What are DAOs? Everything you should know
Definition, key concepts break down, and more
As crypto is here to offer an alternative to many outdated systems so deeply rooted in our societies from previous generations, DAOs are here to disrupt organizational management and change the way we work today.
Crypto isn’t just about digital currencies you can invest your money in. There is an entire world being created using blockchain technology, and 3 of the most powerful use cases enabled are:
Having covered the first 2, it seems about the right moment to complete the set.
What are DAOs?
DAOs stand for Decentralized Autonomous Organizations. Some well-known examples are MakerDao, Aragon, Metacartel, Gitcoin, Dash, and of course, The DAO.
DAOs are essentially Internet native businesses/communities without centralized leadership, that are collectively owned and managed by their members, and decisions are governed by a set of coded rules.
This is a mouthful, so let’s take a look at what makes DAOs unique.
Key Facts about DAOs
DAOs are built on blockchains, such as Ethereum, which currently is enabling the largest number of DAOs.
Their backbone is built on Smart Contracts (read more here), which are coded protocols with the capability of self-execution once predetermined terms and conditions are met.
Compared to traditional organizations, DAOs are known for:
Self Governed/Flat Hierarchy: There are no C-levels, Board of Directors, or other centralized authority figures. They are collectively governed by their members.
Democratic: voting is required for any changes to happen.
Higher Efficiency: once voting is done and tallied, the Smart Contract will self-execute itself (such as generating a payment), without the need for third parties’ involvement.
Open: depending on which DAO there might be specific details, but technically anyone can contribute and/or be part of a DAO.
Trustless: Things will keep happening as per the codes programmed into the smart contract.
Transparency: as part of an open-source blockchain, its codes and rules are out there for anyone to look at.
How does it Work? Key Concepts to note.
The 3 words that make up the acronym DAO gives us a very good hint of how it works:
1. Decentralized: Membership & Governance
DAOs do not have a central authority making executive decisions for the organization.
Instead, they arecollectively managed and run by their members. Members can submit theirproposals for improvement changes, and normally there is a cost associated with it, to ensure the quality and seriousness of these proposals.
Once thevotingis done, thecodesensure it’s executed with certainty.
There are mostly 2 types of membership, which will further determine how the voting system works:
Token-based membership: basically you are granted voted access just by holding a certain amount of tokens for a particular DAO, that can be purchased in an exchange platform. These are usually more permissionless.
Share-based membership: these are less permissionless, even though still very open compared to traditional structures. Here, to become part of the DAO, there is a membership proposal that is required for the group to assess if you provide the right skillsets and expertise. Shares represent direct voting power and ownership.
2. Autonomous
There is a common misconception that DAOs means the removal of the human factor, replaced by protocols and codes. However, just because DAOs are autonomous and run on Smart Contracts, doesn’t mean it gets rid of the human input completely.
It simply means that thanks to the attributes specific to blockchain and cryptography, it cannot be tampered with due to the immutable timestamp and the distribution of the information to the network participants.
Therefore, a DAO is autonomous because it’scorruption-resistant. It’s transparent, open, and decentralized, ensuring both theintegrity of the system, as well as the focus on serving the participants’ interests.
3. Organization
DAO is a way of running an organization, so technically, any organization can be run in a decentralized and autonomous manner if it chooses to, which means the actual use cases and applications of DAOs can be really broad.
For example, a charity can be a DAO, where members from all over the world can decide where to spend the donated money.
Another example can be a Venture Capital fund, where members can vote on which businesses to invest money in.
Another example can be a school, where students’ parents can be the participants to vote on topics from school day hours, to syllabus content, to whether to spend the funds on scholarships, building a new library, or lab equipment.
Because of this, there is clearly not a one size fits all way to do this, and organizations that are built as DAOs need to ensure that besides having clarity on the purpose, goals and processes of the organization, they need to be able to code it in the right way in the Smart Contract.
What are some of the Challenges & Risks?
Besides the normal network security risks that are common to all blockchain projects, there are some risks that are more unique to DAOs:
No business secrets: if you are running a company as a DAO, then sensitive information such as research and development that are normally confidential can be open to everyone.
Speed: because decisions need voting, the speed to make changes or fix bugs can take longer, and this can be exploited by mal intentioned actors and create a higher risk for the network.
Talent Management: just as talent diversity is a strong asset for DAOs, the amount of work and hours a person puts into a particular DAO is not necessarily regulated like a normal job commitment. Usually, people join a DAO because they are really passionate about its goal and purpose, but unless there is a proper check and balances set up, it can be an issue.
Did you know?
Did you know that The DAO was the name of an actual DAO? and did you know that it is the reason why there are 2 Ethereums?
The DAO was a decentralized venture capital founded in 2016. Basically, people who hold DAO tokens would vote how much and where to invest in, and once the voting was done, the Smart Contract will self execute and allocate funds based on it.
Unfortunately, hackers managed to successfully attack the network and $50M worth of ETH was stolen. This is the incident that actually caused Ethereum’s hard fork, which is a permanent divergence in the blockchain: main developers decided to create a separate blockchain where the stolen ETH was given back: this is the current Ethereum as we know it. Ethereum Classic is the original blockchain that still has the money hacked.
Final Thoughts
As crypto is here to offer an alternative to many outdated systems so deeply rooted in our societies from previous generations, DAOs are here to disrupt organizational management and change the way we work today.
There is clearly a long way to go, not just because crypto is in its nascent stage, but also because DAOs have added challenges in terms of aspects related to running an organization.
However, DAOs offer a more effective and safe way to work with like-minded people globally in the digital age. They unlock opportunities and possibilities that can certainly take the future of work and collaboration to the next level
A lot is being done in this space. If you are interested to get some more perspective about the fundamental potential of DAOs, here is a great conversation conducted by Bankless with DAO experts:
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