What is a DAO?

Have you been hearing the term "DAO" thrown around all over the internet but have no idea what anyone’s talking about?

We’ll tell you everything we know about Decentralized Autonomous Organizations.

What does DAO stand for and what does it mean?

DAO stands for Decentralized Autonomous Organization and it’s a relatively new type of organization structure that uses the blockchain and smart contracts to facilitate governance and group decision making regarding proposals and use of funds managed by an organization. 

DAOs have also been popularly described as a subreddit with a shared treasury. This analogy is useful for painting a basic picture of DAOs but fails to describe the potential complexities of DAOs in practice.

But to start with a simple definition, yes, DAOs do kind of work like a subreddit with a shared treasury. 

Members of DAOs can vote yes or no on proposals submitted by other members and have a voice in how the group funds are allocated. 

That is how DAOs work on the most basic level, but if you start asking “how” and “why” they work this way it gets a lot more complicated. 

Wikipedia defines DAOs as “an organization represented by rules encoded as a computer program that is transparent, controlled by the organization members and not influenced by a central government.”

DAOs don’t necessarily have to replace any central government, but rather centralized top-down decision making found in large organizations.

Because DAO transactions and rules are tied to a token and recorded on a blockchain it brings transparency to the organization’s decision making process. If a group of members tries to subvert the rules they can only do so by exploiting a loophole in the code, otherwise they must follow the outlined procedures embedded into the contract.

Many financial and NFT industry analysts believe DAOs have a bright future ahead and that they may upend industries from entertainment to manufacturing and more within the next decade.

Notable analysts like Cooper Turley have called DAOs “the next LLC” and have predicted the next Facebook-like company will be formed as a DAO with a token versus shares and equity. 

Billionaire investor Mark Cuban is also very bullish on DAOs and believes that will become a major competitor to legacy businesses. 

Philosophy Behind DAOs

The philosophy behind DAOs is drawn from the ethos of the Bitcoin Whitepaper regarding decentralization of money and thus power.

Bitcoin is actually considered to be the first DAO by many because it is a permissionless network that functions autonomously and is governed through a consensual protocol. Bitcoin operates on the principle that code is law and DAOs do too.

Bitcoin also championed the idea of anonymity and control over your own coins and data. DAOs are a natural structure to emerge in a world based on these concepts, but they can be used for more specific and targeted purposes like a company, charity, or social affinity group. Really any organization that requires the participation of a large group of people can be ported into the DAO model if the members are interested.

DAOs allow for many users of a network to come to consensus on how they should operate as a group. With rules embedded into the code of the tokens the DAO uses for voting, aka governance, it takes away a lot of the friction of traditional bureaucracies and hierarchies.

Of course, that’s easy to say and much harder to achieve in practice.

Building and running DAOs is difficult and many DAOs aren’t predicted to be successful long-term (similar to how many start-up companies fail “long-term”).

DAOs also carry unique security risks given that they are run on code. If the code underlying the DAO is exploited by hackers then a DAO could lose their treasury instantaneously.

It’s happened numerous times beginning with the hack of "The DAO" (a very early investment DAO) in 2016, but like when crypto exchanges are hacked, the market recovers and we chalk it up to painful security lessons learned for all involved.

How To Start A DAO

DAOs can form in several ways.

Some DAOs form a lot like traditional companies do with initial investors putting up money to receive a share of tokens and thus stake in the DAO. Other DAOs issue tokens via airdrops. Sometimes tokens are offered in structured funding rounds similar to seed capital investing.

It’s also not uncommon for a DAO to start out of a discord or in some other organically created group and then the members decide to form a DAO based around a shared principal or purpose. Then it’s time to raise some capital and fund a treasury.

In the next section, we’ll talk about some notable DAOs that formed treasuries for a large group asset purchase like ConstitutionDAO.

DAOs can also start out as a more centralized organization with a core team and a defined leader but then later decide to decentralize, issue tokens, and set up governance procedures.

The Ethereum Name Service or ENS is one example of a core group decentralizing their governance to their users.

In late 2021, ENS took a snapshot of all the users who had purchased .ETH domain names from them up until that point and based on the amount of participation they had in the service, users received a token allocation.

At that point, users could decide to hold or sell their tokens on the open market, thus allowing anyone to buy membership into the ENS DAO.

