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  • Writer's pictureMichael Paulyn

What is a Decentralized Autonomous Organization (DAO)?

Decentralized Autonomous Organizations (DAOs) are a new and exciting development in the world of blockchain and cryptocurrency. As internet-native organizations, they operate without needing traditional hierarchical structures, but instead, their stakeholders govern through smart contracts and decentralized decision-making processes. In recent years, DAOs have gained significant attention and popularity due to their potential to revolutionize businesses and communities.

This blog will explore what DAOs are, how they work, and their potential applications in various industries. Whether you're an investor, entrepreneur, or simply curious about blockchain technology, this guide will provide a comprehensive introduction to DAOs.

What Is a Decentralized Autonomous Organization (DAO)?

A Decentralized Autonomous Organization (DAO) is a new legal entity with no central governing authority and whose members share a common goal to act in the entity's best interest. DAOs gained popularity through the rise of cryptocurrencies and blockchain technology, making decisions using a bottom-up management approach.

DAOs are governed entirely by their members, who collectively make critical decisions about the project's future, such as technical upgrades and treasury allocations. A DAO is fully autonomous and transparent, with smart contracts laying the foundational rules and executing the agreed-upon decisions. Proposals, voting, and even the very code itself can be publicly audited at any point.

What Is the Purpose of a DAO?

In a DAO, community members create proposals about the future operations of the protocol and come together to vote on each proposal. Proposals that achieve a predefined level of consensus are then accepted and enforced by the rules instantiated within the smart contract. The hierarchical structures seen within large corporations give way to community collaboration under this framework.

How Does a DAO Make Money?

The purpose of a DAO is to improve the traditional management structure of many companies by giving every member a voice, vote, and opportunity to propose initiatives. A DAO also strives to have strict governance that follows a strict code on a blockchain.

DAOs initially raise capital by trading fiat for their native token, representing voting power and ownership proportion across members. If a DAO is successful, the value of the native token will increase. The DAO can then issue future tokens at a higher value to raise additional capital. A DAO can also invest in assets if the members approve such measures.

How do DAOs work?

The DAO's regulations are created by a group of community members using smart contracts, which serve as a framework for its operations. These contracts are easily accessible, verifiable, and subject to public auditing, allowing anyone interested in joining the DAO to understand how it functions.

After recording the rules on the blockchain, the next step is determining how the DAO will receive funding and delegate governance. Typically, the DAO will sell tokens to raise funds; after this, the tokens become part of its treasury. Token holders will have voting rights proportionate to the number of tokens they hold. Once the funding is secured, the next step is publicly launching the DAO.

Once the implementing the code, it's possible to amend it through a consensus reached by member voting. No special authority can change the DAO's rules; it is solely the responsibility of the token holders' community to decide.

Advantages of DAOs

There are multiple reasons why a group or entity might consider adopting a DAO structure. One advantage of this management style is decentralization, where a group makes decisions that impact the organization of individuals instead of a central authority. This structure spreads authority across a more extensive group instead of relying on just a few individuals, such as a CEO or board of directors.

Another benefit is participation, where individuals within the organization feel more connected and empowered when they have a say and voting power in all matters. While individuals may not have strong voting power, a DAO encourages token holders to use their tokens in ways they believe are best for the organization.

A DAO also promotes publicity, as votes are publicly viewable on the blockchain. This focus on publicity incentivizes individuals to act in the organization's and its community's best interest, as their decisions and votes are publicly visible.

Lastly, a DAO encourages community, allowing people worldwide to work towards a common goal. With an internet connection, token holders can interact with others, regardless of location.

Disadvantages of DAOs

However, DAOs have their flaws. Improperly setting up or maintaining a DAO can result in severe consequences. Below are some limitations to the DAO structure:

While a public company guided by a CEO can make decisions quickly, DAOs require every user a chance to vote. This process leads to long voting periods, which time zone differences and conflicting priorities can further delay.

DAOs have a responsibility to educate a large number of people about entity activities. Unlike a CEO who can easily track company developments, token holders in a DAO may have varying levels of education, understanding of initiatives, and accessibility to resources. It can be a challenge for a DAO to unite and educate its diverse group of people.

