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What is DAO (decentralized autonomous organization)?

Posted: 15 December, 2022

1045

6 min read

What is DAO (decentralized autonomous organization)?

What is a DAO?

A DAO (decentralized autonomous organization) is a decentralized autonomous organization that is governed by smart contracts.

There is no traditional hierarchy in a DAO. They work transparently, according to the rules written in the code. At their core, FAOs are similar to existing forms of organizations.

Like FAOs, traditional companies organize groups of people around specific goals. Shareholders vote for the board of directors, the board elects executives, and they make tactical and operational decisions. But such companies have a hierarchical structure and are run from the top down, while FAOs are much less branched out and allow any participant to make suggestions.

The native token holders of DAOs vote on proposals designed to benefit the entire community. Some DAOs practice quadratic voting, which limits the influence of the largest token holders. This contrasts with modern corporations, which are run for the benefit of the largest shareholders.

Usually VAOs have cash reserves (treasury) to implement the ideas voted for by the community.

Most of the activities of a VAO focus on coordinating decisions on the use of the cash reserve. This concept is similar to the one in which corporations reinvest profits to grow the core business and meet obligations to shareholders.

How did MAOs come about?

The concept of DACs (first name decentralized autonomous corporations, DACs) was born in 2013. The key principles of DACs were the decentralization of companies, the tokenization of their shares and the openness of operations with publicly verifiable code. Over time, the community has refined the idea and adapted it to any organization of people with or without a profit motive. This is the concept of modern DAOs.

Blockchain can be seen as the basic infrastructure for building a GAO. In other words, a decentralized autonomous organization is an application deployed on top of an existing network. Some consider bitcoin the first rudimentary open-source DAO, where miners and developers maintain the integrity of the system.

Ethereum is so far the most popular blockchain to launch a DAO, but the development of alternative L1 networks like Solana and NEAR could make a difference in the future.

2016 saw the launch of one of the first-ever DAOs called The DAO on the Ethereum network. Investors invested more than 14% of all circulating ETH at the time.

The goal of The DAO was to create a community-driven venture capital fund that would invest in vote-based projects. However, just three months later, hackers hacked The DAO and stole $60 million worth of ETH.

Although this experiment with the DAO was unsuccessful, it opened the door for the development of distributed communities.

How do DAOs work?

A DAO is a combination of rules and code. A set of rules attached to a control structure and embedded in code. This concept is implemented with smart contracts and provides a control mechanism.

In order to decide on any proposal, the community votes using native tokens. In most cases, DAO operates a model in which the strength of a participant’s vote depends on the number of tokens.

The voting process itself can take place either on dedicated GAO services or on separate platforms like Tally or Snapshot. Using Snapshot saves time in forming additional voting methods.

VAO members work together based on the rules in the smart contract and a common goal. All rules are transparent.

Membership in the DAO can be divided into two categories:

1. Token-based membership.

DAO tokens are freely traded on decentralized exchanges and are mostly used for governance. Each token grants voting rights.

Users can receive tokens from DAO in exchange for providing services to the organization itself. Uniswap’s Airdrop for early users was an example of such a situation.

2. Equity-based membership.

Share-based DAOs are not necessarily open to all comers. Instead, they often vet potential members before allowing them to join and require a certain contribution (e.g., in ETH or DAI). MolochDAO is one such organization.

What are the benefits of a DAO?

No clear hierarchy. In a DAO, every stakeholder can participate in voting and decision making.
Transparency. The history of decisions made is available to everyone.
Openness. Almost everyone with Internet access can become a holder of an FAO token and thus have the right to make decisions.
The concept of DAO allows people to interact with each other to achieve a common goal without having to trust.

What are the disadvantages of GAO?

Regulation. There is currently no clear regulation of DAOs.
Hacking attacks. Such decentralized structures are susceptible to attack risks.
Speed and controversy. Lack of clear hierarchy can cause community splits and slow down decision-making.

What are DAOs like?

A cryptoproject can be considered a DAO if the token holders have the right to participate in voting and determine the path of development. For example, Olympus DAO, Maker DAO, 1inch.
Investment/Venture DAOs. Allow collective investment in assets and projects.
Projects whose activities are aimed at investing or collecting NFTs. For example, PleasrDAO.
VAOs for grant funding. For example, MolochDAO.
Informational decentralized autonomous organizations. For example, BanklessDAO. Organizations of this type are in theory able to create an alternative to Google Search, as well as to check the quality of information.
Educational DAOs. Odyssey DAO is an example of an organization that believes that learning the basics of Web3 should be accessible to all.
DAOs focused on socially relevant initiatives. These organizations invest in socially useful projects and help them achieve their goals faster. Seed Club is one such organization.
Analytical VAOs. Platforms that collect and analyze quantitative, qualitative data about decentralized autonomous organizations. For example, DeepDAO.
Legal DAOs. LexDAO is a community of legal engineers that helps bring law and smart contracts together.

The classification from DeepDAO mentions FAOs focused on the production and trading of tangible assets, and it also separately lists tools for managing the processes in FAOs: voting, allocation of reserves and other activities.

What’s the outlook for VAs?

According to Messari’s latest report, one of the trends in the crypto industry in 2022 will be GAOs. Over the course of the year, we may see a restructuring of such organizations, the emergence of subsidiary FAOs, and a new distribution of roles among participants. Autonomous decentralized organizations will have better collaboration tools, which will enable the community to get rid of passivity and become more efficient. DAO operating systems (DAO tools) for DAOs will help them in this.

DAOs go out of their way to officially recognize them. In April 2021, Wyoming passed a law recognizing decentralized autonomous organizations as a new form of company. A few months later, the first MAO was approved. But in November 2021, the SEC suspended the token registration of the first legally recognized organization, saying it had provided “misleading information” to potential investors.

In 2021, a wave of investment GAOs emerged in which token holders could invest their money in NFTs, Web3 projects, cryptocurrencies or other GAOs. An example of such an organization is PleasrDAO, originally created to acquire the work of artist pplpleasr. It subsequently amassed an impressive collection of NFTs: the original Doge meme, a single copy of the Wu-Tang Clan album Once Upon a Time in Shaolin, and Edward Snowden’s first NFT.

DAO