This is one way DAOs are different from traditional organizations. For DAOs with public tokens, anyone can buy into them and receive the benefits of participation.

DAO Governance

Governance is arguably the most important topic of conversation among proponents of DAOs. Changing DAO rules and procedures once they are locked into a smart contract is difficult and requires technical expertise. DAOs were designed to not need to be amended in this way and making this type of change can crash a token’s value.

Active participation in a DAO takes a lot of time and many of the more successful DAOs either operate using working groups or sub-DAOs to compartmentalize participation to different projects. Many DAOs allow for members to delegate their votes to others who are compensated by the DAO to spend the necessary time and energy to vote thoughtfully on proposals. If this sounds a lot like Congress to you, you are not wrong. Unfortunately Congress doesn’t work off a transparent blockchain and probably 99% of them couldn’t understand a single section of this article.

Some members of DAOs work in exchange for token allocations, this can look like a mix between gig work and contract work. Working for DAOs will be an interesting concept at scale as a member can grow to hold more voting power and equity in an organization over time. Imagine if a major corporation like McDonalds became a DAO and you really could work your way up based on your contribution and not corporate politics.

Working for DAOs can range from marketing work, administration, coding for projects, it’s as wide ranging as can be.

Why Join A DAO?

So why join a DAO?

Since DAOs have begun proliferating, the community has been experimenting with what DAOs can actually accomplish. The most common types of DAOs right now are investment DAOs for Defi projects or collecting NFTs. These DAOs are like investment clubs that are working together to pool resources and earn profits.

Other DAOs function more like LLCs and have similar goals to traditional companies.

People seem to be attracted to DAOs because they are allowing for new ways to get involved with investing and effecting change in the world.

Centralized organizations usually require investment from massive funds or VCs to get off the ground, DAOs have a much lower barrier to entry. DAOs are essentially crowdfunding on the blockchain.

A few of the more notable DAOs that formed in 2021 did so in order for a group of people to purchase rare assets. ConstitutionDAO raised $47 Million in 72 hours to bid on an original copy of the Constitution only to narrowly lose out to a counter bid from a solo whale investor. They ended up disbanding and issues the $PEOPLE token to commemorate the historic event.

Other Notable DAOs are WAGMI United who raised money to purchase a football club, or PleasrDAO who raised funds to rescue the one-of-a-kind Wu Tang album that was previously owned by Pharma bro Martin Shrekli.

FWB or “Friends With Benefits” is a social DAO that members buy into for access to exclusive social events like private dinners, art openings, and talks by influential people.

Different Types Of DAOs

As the community experiments with “DAOing” different types of organizations, we're seeing new categories of DAO emerge. Here’s a breakdown of all the unique types of DAOs we’ve seen form so far.

Protocol DAOs / AMM DAOs

Protocol or AMM (Automated Market Maker) DAOs use smart contracts to provide Defi services like market making and token issuance.

MakerDAO is the protocol behind the DAI stablecoin. Now almost 1000 projects are integrating DAI into their own app ecosystems.

Other Protocol DAOs function as DEXs (Decentralized Exchanges) like UniSwap or SushiSwap. Usually these groups run upon governance tokens and the more participation you have in voting the greater your rewards.

Grant DAOs

Grant funding is one of the earliest use cases for DAOs. A community will pool funds together and then vote on the allocation. Most grant DAOs were created to fund new Defi initiative, Aave utilizes grant style funding to build up its ecosystem. 

Investment DAOs

Investment DAOs are probably the largest category among the financial DAOs. They are attractive to investors large and small because they offer an easier entry point into investments like NFTs.

People have been investing in groups for generations and investment DAOs are just the latest interaction. Younger investors in their 20s and 30s who don’t have large net worths can benefit from the democratization and transparency of investment DAOs. In the traditional financial markets you need to have over $200,000 in yearly income to be considered an accredited investor and have legal access to certain lucrative opportunities.

Investment DAOs are also thinking outside-the-box in terms of the assets they are invested in like PleasrDAO buying a rare album or WAGMI United purchasing an entire sports team. 

Social DAOs

Social DAOs are just getting started and present one of the most fun use-cases for DAOs. Social DAOs are communities created around a social activity or pursuit like enjoying art, culture, fine dining experiences.

