing companies from adopting the DAC framework. A practical example would be blockchain companies that are looking to hire blockchain talent that wishes to remain anonymous. Rather than rely on LinkedIn, they could create a DAC division and hire/manage individuals through Metis. The real dream would be when DACs are legally recognized as legitimate entities by different jurisdictions.

As of 4 March 2022, there are roughly 500 DACs and 5,000 members, which is likely to be inflated, considering most of the planned features have yet to be shipped out, much less battle-tested. A more probable reason for this figure is the DAC adoption rewards program (which ended on 22 January 2022) and the low threshold for creating/participating in a DAC. 

For Metis to increase the adoption rate of its DAC model, the obvious goal would be to build state-of-the-art organizational tools. Organizations that see the benefits of proper management systems would then flock to the chain. The other area of focus is the same as before i.e. to improve the network effects by increasing dApps and user activity. It is difficult to imagine organizations setting up shop on a dead chain that only acts as a company management system. Moreover, the overarching objective should be to attract existing organizations (like Ethereum DAOs) too and make Metis their ‘main HQ’.

Conclusion

Like all L2 solutions, Metis aims to provide scalability and lower transaction costs while relying on Ethereum’s network security. This is essential for the future as organizations are expected to conduct regular transactions to run their day-to-day operations. Other features include native decentralized storage and more accountable network security systems, making it a truly different L2 chain in its own right. However, the L2 solution is only a means to an end. MetisDAO’s true goal is “building a Web3 economy where every individual, team, group of similar minds, community, or small business can create their own decentralized enterprise and collaborate with others in the Web3 world”. The key to that is their feature-rich DAC platform. 

Crypto native communities like DAOs who participate in the DAC framework are a great first step. But the true catalyst for adoption will be when regular companies are onboarded, validating the value proposition of conducting a business on the blockchain. There are over 200M companies in the world, and this does not even include NGOs, neighborhood communities, etc. There are a lot of things to be excited about Metis, especially when you recognize that some of the macro catalysts for a DAC model adoption are already here or just over the horizon. Some of our predictions/examples include:

  1. A decentralized business model gets recognized as a viable alternative to traditional top-down structures.

  2. Existing companies will want to have a blockchain/web3 presence.

  3. Crypto/web3 adoption rate increases.

  4. Cross-border organizations without legacy infrastructure (e.g. national company registrars) become more popular.

  5. Self-organization within the online medium grows more appealing.

Whether or not the DAC framework will be truly adopted ultimately depends on MetisDAO’s execution. Metis is still only in its infancy and competition is fierce. Metis must also deliver on its promises to become a better L2 solution with increased versatility, more user-friendly interfaces, and cheaper/faster transactions. However, if Metis can cultivate a robust dApp ecosystem with a properly-designed DAC framework, the stars will be truly aligned for a decentralized business network. 

Footnotes

1. It is worth noting that TVL data differ across data platforms. For instance, as of 4 March 2022, Metis’s TVL is $500M on l2beat

2. The Doing Business Index has been discontinued since 2020 and is primed to be replaced by a new Index, known as the Business Enabling Environment (BEE). See https://www.worldbank.org/en/programs/business-enabling-environment.


We recently also spoke to Elena Sinelnikova on the CoinGecko Podcast on how MetisDAO aims to create DACs. Listen to the episode below or on all popular podcast platforms here, or watch it on YouTube

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Benjamin Hor
Benjamin Hor

Benjamin is an ex-consultant who is tapping into his legal roots to explore the world of crypto. Follow the author on Twitter @NeBB399

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