Kryptolesson #20

What is a DAO?

A DAO, or decentralized autonomous organization, is a type of software running on a public blockchain. Unlike in traditional corporations which are managed in a hierarchical way by executives, boards and committees, DAOs are member-owned communities without centralized leadership where decisions are made in a grassroots or bottom-up way. DAOs can provide an open, inclusive and transparent model for human coordination. They allow members to gather a global set of participants around a common mission and collaboratively allocate funds toward it. Any community can adapt a DAO and program it according to its own goals.

DAOs ↗ are intended to emulate a company model where rules and regulations are programmed into smart contracts. Recall that smart contracts are computer programs running on a blockchain which automatically execute if certain pre-specified conditions are met - without the need for a third party. The contract defines the rules of the organization and holds the community’s funds. Once the contract is deployed, it cannot be updated and is configured to change its rules only after a vote. Prior to going live, DAOs usually conduct a funding phase that anyone can participate in. There are different models for DAO membership. To join a DAO, users are typically required to hold its token which grants access to vote on proposals and updates, proportional to the token amount they hold. From a governance perspective, the native tokens ensure that each token holder has a voice. A member's vote can also increase based on the amount of work they have contributed to the project.

That said, DAOs also come with potential drawbacks, including lengthy decision-making processes through voting, a lack of democracy in the event of dominant token holders as well as ongoing legal and regulatory uncertainty. Meanwhile, the US state of Wyoming has passed landmark legislation ↗ by clarifying the legal status of DAOs. The recent DAO-focused bill now recognizes DAOs as limited liability corporations (LLCs) and makes the rights of DAOs as legal persons enforceable in court.

A project called “The DAO” was one the earliest examples of a DAO. It was governed by a “code is law” philosophy and designed to work as an autonomous venture fund platform investing in projects voted on by its token holders. The vehicle raised 12.7 million ETH in May 2016 – roughly 14% of ETH in circulation at the time - worth about $150 million. On 17 June 2016, a hacker managed to exploit its flawed code which allowed them to drain 3.6 million ETH ↗ into a child DAO. Today, there are hundreds of DAOs ↗ with different types of membership types and governance models. Some well-known DAOs include MakerDAO ↗ (governance of the Maker Protocol), MolochDAO ↗ (focused on funding Ethereum projects) and PleasrDAO ↗ (fractional NFT ownership).

Photo by Joel Filipe