The most known social DAO is FWB (Friends With Benefits) which we mentioned above. The mission of FWB is to bring artists and cultural thinkers together allowing them to collaborate via members only events. The community is governed by social tokens and you need to hold them to get access to their events. The value of the tokens more or less reflects the social market cap of the community.

Collector DAOs

Collector DAOs are similar Investment DAOs and there is some crossover between them. PleasrDAO falls into this category as well since their investment strategy revolves around purchasing rare collectible assets. They also purchased several NFTs including the original Doge meme which ran them $4 million in ETH. Both Collector DAOs and Social DAOs have a networking aspect because in the NFT space art and community go hand in hand.

Media & Social Media DAOs

Media DAOs and Social Media DAOs are content platforms that are driven by individual creators who are the token holders. As opposed to traditional top-down media organizations, DAOs like Bankless and Forefront create opportunities for people to learn about DeFi and to get involved with the platform's content creation and curation activities. 

Entertainment/NFT DAOs

Entertainment or NFT DAOs are DAOs organized around a PFP project or community. Projects like BAYC that give holders full IP rights to each NFT have formed several different Entertainment related DAOs based on the underlying IP like Jenkins The Valet which is creating a novel and IP based off of the Jenkins Ape and other Apes.

Yuga Labs, the team behind BAYC, has also announced plans to turn the entire operation into a DAO at some point in the future. 

Other decentralized IP projects like Doodles have also hinted at turning their communities into fully fledged DAOs down the line. 

NounsDAO has operated as a DAO from the get-go and recently featured in Budweiser’s SuperBowl ad. 

Creating entertainment that’s widely enjoyed is no easy task, so we’ll see how these types of DAOs fare as the space continues to evolve.

Challenges With DAOs

Despite the enthusiasm around DAOs they are not without significant challenges to gaining wider adoption. As stated earlier, a lot of DAOs are likely to fail in the long run. DAOs that lose their purpose, like ConstitutionDAO, need to have a game plan for how to decommission themselves and appropriately return funds to their members.

Governance token prices aren’t guaranteed. They can lose all value and go to zero. In that case it acts as a vote of no confidence in that particular DAO.

The regulatory issues around DAOs also present a massive headache for bridging into the mainstream and I don’t think anyone is looking forward to that day. Financial and congressional regulators barely understand crypto let alone web2 sites like Facebook or Twitter, how can we possibly expect them to wrap their heads around DAOs or NFTs anytime soon?

Unfortunately the only governmental body intent on learning around crypto is the IRS so DAOs are unlikely to escape the long arm of the taxman.

Security concerns also remain one of the biggest drawbacks to DAOs. As DAOs gain popularity and more people try their hands at creating them new opportunities open up for DAO code exploits to occur. The first DAO that was hacked in 2016 lost millions of dollars in an instant and the start-up behind it never recovered.

Unfortunately in the crypto industry most people only learn security lessons the hard way. Take the time to learn how to analyze and review any contracts you sign with your hot wallet and store anything valuable in a cold wallet.

Since the  2016 era, best practices for running DAOs have improved tremendously so the risks of joining an established DAO are much lower than they were back then.

Final Thoughts

DAOs are a terrible idea and are NGMI!  

Just kidding of course. 

Had to make sure you were all still paying attention. 

I am a believer in DAOs although I want to take a pragmatic approach towards them.

I am wary of those who want to turn every project into a DAO on day one. There seems to be a tendency to push innovation as far as possible when dealing with new technologies because it’s fun to be on the edge and be different, but if you miss the market then what do you have left? A bunch of worthless tokens and a bag of cope.

It’s analogous to the dotcom boom where a lot of companies were just too ahead of the market. In the years since newcomers with similar ideas have been incredibly successful because the world and culture evolved.

Imagine if Airbnb launched in 1999? Probably would have been a laughing stock instead of a massive and game-changing business. I see DAOs in 2022 the same way. 

That all said, there are a lot of thoughtful people building DAOs today as well as the tools to help manage and improve them. DAOs definitely present an opportunity for organizations to become more sustainable, inclusive, and equitable. 

That’s what I am excited about especially when you think about all the industries and people that could benefit from more decentralization. 

I’d love to see DAOs tackle projects like health care or the upkeep of public space. DAOs have a lot of promise, so I will continue to learn as much as I can about them and maybe I’ll even join one before 2023 rolls around.