The Complete Guide to DAOs
We explain what they are, how they work, and why you should care.
- Writer Chisom Maduonuorah
- andEditor Gary Anglebrandt
- March 6, 2023
- •4 Min Read
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Decentralized autonomous organizations (DAOs) are a new type of organization making their mark in our world lately. Unlike traditional organizations, they have no central governing body but instead are controlled by the organization’s members who have proportional votes. This article explores this new type of organizational model which is seen primarily in the crypto sphere.
What is a Decentralized Autonomous Organization (DAO)?
A decentralized autonomous organization is a type of organization with no central governing body and whose members have a common goal of acting in the organization's best interests. This type of organization involves token holders having voting power tied to the number of tokens they own, and they can cast votes on all the organization’s decisions. Decisions in a DAO flow from bottom to up, while those in a traditional organization flow from top to bottom.
The appeal of DAOs is having an organization where the focus is not solely on profits but also on the community, and where the members decide the strategy of the organization instead of appointed leaders. Though relatively new, we've seen many use cases for DAOs, including fundraising, investments, and charity, and this works without the help of an intermediary.
- No centralized governing body
- Decisions follow a button-up approach
- Rules are dictated by smart contracts
- No executive roles
- Centralized governing body
- Hierarchical – decisions flow from top to down
- Rules can be amended without votes and aren’t fully transparent
- Has executive roles, e.g., CEO
How Does a DAO Work?
DAOs rely on smart contracts for their operations. The code dictating the decisions is based on an underlying blockchain, and changes can only be made if the majority of members authorize it via a vote. For example, the code can be tweaked to increase the supply of a token only after the members authorize the change.
The voting process for a DAO is hosted on a blockchain, and members must often choose between mutually-exclusive options. Voting power is determined based on the number of tokens each member holds. For instance, a member with 300 tokens will have triple the voting power of a member with 100 tokens.
The appeal of a DAO is that members are monetarily invested in the organization, so they're incentivized to act in the entity's best interests. A member may vote for a decision that doesn’t favor the organization, but they’ll be jeopardizing the value of their tokens in the process.
DAOs usually have treasuries containing tokens that can be issued in exchange for fiat from new members of the organization. Existing members can vote on how to use the fiat the organization receives, e.g., to buy an NFT or invest in a specific cryptocurrency.
- Encourages collaboration between members
- Fully transparent
- Rules are strictly enforced by smart contracts
- Can move at a slower pace than traditional organizations
- Vulnerable to hacking
- DAOs aren't recognized as legal entities in most jurisdictions
Types of DAOs
There are different types of DAOs, including:
1. Protocol DAO
This type of DAO is built to govern a decentralized protocol such as an exchange or a lending application. An example of this type of DAO is the Yearn DAO, which governs the crypto investment platform Yearn Finance by delegating funds to different investment strategies.
2. Philanthropy DAO
This type of DAO forms around a specific philanthropic cause. The members pool funding and decide which organizations related to that cause to donate to based on votes. An example of this type of DAO is the UkraineDAO, which raised over $3 million in ETH for Ukrainian soldiers following the Russian invasion.
3. Grant DAO
A Grant DAO is similar to a philanthropy DAO. Members of the DAO pool their funds, call for applicants and decide which ideas to fund based on votes. An example of this type of DAO is the Aave Grants DAO, which funds ideas aimed at developing the Aave decentralized protocol.
4. Collector DAO
A collector DAO pools funds from members to invest in specific assets and distribute profits proportionally after a specific period. An example of this type of DAO is the ConstitutionDAO, which raised $47 million in ETH from over 17,000 members to buy an original copy of the U.S. constitution but lost the bid in the end.
5. Social DAO
A social DAO is focused on bringing together like-minded individuals under a single umbrella. They usually have a barrier to entry like owning a specific amount of tokens or a particular NFT. An example is the Developer DAO, a collective of crypto developers whose membership requirement is owning a Genesis NFT.
A venture DAO pools funds to invest in assets not available in the traditional finance sector, e.g., artwork, rare metals, and artifacts. An example is the Krause House DAO, which is raising funds to buy an NBA team but hasn’t succeeded so far.
Largest & Most-Funded DAOs
1. Constitution DAO
The Constitution DAO was formed in 2021 when an interesting asset emerged for sale: an original copy of the U.S. Constitution. The organization raised $47 million in ETH by selling a token called PEOPLE and participated in the auction of the rare item. However, it lost the bid to another moneyed buyer. It shut down in 2021, with members able to redeem their PEOPLE tokens for ETH.
MakerDAO is the decentralized autonomous organization that governs DAI, a stablecoin with a market capitalization of nearly $6 billion, according to CoinMarketCap. It organizes governance through the MKR token, so holders can vote on important decisions regarding DAI such as the circulating supply and the types of acceptable collateral for lending.
