If you have no idea what the terms blockchain, decentralization, or smart contract mean, get caught up on our previous post here, before coming back to learn about DAOs.
You’ve been in the crypto space for a minute and, inevitably, the term ‘DAO’ came up. A simple Google search might have led you to all kinds of DAOs, such as Data Access Object, Diamine Oxidase, or even Taoism.
The DAO we’re discussing today comes from the crypto definition. That is, ‘Decentralized Autonomous Organization.’ If you’ve read our previous post (here), you’ve seen our short and sweet description.
But DAOs are fascinating enough to warrant their own post. So, we’ve compiled a short 10-point list that will get you caught up on the past, present and future of blockchain organizations.
1. What is a DAO?
A Decentralized Autonomous Organization, DAO for short, is an open source blockchain protocol which is governed by a set of automated rules. The rules are decided and created by elected members of the DAO, and are coded to execute when certain conditions are met, without the need for human members to enforce them.
Thus, it is decentralized, which means (if you’ve been reading our other stuff) that there is no central governing entity, like there would be in a conventional company/organization. The DAO is made by the people, for the people, and enforced fairly with the use of technology.
2. How DAOs operate
So how exactly do these “rules” work? The rules are maintained and enforced by “smart contracts,” which are pieces of computer code that perform certain actions when given a specific input. (More on smart contracts here)
The idea behind the DAO is that if you chain enough of these contracts to work in harmony, you can build an entire automated business model! Of course, since these smart contracts are decided and managed by the people governed by them, the decision of the rules would be democratic, and each update, tweak and addition to the contracts would be clear to all members.
3. 2016: The origin story
Inspired by the concept of cryptocurrencies, members of the Ethereum community decided to try that same concept of decentralization onto organizations. In 2016, they announced the inception of The DAO, also known as Genesis DAO.
The DAO was built as a smart contract on the Ethereum network and received a lot of enthusiasm and support from the community. During its creation period, The DAO gained about 12.7M Ether (approximately $150M) through crowdfunding.
The DAO’s purpose was to act as a platform for people to pitch their ideas to the community and possibly receive funding. Holders of The DAO tokens were able to vote on plans, and received rewards if projects gained profit.
4. Tragic beginnings
Despite its running start, The DAO was soon met with tragedy. In June 2016, a hacker discovered an error in the code, and used it to drain a significant amount of funds from The DAO. Roughly 3.6M ETH was stolen, and this act marked the beginning of the end for The DAO, and it folded shortly after.
Things were quiet for DAOs for a few years, until its popularity rose again in 2020, with the explosion in popularity of DeFi (decentralized finance) protocols. Many popular yield farming and DEX (decentralized exchange) platforms, such as Compound and Uniswap, utilize DAOs for governance.
Despite the shaky beginning of the DAO, many are starting to see its potential and the benefits of DAOs, which we’ll explore in the next few points.
5. DAOs are transparent
There are many benefits of using DAOs for governance over conventional top-down organizational models. One of these benefits is that all the rules and regulations within the organizations are completely transparent.
The entire contract-drafting process, from inception to enforcement, is made crystal-clear to all members. The rules and actions are recorded on the blockchain ledger which is open source and is available to be viewed by anyone.
Moreover, the regulations can be managed and changed by the DAO community members through a democratic process: each member can vote on the changes, or they can vote depending on their contribution to the system.
6. DAOs could lead to better organization
Since the rules are defined, and then automated through smart contracts, no human interaction is necessary for interpreting the rules and enforcing them; which means that there is a low chance of human error, or corruption of justice within the organization.
The rules are executed automatically, and no third parties are needed to enforce them, thus DAOs can speed up network decision-making, and management costs are lowered significantly.
7. DAOs are autonomous
With a well-organized set of smart contracts in place, a DAO can run autonomously, which means there is no need for a central entity to control it. The organization has the ability to fully function without the need for a hierarchical management structure, and the community has the power to shape the DAO and how it operates.
8. Potential risk of DAOs
As evidenced in the fourth point, errors in code could indeed lead to hacking, and it’s always a possibility. But since the tragedy of the Genesis DAO, many blockchain development teams look to it as an example of what not to do.
Since the hack, there has been a strong emphasis on establishing secure blockchain platforms, and ensuring that code is written carefully and without error, in order to not be exploited.
9. The future of DAOs
Crypto DAOs are gaining attention recently for their large treasuries, which are derived from a portion of the projects’ native tokens. Some DAOs have huge amounts of capital waiting to be deployed, and the community members have the power to deploy it whenever and on whatever they wish.
While DAOs are mainly used to govern crypto projects, their uses are potentially limitless. They can be used in any organization that wants to follow a business model that focuses on community participation.
10. So, what’s stopping us from making DAOs out of everything?
Despite the many benefits (and very few disadvantages) of DAOs, legally speaking, they’re in a grey area. A DAO is neither legal nor illegal, but they currently reside in an uncertain regulatory landscape. In many places, DAOs are not recognized as business entities!
We established WACEO with the mission to solve this exact problem. Our non-profit organization helps and advocates for DAOs to be recognized as a legitimate entity. We also design frameworks for these blockchain organizations to legally operate and avoid potential regulation issues.
