Decentralized Autonomous Organizations (DAOs): A New Era of Community-Led Entities

A version of this article was first published in The Next Web.

Introduction: What is a DAO?

A DAO, or “Decentralized Autonomous Organization,” is a community-led entity with no central authority. It is fully autonomous and transparent: smart contracts lay the foundational rules, execute the agreed upon decisions, and at any point, proposals, voting, and even the very code itself can be publicly audited. Ultimately, a DAO is governed entirely by its individual members who collectively make critical decisions about the future of the project, such as technical upgrades and treasury allocations.

DAOs (pronounced “Dows”) are a new kind of entity, regarded by their enthusiasts not as “companies” at all but as collections of individuals organized around the decentralization, autonomous functioning, transparency, and bottom-up principles that characterize the digital universe. DAOs have been created for varied purposes, both charitable and profit-making. Although most have been focused on cyber-related projects, their presence has been expanding beyond the cyber realm. For example, “SPADs”-which are SPACs (special purpose acquisition vehicles) that are DAOs-have emerged to engage in the acquisition of physical target companies. Some investors, dubbing DAOs “the new LLCs,” expect that they will become a significant form of business entity in the very near-term.

Significant interest in DAOs began in 2020, alongside surging interest in cryptocurrencies, NFTs, and “decentralized finance” (DeFi). In 2021, the total value of crypto funds held in DAO treasuries reportedly surged from $400 million to $16 billion, and the number of holders of interests in DAOs rose from just 13,000 to 1.6 million.

How DAOs Work: The Mechanics of Decentralized Governance

Smart Contracts: The Foundation of DAO Operations

The rules of the DAO are established by a core team of community members through the use of smart contracts. These smart contracts lay out the foundational framework by which the DAO is to operate. They are highly visible, verifiable, and publicly auditable so any potential member can fully understand how the protocol is to function at every step.

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Funding and Governance: Token Issuance and Voting Rights

Once these rules are formally written onto the blockchain, the next step is around funding: the DAO needs to figure out how to receive funding and how to bestow governance. This is typically achieved through token issuance, by which the protocol sells tokens to raise funds and fill the DAO treasury. In return for their fiat, token holders are given certain voting rights, usually proportional to their holdings.

Deployment and Immutability: The Autonomous Nature of DAOs

Once funding is completed, the DAO is ready for deployment. At this point, once the code is pushed into production, it can no longer be changed by any other means other than a consensus reached through member voting. That is, no special authority can modify the rules of the DAO; it is entirely up to the community of token holders to decide.

Key Features and Benefits of DAOs

Transparency and Accountability

DAOs are transparent and accountable - all transactions and decisions made by a DAO are recorded on the blockchain and can be viewed by anyone. This ensures that DAOs are democratic and fair, and that there is no hidden agenda or manipulation by any individual or group. The details of each proposal are readily available, voting history is continuously recorded, and even the voting records of particular token holders can be observed.

Direct Control and Efficiency

DAOs (in their pure form) can be set up more quickly and easily than traditional legal entities; have easy access to individuals worldwide to become members; and can be run without the significant overhead costs of traditional companies. Also, without an unwieldy process, they can commence instant discussion of issues by, and receive widespread and varied input from, actual stakeholders, ostensibly leading to better decision-making.

Alignment of Incentives

Part of the elegance of this framework is the alignment of incentives. That is, it is in the individual’s best interest to be forthright in their voting and only to approve proposals that serve the best interest of the protocol itself. A healthy, robust protocol will garner more usage, and in turn, increase the value of the tokens of which each DAO member is in possession of. So as the protocol succeeds, so do the token holders.

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Trustworthiness

Operation via the self-executing smart contracts helps to ensure that DAO funds cannot be used in violation of the DAO’s operating rules.

Immunity to Corruption

DAOs are immune to corruption - since they are decentralized, there is no one person or group in control of a DAO. This makes it difficult for anyone to engage in corrupt activities, as they would not be able to get away with it undetected.

Enhanced Security

As blockchains are immutable and tamper-proof, data stored on a blockchain is incredibly secure. This makes DAOs less prone to hacking attacks, data breaches and theft than traditional organizations.

