What is a Decentralized Autonomous Organization (DAO)?

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gingerbreadfork
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6 min read

The blockchain concept that provides an opportunitiy to take a fresh look at governance.

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As soon as cryptocurrency started to grow beyond a niche oddity, many of those involved looked at the potential for blockchain technology to do more than exchange value but change the world around us in even more experimental and creative ways. So let’s delve into one of the concepts gaining traction resulting in some exciting projects and perhaps offering a new way to look at governance structures entirely.

What is a DAO?

Commonly referred to by the abbreviation DAO, a decentralized autonomous organization is something that has become an interesting phenomenon in the blockchain space. While it can act as a form of decentralized venture capital fund, it also has a range of other interesting features.

Participants in a DAO can share control of an asset, funds, or just about anything conceivable while doing so with a flat hierarchy, something that can be nearly impossible in many other similar business structures of more traditional formats. A DAO can operate without the need for a CEO, board of directors, or any of the overarching forms of governance that many forms of businesses utilize.

How Does a DAO Work?

DAOs are similar in some ways to dApps (decentralized applications) in the sense that they are managed and secured by smart contracts. However, while humans typically develop these contracts (at least for now), a DAO doesn’t require human leadership to function, and most spread the responsibilities for whatever the DAOs goals are between all the participants.

As with most blockchain technology, code is law when it comes to a DAO, as the rules are set and enforced by the smart contract used by the project. Commonly tokens are used to provide a way to connect participants with whatever the DAO intends to do, and these tokens are very commonly used for voting and other forms of participation among those involved and holding the tokens. As DAO tokens have the potential to gain value or at the very least control some form of value, participants in a DAO as incentivized to do the best by the project as they are exposed to the same potential losses or gains as anyone else holding them.

Voting is often weighted towards who has the most to lose or who holds the most tokens to ensure that a small token holder couldn’t negatively impact the DAO in any obvious way. Still, other metrics may play a part too, such as specific forms of participation. So if you are considering getting involved in a DAO yourself, be sure to understand the structure and original distribution of the tokens as this may play a role in how balanced control over the DAO may be as just because something is decentralized doesn’t mean it’s always fair.

Some Benefits of DAOs

  • Decentralized
  • Borderless by design
  • No traditional management
  • Open participation
  • Increased transparency
  • Crowdsourced participation
  • Pooled knowledge

Challenges Faced a DAO

The biggest concern for any decentralized organization is vulnerabilities, as these can result in a total loss of funds or even just result in the organization collapsing entirely. If the contracts used can’t be trusted or weaknesses are discovered, this can damage faith in the organization beyond repair. In the worst-case scenario, the DAO cannot proceed with whatever the intentions are as all value has been lost.

Potential future regulatory concerns are something that opposers of DAOs often bring up. While this is a concern in the crypto space in general, clarity is improving over time in many regions as to what is acceptable practice for blockchain technology. Additionally, as the technology naturally results in a borderless existence of DAOs, this also adds to the ambiguity of launching or participating in a DAO. However, over time, the legal standing of such projects will likely become far more straightforward than today, and the more precise boundaries that will result can only be a positive thing for the future of the decentralized autonomous organization model.

Some studies have also raised questions about the validity of trusting the masses with financial decisions, but this is something that will naturally be battle-tested as various DAOs begin to age and become more established. With the token distribution of many projects being slanted to those that launch them, there can also be questions as to the risk of large holders exerting too much control over a DAO, but this is something that should be looked at on a case by case basis and something that applies to any cryptocurrency/token/DAO launch. If the voting power becomes (or was from the beginning) too centralized a DAO may just begin to feel like a traditional business with a bit of extra complexity on top. What are the Different Types of DAOs? While a DAO can be quite abstract as this is a relatively new technology that results in quite impressive levels of experimentation at times, there are a few more common structures that represent noteworthy categories of DAOs.

Grant Management: A large amount of the modern crypto ecosystem is growing thanks to various grants offered by larger crypto projects. Some of these projects have opted to increase their transparency and maximize community participation by operating a DAO to manage grant funding provided by that project.

Charities and Non-Profits: In the traditional world of charity, there are often questions about how money is distributed or directed and if the funds available are used as well as they could be. As a result, DAOs are beginning to be an interesting part of how charities can operate in the modern world where communities can negotiate among themselves where the most value can be provided with the resources they have under their control.

Asset Collections: One of the more exciting segments of these decentralized autonomous organizations is the collecting communities forming DAOs. A growing number of DAOs are pooling or crowdfunding resources to control assets, such as one-off albums, physical art, property, or even collections of valuable NFTs. While a single participant may not be able to own more significant assets themselves, a group of DAO participants may very well be able to gather these assets and manage control of them.

Fundraising: While ICOs/IEOs and the like are becoming far less common these days, fundraising for specific projects or purposes is starting to show up more often in the format of a DAO. In addition, those involved may appreciate the increased transparency and accountability afforded by such arrangements instead of the many projects that have failed to launch a promised product or service even after large-scale fundraising via some of the previously mentioned models.

What are Some Examples of a DAO?

  • Uniswap - operates as a DAO thanks to its governance token
  • Maker - if you’ve ever used DAI, you can thank the governance provided by Maker DAO
  • BitDAO - helping to shape the future of DeFi by wielding its massive treasury
  • ConstitutionDAO - attempted to buy the US Consitution as an interesting experiment
  • PleasrDAO - NFT investment collective that also purchased the one-off Wu-Tang album
  • Aave - non-custodial and open-source money market managed by a DAO
  • 0x - a protocol for crypto-to-crypto exchange operating its treasury using a DAO

Are DAOs the Future of Government?

Something you have likely noticed while investigating DAOs is their ability to decentralize and increase democratization of governmental structures in businesses and otherwise. As such, you may wonder if these may grow to the scale of real-world governments in the future, and you may question whether this is even viable, but the simple reality is that we don’t yet know. There is a range of economic variables and even large-scale psychological dynamics at play that haven’t been thoroughly tested to the point where we know exactly how far we can push these decentralized organizations.

It’s hard to argue, though, that this modern approach to governance structures will continue to experiment and push the boundaries of what is possible now so that we may very well see potential tomorrow that was perhaps even unimaginable today. The exponential growth of these projects and their scope is extremely interesting. If this experimentation leads to breakthroughs that result in large-scale adoption, the sky may very well be the limit, but time will tell.

Perhaps one day, your favorite brand, entertainment project, or even your most treasured community initiative won’t be operated by some overpaid board members and c-suite executives but will instead be controlled by their entire community.

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