Due to the need to coordinate many individuals, DAOs may need to be more efficient. A DAO may get bogged down in trivial administrative tasks. Educating voters, communicating initiatives, explaining strategies, and onboarding new members can take up much time, leaving little time for implementing change.

Security is a significant concern for all digital platforms, including blockchain resources. Implementing a DAO requires technical expertise; without it, there may be issues with the validity of votes or decisions made. Trust can be lost, and users may leave the entity if they need to rely on the structure of the DAO. Even using multi-sig or cold wallets, there is potential for the exploitation of DAOs, causing treasury reserves can fall into the wrong hands.

How to Join a DAO

After finding a DAO project that interests you, there are various ways to become directly involved. It's important to note that not all DAOs have the same purpose, so it's crucial to determine the core function of each one.

For DAOs that focus on technical governance, it's essential to understand the voting rights granted to token holders and the type of proposals they're voting on. For example, in Uniswap, token holders can vote on the distribution of protocol fees. In contrast, in Compound, token holders can vote on allocating those fees toward bug fixes and system upgrades.

These DAOs also offer freelancers and interested individuals opportunities to join and receive compensation for their work through grant-funded projects. The DAO regularly posts such projects on its Discord server. Other DAOs may focus more on treasury pooling and allocation, like SharkDAO, which helps pool individual token holders' funds to acquire rare NFTs that are too expensive for the average person.

Transparency is a crucial aspect of DAOs, with the details of each proposal readily available, voting history recorded, and the voting records of particular token holders visible. DAOs often call upon the community to build out interesting ideas through grant-funded projects, and entrepreneurs can submit proposals to help lead the future development of a protocol.

Levels of DAO participation vary, with options ranging from swapping into governance tokens and paying attention to Snapshot votes to joining the DAO's Discord and taking on actual projects for compensation or investing in DAOs of interest through networking at conferences. The level of involvement is entirely up to the individual.

Here are Some Examples of DAOs

Here are some descriptions of different DAOs and how to get involved with them:

  1. DAOhaus: A platform for creating and managing DAOs run by its community. It doesn't require coding knowledge and is an excellent option for those interested in exploring the world of DAOs.

  2. MakerDAO: A protocol that created the first unbiased stablecoin called DAI. Those interested in contributing to the governance of the Maker protocol can vote on proposed changes.

  3. RaidGuild: A service-based DAO that originated from the MetaCartel network and is heavily involved in the Web3 community. It's seeking talented individuals with development, marketing, or design skills to help with various projects.

  4. Proof Of Humanity: A registry of verified humans that uses social verification and Kleros' courts to distribute Universal Basic Income tokens. Join this democratic DAO if you're interested in the justice revolution.

  5. Opolis: A member-owned digital employment cooperative that provides shared services and benefits to independent workers. If you're passionate about shaping the future of work, join this DAO.

  6. BanklessDAO: A media-centric DAO that educates people about Web3. If you want to spread the word and create content, this DAO might be for you.

  7. MolochDAO: An OG DAO that awards grants to promote the Ethereum ecosystem. Those who want to contribute to the group as a governing member can apply by filling out an application.

A Few Final Thoughts on DAOs

DAOs have several advantages over traditional organizations due to their internet-native nature. One significant advantage is the reduced need for trust between parties. In traditional organizations, trust in the people behind it, especially from investors, is crucial.

However, in DAOs, only the code must be trusted, which is publicly available and can use extensive testing before launch. After being launched, every action a DAO takes must have the community's approval and is entirely transparent and verifiable.

Unlike traditional organizations, DAOs lack a hierarchical structure but can still accomplish tasks and grow with stakeholder control via their native token. This lack of hierarchy allows stakeholders to present innovative ideas that the entire group can consider and improve upon. Disputes can often find quick resolutions through the voting system, in line with the pre-written rules in the smart contract.

DAOs also allow investors to pool funds and invest in early-stage startups and decentralized projects while sharing risks or profits that may arise.

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