Greater Autonomy

Members of a DAO have more say in how the organization is run than they would in a traditional company. This allows for a greater degree of creativity and innovation, as well as the development of new governance models that better reflect the needs of the community.

Cost Efficiency

By automating many of the processes involved in running an organization, DAOs can reduce costs and streamline operations. This makes them a very attractive option for businesses or organizations looking to save time and money while still driving growth and innovation.

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DAO Membership Models: Token-Based vs. Share-Based

Two common membership structures are Token- and Share-based membership.

Token-Based Membership

Token-based membership is commonly used to govern broad decentralized protocols alongside the DAO’s native token. Depending on the governance token, token-based membership can be fully permissionless if traded on a decentralized exchange. Members can earn tokens by providing useful liquidity or when contributing to consensus via staked governance tokens. MakerDAO is an example of a token-based membership model. Anyone holding its governance token MKR has voting rights with the power to shape the future of the Maker protocol.

Share-Based Membership

The share-based DAO model is not fully permissionless--this structure is often used by private communities united via common goals. Private DAOs may extend membership to select individuals via exclusive invitation. Other share-based DAOs may allow prospective members to petition or pay for access to a community. Shares determine ownership and voting power. MolochDAO is an example of this membership arrangement. To join, prospective members were required to submit a proposal demonstrating they had valuable expertise and assets useful for advancing the DAO’s mission.

How to Get Involved in DAOs: A Guide to Participation

Once you’ve found a project of interest, there are a few different ways to get directly involved. It’s important to note that not all DAOs operate with the same purpose so the first step is figuring out the core function of each DAO.

Technical Governance

For DAOs focused on technical governance, it’s important to understand what sort of voting rights are granted to token holders and what kind of proposals are at stake. In some instances such as Uniswap, token holders can vote on distributing a portion of the fees that the protocol collects amongst themselves. In other protocols such as Compound, token holders can vote on distributing these protocol fees towards bug fixes and system upgrades.

This approach also allows freelancers and those generally interested in the project to be able to join ad hoc and receive compensation for their work by way of DAO grant-funded projects (DAOs regularly post these sorts of ad hoc projects on their Discord server).

Treasury Pooling and Allocation

For other DAOs, the focus is less about governance over the technical aspects of the protocol, but more so on treasury pooling and allocation. SharkDAO, for instance, exists primarily to facilitate the pooling of individual token holders’ funds as a means to acquire rare NFTs that would otherwise be too expensive for the common person (in this case, the goal is to acquire Nouns, which can sell for well over $250,000). This approach presents novel opportunities for individuals to leverage the power of a collective pool of assets.

Levels of Participation

Levels of DAO participation vary. You can choose to swap into governance tokens and pay attention to Snapshot votes; you can join the DAO’s Discord and take on actual projects where you’re compensated for your contribution; you can even invest into DAOs of interest by networking at conferences. You choose how involved you want to be.

