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What is DAO (Decentralized Autonomous Organization)?

DAO is a decentralized autonomous organization that is managed through smart contracts. DAOs have no traditional hierarchy. They work transparently, according to the rules written in the code. In their essence, DAOs are similar to existing forms of organizations.

Like DAOs, 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 DAOs are a much less branched out structure 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 DAOs have cash reserves (treasury) to implement the ideas voted for by the community. Most of the activities of a DAO 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 DAOs come into being?

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.” 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 projects based on voting. 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?

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 governance 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 DAO services or on separate platforms like Tally or Snapshot. Using Snapshot saves time in forming additional voting methods. DAO members work together based on the rules in a smart contract and a common goal. All rules are transparent.

Membership in the DAO can be divided into two categories:

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.

Share-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 advantages of DAO?

  • There is no clear hierarchy. In a DAO, every stakeholder can participate in the voting and decision-making process.
  • Transparency. Decision-making history is available to all.
  • Openness. Almost everyone with Internet access can become a holder of an DAO 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 VAO?

  • Regulation. There is currently no clear regulation of DAO.
  • Hacker attacks. Such decentralized structures are vulnerable to attacks.
  • Speed and controversy. The lack of a clear hierarchy can cause the community to splinter and slow down decision-making.

What kinds of DAOs exist?

  1. A crypto project can be considered a DAO, provided that token holders have the right to participate in voting and determine development paths. For example, Olympus DAO, Maker DAO, 1inch.
  2. Investment/Venture DAOs. Allow collective investment in assets and projects.
  3. Projects whose activities are aimed at investing or collecting NFTs. For example, PleasrDAO.
  4. DAOs for grant funding. For example, MolochDAO.
  5. 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.
  6. Educational DAOs. Odyssey DAO is an example of an organization that believes that learning the basics of Web3 should be accessible to all.
  7. 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.
  8. Analytical DAOs. Platforms that collect and analyze quantitative, qualitative data about decentralized autonomous organizations. For example, DeepDAO.
  9. Legal DAOs. LexDAO is a community of legal engineers that helps bring law and smart contracts together.

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

What’s the outlook for DAOs?

According to a recent Messari report, one of the trends in the crypto industry in 2022 will be DAOs. Over the course of the year, we may see a restructuring of such organizations, the emergence of subsidiary DAOs, 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 tools will help them do this.

DAOs are moving toward formal recognition. In April 2021, Wyoming passed a law recognizing decentralized autonomous organizations as a new form of company. A few months later, the first DAO 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 DAOs emerged in which token holders could invest their money in NFTs, Web3 projects, cryptocurrencies or other DAOs. 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.