What is a DAO?
A DAO (decentralised autonomous organisation) is run via smart contracts.
DAOs have no traditional hierarchy. They operate transparently under rules encoded in software. In essence, they resemble familiar organisational forms.
Like DAOs, traditional companies organise groups of people around specific goals. Shareholders vote for a board of directors; the board appoints executives, who make tactical and operational decisions. Yet such companies are hierarchical and top‑down, whereas DAOs are far flatter and let any participant make proposals.
Holders of a DAO’s native tokens vote on proposals intended to benefit the community as a whole. Some DAOs practise quadratic voting, which limits the influence of the largest tokenholders. That contrasts with modern corporations, run in the interests of their biggest shareholders.
DAOs typically maintain a treasury to fund ideas approved by the community.
Much of a DAO’s activity centres on coordinating how to deploy the treasury. The concept resembles the way corporations reinvest profits to expand the core business and meet obligations to shareholders.
How did DAOs emerge?
The idea of DAOs—first called decentralised autonomous corporations (DACs)—was born in 2013. Key principles were decentralising companies, tokenising their shares and conducting operations openly with publicly auditable code. Over time the community refined the concept and adapted it to any organisation of people, profit‑seeking or not. That is the modern DAO.
Blockchains can be seen as the base infrastructure for DAOs. In other words, a DAO is an application deployed atop an existing network. Some view Bitcoin as an early, rudimentary open‑source DAO, where miners and developers uphold the system’s integrity.
Ethereum remains the most popular blockchain for launching DAOs, though the rise of alternative L1 networks such as Solana and NEAR could change that.
In 2016 one of the first DAOs, called The DAO, launched on Ethereum. Investors contributed more than 14% of all ETH in circulation at the time.
The DAO aimed to create a community‑governed venture fund that would invest based on votes. Yet within three months hackers exploited The DAO and stole ETH worth $60m.
Although that experiment failed, it opened the door to the development of distributed communities.
How do DAOs work?
DAOs are rules expressed as code: a governance framework embedded in software. This is implemented via smart contracts, providing the mechanism for control.
To decide on any proposal, the community holds a vote using the native tokens. In most DAOs voting power is proportional to token holdings.
Voting can take place on DAO‑specific services or on platforms such as Tally or Snapshot. Using Snapshot saves time on building additional voting methods.
Members work together under rules set in the smart contract and a shared goal. All rules are transparent.
DAO membership typically falls into two categories:
1. Token‑based membership.
DAO tokens trade freely on decentralised exchanges and are mainly used for governance. Each token confers a vote.
Users can receive tokens from a DAO in exchange for providing services to the organisation itself. A case in point was the airdrop from Uniswap for early users.
2. Share‑based membership.
Share‑based DAOs are not necessarily open to everyone. They often vet prospective members before admitting them and require a contribution (eg in ETH or DAI). MolochDAO is one such organisation.
What are the advantages of DAOs?
- No rigid hierarchy. Any stakeholder can participate in voting and decision‑making.
- Transparency. The record of decisions is available to all.
- Openness. Almost anyone with an internet connection can hold a DAO token and thus gain a say.
- The DAO model lets people collaborate towards a common goal without the need for mutual trust.
What are the drawbacks of DAOs?
- Regulation. Clear rules for DAOs are currently lacking.
- Hacker attacks. Such decentralised structures are exposed to security risks.
- Speed and disagreement. The absence of a clear hierarchy can split communities and slow decision‑making.
What kinds of DAO exist?
- A crypto project can be considered a DAO if tokenholders may vote and set its direction. Examples include Olympus DAO, Maker DAO and 1inch.
- Investment/venture DAOs. They allow collective investment in assets and projects.
- Projects focused on investing in or collecting NFTs. For example, PleasrDAO.
- Grant‑funding DAOs. For example, MolochDAO.
- Information DAOs. For example, BanklessDAO. In theory such organisations could create an alternative to Google Search and assess information quality.
- Educational DAOs. Odyssey DAO believes learning the basics of Web3 should be accessible to everyone.
- DAOs focused on social‑impact initiatives. They invest in public‑interest projects and help them reach their goals faster. Seed Club is one such organisation.
- Analytics DAOs. Platforms that gather and analyse quantitative and qualitative data on DAOs. For example, DeepDAO.
- Legal DAOs. LexDAO is a community of lawyer‑engineers helping bridge law and smart contracts.
In the classification by DeepDAO there are DAOs focused on producing and trading physical assets, as well as dedicated tools for running DAO processes such as voting, treasury allocation and other activities.
What are the prospects for DAOs?
According to the latest Messari report, DAOs are set to be one of crypto’s 2022 trends. Over the year we may see these organisations restructure, spawn sub‑DAOs and redistribute roles among participants. Expect better collaboration tools that help communities shed passivity and become more effective, aided by “DAO tools”.
DAOs are edging towards official recognition. In April 2021 Wyoming passed a law recognising DAOs as a new form of company. A few months later the first DAO was approved. But in November 2021 the SEC suspended the registration of tokens of the first legally recognised organisation, saying it had provided “misleading information”.
In 2021 a wave of investment DAOs emerged, allowing tokenholders to pool funds into NFTs, Web3 projects, cryptocurrencies or other DAOs. One such organisation is PleasrDAO, initially created to acquire works by the artist pplpleasr. It later assembled an impressive NFT collection: the original Doge meme, the sole copy of Wu‑Tang Clan’s album “Once Upon a Time in Shaolin”, and the first NFT by Edward Snowden.