Examples of DAOs: A Glimpse into the Decentralized World

DAOhaus: DAOhaus is a no-code platform for launching and running DAOs. It is owned and operated by the community. If you’re interested in starting your own DAO or exploring the vibrant landscape, look no further.
MakerDAO: If you would like to contribute to the protocol that introduced the world’s first unbiased stable coin, DAI, you can get involved in governance by voting on changes to the Maker protocol.
RaidGuild: This service-based DAO stemmed from the MetaCartel network and is deeply entrenched in the Web3 world. If you’re looking to offer up your developer, marketing, or design skills to the guild, they’re looking for quality talent to continue slaying product demons.
Proof Of Humanity: This sybil-resistant registry of humans uses social verification and Kleros’ courts to distribute Universal Basic Income (UBI) tokens to verified humans on-chain. If you would like to join the justice revolution, start here with this democratic DAO.
Opolis: This member-owned digital employment cooperative offers benefits and shared services for the independent worker. If you’re passionate about the future of work and want to have a say in what that looks like, join here.
BanklessDAO: Interested in spreading the Web3 word and educating the masses through content? This media-centric DAO might be of interest to you. You can learn more here.
MolochDAO: This OG DAO awards grants to advance the Ethereum ecosystem. If you would like to become a governing member and contribute to this group, you can fill out this application.
FriesDAO: FriesDAO seeks to fund the acquisition of fast food restaurants by franchisees, who will then run them as part of a decentralized network of restaurants, governed by the DAO’s members. FriesDAO has raised $5.4 million so far and is commencing its efforts with Subway franchisees.
BuyTheBroncos DAO: This DAO recently sought to acquire the Denver Broncos football team when it was for sale. The plan was to raise $1 billion from the DAO’s members and the remainder from more traditional investors. There was speculation that the DAO had an advantage in the sale auction because the National Football League wanted the team to be partly owned by an investor from a minority group, and with the DAO’s dispersed membership there would be many minority owners.
BlockbusterDAO: This DAO, with 8,000 members (including the daughter of the deceased long-time CEO of almost-defunct Blockbuster), was created with the mission of pressuring Dish Network, which owns the intellectual property of Blockbuster, into selling the intellectual property to the DAO, so that the DAO could transform “Blockbuster” into a new kind of streaming video platform that is run on a blockchain. According to the DAO team, Dish Network ultimately refused to sell the asset to a DAO.
ConstitutionDAO: Constitution, raised $47 million (in ether) over a few days.
Ukraine-related DAOs: More recently, several DAOs quickly raised millions of dollars to support Ukraine after the Russian invasion.
Uniswap: a DAO that provides liquidity for the exchange of crypto-assets, currently manages a treasury of more than two billion dollars and is governed by a network of holders of Uniswap governance tokens.
Friends with Benefits: A community DAO, Friends with Benefits, supports creatives in the development of projects, events, and more.
Gitcoin: DAOs are even developing new ways of funding the development of digital public goods. Gitcoin is a platform for directing resources to the creation of public tools including open-source software. So far, it has provided more than 40 million dollars in funding using novel mechanisms such as hackathons and decentralized crowdfunding.

Challenges and Risks Associated with DAOs

Potential Fraud: The more freewheeling nature of DAOs lends itself to investors being defrauded or misled when funds are raised.
Crypto-related Risks: Crypto-related risks.
Lack of Legal Status and Potential for Unlimited Liability: Unless a DAO is organized as a legally-recognized entity (which inherently defeats DAO-related principles to some extent), as a legal matter it may be considered, by default, to be a general partnership, with each member potentially having unlimited legal liability if something goes wrong. The lack of legal status also makes entering into and enforcing contracts more difficult and uncertain. (Accordingly, some DAOs are organized as (“wrapped” in) LLCs or other recognized legal entities and try to adapt those formats to integrate as much as possible the DAO-based principles of decentralization and autonomous functioning.
Securities Law Compliance: Securities law compliance.
Governance-related Issues: First, a DAO’s decentralized governance model does not always work as advertised, as a small group of founders, holders of significant amounts of tokens, and/or others interested in being actively involved may become a de facto control group (either because the size of their holdings is sufficient to control the vote or, as often occurs, other members lose interest in participating). Second, decision-making through smart contracts on the blockchain can stifle change and needed adaptation, as it requires consideration and voting by the members and re-coding of the software every time a change is to be made. (To address these two issues, some DAOs have instituted subgroups, dubbed “sub-DAOs,” which are effectively committees comprised of groups of the DAO’s members, to consider and accomplish specific tasks and thus avoid the necessity of votes by the full membership on every small decision.) Third, arguably, decentralized governance may not produce good or timely decision-making as compared to professional management with relevant expertise, particularly when complex issues are involved.
Difficulty Returning Funds: Due to fluctuating and often high fees incurred to conduct on-chain transactions, it is often not practical for a DAO to return funds to the members (when, say, the DAO fails in its purpose or there are irreconcilable disagreements among the members).
Environmental Concerns: The intense energy usage and related carbon emissions created by the blockchain infrastructure supporting some DAOs has raised environmental concerns.
Lack of Recognized Legal Status: Except where DAOs are structured in the form of (or “wrapped” in or “bridged” to) a legally recognized entity (such as an LLC, cooperative, or foundation-as discussed below), it is unclear what laws and regulations apply to them-and, thus, whether the members face unlimited personal liability ; how they can enter into or enforce contracts or conduct other traditional business activities; what jurisdictional authority applies; and on what basis they may be subject to taxation.
Antitrust Uncertainty: The antitrust agencies have not yet issued any guidance relating to DAOs. To the extent that a DAO may be deemed, for purposes of the antitrust laws, not to constitute and function as a sin…
Cybersecurity: They can be vulnerable to spammers and data breaches if not properly access controlled. There have been some high-profile cases where hackers have managed to steal funds or data from DAOs.

