The term DAO has begun to make its way into the mainstream. You may have heard of the ConstitutionDAO, who tried to buy a copy of the U.S. Constitution up for auction in 2021. Relatively speaking, DAOs are a new concept and one that many people are still trying to figure out. The ideas sound simple, but putting them into practice is another story. With that said, to date, there have been many successful DAOs. There have also been many more DAOs that have failed for one reason or another. Here we will lay out what a DAO is in straightforward terms. Keep in mind that new DAO methodologies and DAO tools are created all the time, so it’s possible a DAO you know about, or one may discover in the future, might be doing things slightly different than what is described below. Alrighty… let’s jump in!

DAO (pronounced “Dow”) stands for decentralized autonomous organization. In real terms, a DAO is a group of people that work together for a common purpose, agreeing to a set of rules or terms of how the DAO will operate and work towards its’ goal. DAOs operates online, allowing members to remain anonymous. User names are often pseudonyms, and wallet addresses (i.e., MetaMask- more on this in a later post!) are used to verify participants. 

DAOs are typically smart contract-based, meaning the “rules” are written into computer code published on a blockchain. This is where the autonomous portion of the name comes in. These codes are condition-based, meaning Y action is automatically taken if X happens. The blockchain, in turn, acts as a ledger of the happenings within the DAO. This method offers transparency where anyone can see when, how, and why the DAO proceeded with an action. It also facilitates accountability and trust amongst members since anyone can access or audit the ledger anytime. (See our other posts to learn more about blockchain tech and smart contracts). 

In contrast to a typical business or company, there is no organizational hierarchy. The “power” is decentralized to the stakeholders; all members have an equal vote on what happens and when. Some DAOs only allow one vote per stakeholder, but others allow more votes or increased voting weight depending on how many “shares” are purchased. 

Due to the decentralized nature of a DAO, where no single person is in charge, you may be asking yourself, “How does a DAO get anything done?!?” Great question! Many governance models are being used in the DAO space. (We’ll get into the various models in another post.) Speaking in the most general terms, here is a brief outline of how DAOs typically take action. First, DAO members offer proposals for action, change, etc. The group then votes on the proposal. Should the group vote “yes” to the proposal, it’s recorded on the ledger, and the action of the proposal moves forward. If the proposal fails to get the needed votes, this is recorded, and the action does not move forward. DAO members often help with projects or to-do items as voted on by the group. Alternatively, the DAO may vote on hiring outside help to reach a goal or complete a task. 

How do you join a DAO?

To join DAO, you need buy-in to become a stakeholder. Buying in looks different depending on each DAOs’ structure. You can think of this as buying “shares” of a company. Some offer “shares” in the form of tokens (aka cryptocurrencies) or NFTs. DAOs are constantly developing new and creative ways to become a stakeholder. Some buy-ins are honored in perpetuity, and some use a subscription-based model, requiring seasonal or repeated purchases at certain intervals to remain an active voting member. Also, some DAOs allow unlimited stakeholders, and some have a maximum number of stakeholders allowed to join. At any point in time, stakeholder status can be “sold” to someone else via the sale of whatever was purchased to gain entry (NFT, tokens, etc.). Upon selling your “share,” you are no longer a member of the DAO.

What are the benefits of DAOs?

  • Anonymity- DAOs allow participants to remain as anonymous (if they'd like), removing biases such as race, gender, or religion.
  • Community-focused and put the stakeholder’s best interests first.
  • No structured hierarchy, which increases longevity and diversity of thought.
  • Open-sourced, which promotes transparency.
  • Allow for worldwide participation since they operate online.

What are the potential pitfalls of DAOs? 

  • Anonymity- Wait a second… how can this be a benefit and pitfall?! Remaining anonymous can be a detriment as it allows potential “shady” players to participate. There have been situations where someone says they are forming a “DAO” and then run away with everyone’s investment. Since they are anonymous, there is no accountability or way to hold them liable. This leads perfectly to my next point….
  • A DAO saying they are operating as a DAO but are not. This happens more frequently than you might imagine. In less extreme examples, many DAOs fail to have a proper voting mechanism, or it’s unclear how to join. In a worst-case scenario, something terrible happens, as stated in the previous bullet.
  • The legal system has not caught up and is a barrier to broader adoption. Many call the current environment the “wild west” when it comes to the legalities around DAOs. Hopefully, this will change in the near future.

What kind of DAOs exist, and how can I find them?

I’m glad you asked! There are many resources to find DAOs, but not all are created equal. Many of the prominent players use metrics as the driving source of information provided on the DAOs they share. Metrics are important, but what if you have no idea how to interpret those metrics? Alternatively, The List of DAOs (www.listofdaos.com) is mission-focused and allows its users to search for DAOs based on their interests. This promotes broader participation, including in those DAOs that may be in their very early stages. On The List of DAOs, you can find the purpose of each DAO and their social and/or website links to learn more. There is a DAO for every interest or cause, and the diversity of projects in the space is growing daily! Definitely check out www.listofdaos.com to see which DAOs may interest you.

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Resources:

https://office.kokonut.network/blog/english/what-is-a-dao

https://blockchainhub.net/dao-decentralized-autonomous-organization/

https://www.omm.com/resources/alerts-and-publications/alerts/what-the-dao-why-everyone-is-talking-about-decentralized-autonomous-organizations/

https://www.coindesk.com/learn/what-is-a-dao/

The content is for informational purposes only. Nothing contained in this article constitutes a solicitation, recommendation, endorsement, or offer of a security, token, or application. This is not investment or legal advice. Please do your own research.