Decentralized autonomous organizations, or DAOs, are Internet-based organizations controlled by their members and governed by rules that are encoded as transparent computer programs. Thanks to blockchain technology, these organizations can operate without centralized governance.
What are DAOs?
With the Internet becoming more and more widespread, there have been more opportunities for people and organizations to collaborate on different projects and causes. Whether through charities or crowdfunding platforms, it seems it’s never been easier, especially for regular people, to support a project they like. But those models have their limitations, mainly stemming from the fact that they rely on centralized governance.
Let’s take, for example, crowdfunding, which has exploded in popularity in recent years and has contributed to the successful development of a myriad of projects. However, traditional crowdfunding models rely on platforms like Kickstarter to facilitate the process.
In essence, decentralized autonomous organizations offer a new way for people to collaborate on projects without the need for some form of centralized governance. In addition, DAOs also enable their members to play an active role in the decision making process, in contrast to crowdfunding, where the user contribution typically is strictly monetary.
As is the case with other prominent blockchain applications like DeFi and NFTs, DAOs are made possible by smart contracts. Smart contracts that contain the rules and functionalities that make up a DAO and are stored immutably on a blockchain to ensure that they cannot be tampered with. These contracts also govern the DAO treasuries, ensuring that all spending is subject to approval by the community.
The fact that DAOs are governed by their members naturally raises the question: how does one become a DAO member? Well, when it comes to DAO membership, there are two distinct models – token-based and share-based. Let’s examine the two more closely.
A DAO that relies on token-based membership has a governance token that gives its holders voting rights, allowing them to take part in deciding the DAOs future. So anyone who owns the DAO’s governance token is a member of that DAO.
The governance tokens model allows DAOs to have truly permissionless membership. Because, in general, such tokens can be traded freely on crypto trading platforms like DEXes, they are readily available to anyone who’s interested in joining a particular DAO community.
A DAO can also provide users with other means to obtain governance tokens. For example, tokens can be earned as rewards for staking, validating, proving liquidity, etc. Those mechanisms incentivize members to keep their token holdings and remain engaged with the DAO community.
Because of their capacity for facilitating permissionless membership and supporting large communities, token-based models are particularly suitable for larger blockchain projects such as DeFi protocols.
The share-based model is permissioned, although, depending on the DAO, membership might not be difficult to obtain. That’s because in most cases, anyone interested in joining a DAO can submit a proposal to become a member and has a real chance of getting approved. Such proposals typically involve making some contribution to the DAO, whether in the form of tokens or work. A share gives its holder voting power, as well as an ownership stake in the DAO’s treasury. Notably, members are free to leave a DAO with their share of the treasury.
This model is very useful for DAOs built around smaller groups of like-minded individuals that want to work together to achieve common goals. However, the model can also be used to govern protocols and tokens.
What are DAOs used for?
DAOs represent a new type of organization, one that is much needed in today’s increasingly digital world. A true Internet-native organization that allows for people to quickly band together to work towards a shared goal, to build a community around a cause. It enables the creation of digital-first businesses whose flat and flexible structure allows them to move at a breakneck speed.
Here are some of the cool things we can do with DAOs today:
DeFi protocols and platforms rely on DAO-based governance structures, with governance tokens that allow the whole community to be involved in the process. The popular example here is MakerDAO, which oversees the generation of the decentralized token Dai.
A recent trend has seen the emergence of DeFi platforms – sometimes referred to as “DeFi 2.0” – with a distinct DAO-to-DAO focus.
Crypto investment funds
DAOs offer an easy way for people to pool their resources in order to pursue investment opportunities in crypto, NFTs, etc. The DAO model ensures that every member of the collective has a say on how those resources are used.
With DAOs, founding Internet-based charities around certain causes becomes easier than ever before. Charitable DAOs can have various agendas, ranging from advancing the blockchain ecosystem to supporting all kinds of social wellbeing initiatives.
A group chat with a bank account
According to one popular description, a DAO is a ‘group chat with a shared bank account’. It might seem a bit tongue-in-cheek, but to me, this description perfectly conveys DAOs biggest strength – their capacity for connecting like-minded people and encouraging collaboration. And as the technology behind them evolves and matures, DAOs seem poised to inspire new community-driven and digital-first approaches to doing business.