A decentralized autonomous organization (DAO), is a group that is organized around missions and coordinates using a set of rules on a blockchain. This means that they are not controlled solely by one institution, such as a central bank or government.
A DAO has the advantage of being more transparent than traditional businesses, as all actions and funding are visible to everyone. This greatly reduces corruption and censorship. Publicly traded companies must submit independently audited financial statements. Shareholders only have a snapshot of the financial health of the company. The balance sheet of a DAO is available on a public blockchain. This makes it transparent to all transactions.
DAOs are generally more accessible globally and have lower entry barriers than companies. DAO members that don’t agree to the rules or actions will have lower switching costs due to the transparency and lower barriers of entry. DAOs with similar missions might have to compete for members. They are encouraged to be transparent and not to extract too much rent from their group in order to attract the best members. The DAOs may need to evolve quickly to meet members’ needs.
This post will not cover every DAO in crypto. It is meant to provide a high-level overview of DAOs, their benefits, and some examples of their potential uses.
Some DAOs
This DAO was perhaps the most famous. It was launched as a decentralized venture capital fund in April 2016. Members contributed Ethereum and received tokens in exchange. These tokens could be used to vote on the projects in which funds should be distributed. The DAO raised $150 million in ETH, and $60 million was stolen. The interesting thing about the DAO hack is that anyone can still see all transactions that took place on the public blockchain. This record will not disappear even though it has been defunct. Despite the fact that DAO hacking temporarily caused some people to be skeptical of the term DAO, DAOs are a powerful form of organizing. It didn’t take long for DAO activity to a resurgence within the crypto space.
DAOs can also be applied to crypto projects if they are managed through decentralized governance. Token holders can vote on the direction and setting of various parameters, as opposed to being determined solely by a central team. Token holders of MakerDAO building decentralized stablecoin can vote on the parameters and govern the system.
Curve DAO is another good example, building an automated market maker (AMM), which generates fees and shares revenue with token holders who lock their tokens. The more time the Curve token (CRV), is locked, the higher the voting power and rewards for DAO members. This DAO is different from traditional companies that pay out profits pro-rata. The voting power and revenue share are weighted based on how long a token holder has been invested.
Stakeholders can directly control the assets of a DAO using a token. Any stakeholder can be pseudonymous, and they can be located anywhere in the world. These stakeholders can work together to allocate DAO assets to any purpose, even to hire workers. This is what is happening right now. DAOs are made up of hundreds of pseudonymous and known members. They have hired legitimately based on their community reputation. The Empty Set Dollar DAO (ESD), for example, is paying Lewi $180,000 as a salary. He said that this was the highest-paying job in his career. This system has been used by Decred to reward contributors.
There have been many DAOs that were created to fund grants or investments. Like the LAO, which is made up of Ethereum enthusiasts who invested early in projects such as Aavegotchi and Boardroom. The LAO and MetaCartel Ventures are two examples of DAOs with strong access to the crypto ecosystem’s deal flow. The founders of these DAOs want to work alongside the DAO members, and the DAO itself is the ethos of crypto.
There have been DAOs that offer more targeted investment opportunities, such as the ownership of NFT (point to our article) artwork and virtual gaming items.
DAOs can also be organized around work, such as Raid Guild, which is a decentralized group of builders and designers who are available to work on products within the crypto space. MetaFactory is organized around fashion and culture and sells the products they create.
Possible Application Cases in The Future
DAOs have many interesting uses and we’re only at the beginning of our design journey. DAOs will allow us to rapidly experiment with governance systems and quickly learn what works and what does not. One example of a DAO that uses futarchy to make decisions is one where members bet in prediction markets, and then use the outcomes of those markets as a guide.
Meta-governance will also be available when DAOs serve different protocols and get governance tokens back. DAOs will be able to vote and act as delegators in DAOs.
A DAO with anonymous members is one possible use case. Members can gain a reputation without having to reveal their identities and build up their profiles in the DAO. This makes it possible for members to play on an even playing field. It also makes it easier to reward individual contributors, rather than catering to high-profile members who have a large following.
Another use for DAOs is collective NFT art. Each member can vote on the attributes of an art piece and the overall piece will change according to their votes.
Potential Cons of DAO
DAOs can be a powerful way to organize, but they may have some limitations and are not the best system for all situations. Although DAOs are able to replace certain aspects of legal contracts with code and can save a lot of operational overhead, there may not be any legal protections beyond the rules outlined in smart contracts that facilitate the DAO. It can cause problems if the DAO’s control is centralized or unclearly defined. However, some DAOs might also be legal entities that facilitate the DAOs. The Wyoming Senate also passed a Wyoming DAO bill that would assist in the creation of legally recognized DAOs.
It may be more difficult to coordinate and move quickly depending on the DAO’s setup than centralized leadership such as a CEO who makes quick decisions when needed. A DAO might set up quorums that are quick and establish requirements for how responsive DAO members must be. There could also be more centralization at the beginning when many decisions must be made. The DAO then decentralizes as time goes by in what is known as “progressive decentralization”.
It is possible for some members to become apathetic and not want to vote. This is where voters will delegate to other members who are more informed and actively participate in voting. These representatives are often referred to as protocol lawmakers because they often campaign for votes to be delegated to them by DAO members, much like current politicians. There may be protocol lobbying groups trying to influence the decisions of these politicians. On the other hand, one-day DAOs might be major political institutions themselves and lobbying for them.
Another problem is that open membership could cause lower quality and more noise in the DAO. However, these issues can be addressed by DAO screening processes and minimum token holding amounts. This will ensure that participants have some stake in the game and are incentivized for the DAO to succeed.
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