The First DAO: A Cautionary Tale

The very first functioning DAO (called “The DAO”), which was established in 2016 to invest in blockchain projects, raised $150 million (in ether) in a matter of weeks. Investor reaction to the DAO announcement greatly exceeded expectations. Unfortunately, there was a problem with the coding of the exit door. Unfortunately, there was a problem with the coding of the exit door. the organization, over $150 million in Ether was contributed to The DAO. Unfortunately, there was a problem with the coding of the exit door. updated. door refund. ever being updated. been implemented. distribution of the $70 million after the 28-day waiting period has expired. was at the heart of the Ethereum blockchain prevented any simple solution. was made to create a “hard fork” in the blockchain. Ether on the blockchain and was adopted by a large majority of the voters. contract. This hard fork was extremely controversial. consequences. longer worthy of trust. took over the Ethereum blockchain without the roll-back. Ethereum Classic kept moving forward. of dollars’ worth of Classic Ether. to go after bad actors on the blockchains. blockchain to freeze out those accounts. owner to “wash” the funds and make then transferable again. traceable history that is generally associated with all crypto tokens. directed by the individual transfers. Tornado Cash then takes a fee for the transaction. blockchain (used to operate the popular NFT game Axie Infinity). thefts were made by North Korean-backed hackers known as the Lazarus Group. thefts have been used to help fund the North Korean’s weapons program. Tornado Cash or the related accounts added to the SDN list. addresses containing more than $400 million in assets. down.

Setting Up a DAO: A Step-by-Step Guide

Define Your Goals: Start by creating a mission statement and defining your goals. What do you want your DAO to achieve?
Build a Community: Next, build a community of supporters who will help you enact your goals. Use your community tools to engage them and get their feedback.
Establish Funding: Once you have a strong community in place, establish funding goals, set up the treasury and structure your financing strategy.
Discover Governance Structures: Discover governance structures and determine how the DAO will be run. Determine your voting mechanisms. Will it be democratic or autocratic inclined?
Decide on Ownership: Finally, decide on ownership and memberships structures and who will have control over the DAO and who will decide the future course. Establishing clear ownership and governance will help ensure that your DAO runs smoothly and achieves its goals.

Platforms for DAO Creation: Tools for Building Decentralized Organizations

DAO creation platforms Platforms like Aragon, Daolens, and Syndicate provide templates and tools to help you create and manage your DAO. These platforms also offer a community of users who can offer support and advice. Aragon is a DAO creation platform that makes it easy to create and manage your DAO. It offers templates and tools to help you get started, as well as a community of users who can offer support and advice. Daolens is another DAO creation platform that offers similar features to Aragon. It also provides templates and tools to help you get started, as well as a community of users who can offer support and advice. Syndicate is a DAO creation platform that focuses on governance and ownership. It offers templates and tools to help you establish these aspects of your DAO, as well as a community of users who can offer support and advice.

The Future of DAOs: A New Paradigm for Organizations

DAOs anticipate a future in which democratized organizations supersede traditional corporate models withinWeb3. DAOs present individuals with unprecedented opportunities to connect to like-minded communities across the globe. Legislative bodies around the world are coming to grips with the legal status of DAOs. Their decisions could cause tremendous upheaval or help prevent abuses of the system - or both. One troublesome question involves how governance tokens should be treated for tax purposes. Advances in distributed ledger technology can bring other possibilities to light for DAOs. Only time will tell if, and if so how, DAOs will ultimately have their greatest impact. While DAO proponents evangelize the revolutionary potential of these systems, skeptics question their utility.

tags: #DAO #explained