MakerDAO has tens of thousands of members worldwide and over $8 billion of assets locked in its smart contracts.
BitDAO is a venture DAO that invests in DeFi assets on its members’ behalf. The organization currently has over $1.6 billion worth of tokens in its treasury and has allocated hundreds of millions of dollars to various DeFi projects. It’s governed by holders of the BIT token.
DAO GovernanceExpand to learn more
Governance is the most critical aspect of a DAO, and there are three main governance models for a DAO:
- Delegation: Some members are assigned as delegates to implement changes on the blockchain after a successful vote from all members.
- Automatic transaction governance: This model involves using smart contracts that automatically execute a transaction once there are sufficient votes or prevent it if there are insufficient votes.
- Multi-Sig Governance: This model distributes the governance power among multiple wallet holders. The wallet holders with decision-making power usually comprises a committee assigned by the DAO members.
DAO MembershipExpand to learn more
A DAO member is anyone who can vote on decisions regarding the organization. There are three main models of DAO membership:
- Token-based: Here, you can become a DAO member by acquiring the membership tokens on any exchange.
- Share-based: You can become a member by offering some value to the DAO through work or tokens, and you'll be granted shares that represent direct voting power.
- Reputation-based: Here, users earn reputation scores by participating in DAOs. The more you participate, the higher your reputation score, which corresponds to your voting power.
History of DAOs
2016: The DAO
In 2016, the first-ever DAO aptly named The DAO was created. It was a venture capital fund whose investments were decided by members voting on the Ethereum blockchain. However, in the same year it launched, some users exploited a vulnerability in the DAO's code to siphon over $60 million worth of ETH from its treasury to another account. The theft led the developers behind The DAO to shut it down and return the remaining funds to members.
2021: Constitution DAO
In November 2021, the Constitution DAO was created to raise funds to acquire an original copy of the U.S. Constitution. It successfully raised $47 million in ETH but lost out to a $43 million bid from an American hedge fund tycoon — despite having a higher bid. The auction house was likely concerned with the volatility of ETH, so went with the slightly smaller cash offer.
Although the Constitution DAO didn’t fulfill its intended purpose, its existence brought a lot of attention to DAOs and how they constitute a viable crowdfunding tool.
2021: Legality Milestone
A major problem with DAOs is that they aren’t recognized as legal entities in most jurisdictions, so participants may not have the backing of the legal system if things go wrong. But, in 2021, the DAO sector achieved a major win when Wyoming, a U.S. state, legally recognized the American CryptoFed DAO. This milestone paved a way for more jurisdictions to recognize DAOs in the future.
2022: Olympus DAO Hack
In 2022, a hacker exploited a bug in the code of the Olympus DAO to withdraw tokens worth $300,000 from its treasury. But, for unclear reasons, the hacker returned the tokens hours after withdrawing them. This case highlighted the security risks with DAOs and how members can lose their funds if the developers behind a DAO make mistakes in their code.
The Future of DAOs
DAOs are a fairly new phenomenon representing an attempt to improve human coordination. The idea is to give members of every organization, both for-profit and nonprofit, a say in how their firm is run. Hypothetically, democratization will improve the governance of organizations by ensuring they implement decisions that benefit their members in the long term instead of making short-sighted decisions.
We’ll likely see a proliferation of DAOs as time goes on, especially as more jurisdictions begin to recognize them as legal entities. Expect to see some organizations that you know becoming DAOs at one point or the other.
To Sum it Up
DAOs are one of the most important innovations to emerge from the blockchain industry. They enable groups of people with shared interests to pool their resources to achieve desired goals. Unlike traditional organizations, every member of a DAO has a say in the decisions governing their organization. We think many DAO corporations will emerge in the future once they become legally recognized in more jurisdictions.
Frequently Asked Questions
What is an example of a DAO?Expand to learn more
MakerDAO is an example of a DAO; it governs the DAI stablecoin.
What is a DAO NFT?Expand to learn more
This is a type of non-fungible token (NFT) that confers the benefits of ownership and voting power to members of a DAO.
What is a DAO protocol?Expand to learn more
A DAO protocol is a set of rules implemented by smart contracts that govern the operations of a DAO.
Are there any DAO crypto jobs?Expand to learn more
Yes, DAOs need people to support their operations, so you can find many jobs such as a programmer, accountant, marketing manager, etc.
Chisom Maduonuorah is a writer passionate about tech startups, venture capital, the global stock markets, and emerging financial markets like cryptocurrency. When not writing, you can find him staring into the sky pondering what life is about.
Gary Anglebrandt is a US-based editor, copywriter, and communications consultant with a background in business and international news. Beyond the US, he has worked from Seoul and Beijing, and continues to work with professionals based around the globe.
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