What is DAO?
DAO is a form of organization that gives users completely new possibilities when it comes to managing the structure of a company or association. DAO fans even claim that it will radically change the way business is done.
These decentralized autonomous organizations do not have corporate headquarters and replace traditional hierarchies with flat distributed structures. They are managed by cryptocurrency holders and rely on rules that are automatically enforced on the blockchain through smart contracts. Members of such organizations use governance tokens to vote and make decisions.
History of DAO
Vitalik Buterin started the idea of a DAO in 2013. In its whitepaper, Ethereum described the potential possibilities of such a solution, originally called a Decentralized Autonomous Corporation (DAC). Three years later, in 2016, the first blockchain-based organization – the DAO – was founded. The project was built on the Ethereum network by Slock.it. The DAO was supposed to be a platform for VCs interested in investing in crypto projects. The premise was the idea that every DAO token holder would be able to vote on funding projects. The DAO project raised up to ETH 12.7 million, which was worth around USD 150 million at the time.
However, the DAO never took off. On 17 June 2016, hackers managed to use a few incorrect code lines to transfer ETH 3.6 million worth USD 70 million. Fortunately, the funds were on ChildDAO and could not be transferred for 28 days. This gave the Ethereum community time to fix the problem. That’s when the decision was made to hard fork the chain, now known as Ethereum, and get rid of the old blockchain, Ethereum Classic. During this event, the developers rewrote the code so that the hack would never happen again.
The DAO development continued but was no longer the center of attention. Projects like DAOstack and DAOhaus have learned key lessons from the original DAO and are now building and running decentralized organizations for some of the biggest DeFi protocols. The 2020 decentralized financial boom has brought a new wave of interest in DAOs, which have been the basis of many leading projects.
How do decentralized autonomous organizations work?
Just as some cryptocurrencies seek to replace fiat currencies or traditional asset classes, DAOs offer an alternative to traditional business structures. Some DAOs enforce decisions automatically, others have contributors or paid team members take the final steps.
A community cantered around a particular autonomous organization can customize the DAO and program it according to its goals. The DAO code is created in the form of smart contracts that provide a kind of governance mechanism. The influence of a member’s vote may increase, for example, depending on the amount contributed to the project. The DAO uses the power of blockchain technology to create an organization where control is distributed among participants, not built on a top-down hierarchy. A DAO can be thought of as an autonomous machine. The task it is supposed to perform is determined by pre-written smart contracts.
Let’s take a closer look at the advantages DAO provides in the way of management, as well as the disadvantages of such a solution.
Advantages of DAO
- Transparency – Voting, funding decisions and other activities are transparent and visible to all stakeholders.
- Greater power – Members from all over the world can contribute, allowing the DAO to become a very powerful and influential organization.
- Lower costs – The DAO concept has become firmly rooted in DeFi (decentralized finance) and there are now many tools that prevent the need to build an organization from scratch. Instead, we can use ready-made solutions and adapt them to our project needs.
- Greater development opportunities – The ability to vote allows each member to collect many proposals and allows experts to invest in the ecosystem they are building.
Disadvantages of DAO
- Flat structure – Due to lack of clear authority or chain of command, decentralized organizations operate more slowly as they take longer to make decisions.
- Misunderstanding – When the community cannot agree, the organization can break up into smaller groups.
- Power concentrated in the hands of the bigger players – In some DAOs, those who hold the largest number of tokens have a significant decision-making advantage.
- Decision-making – Given the previous point, management can end up being very similar to how traditional organizations operate.
- Unclear regulations.
DAOs have seen a large increase in interest in recent years. Hundreds of developers worked on technical innovations, improvements to control mechanisms and voting solutions. Decentralized autonomous organizations are particularly active in the creative industry, and organizations create headless fashion brands or film communities. However, in many cases these creative DAOs retain a centralization element. For example, while production company Decentralized Pictures allows token holders to vote on a shortlist of film projects to receive funding, the final decision on which project wins the prize is made by a jury.
One of the more interesting Polish projects is Candao, whose team has the ambition to build a global social network based on DAO. Its hallmark should be the benefits granted to creators thanks to the voting mechanism.
In recent years, there has also been a wave of investment DAOs, in which token holders vote on which projects their community will invest in. Some of them, such as NeptuneDAO, focus on providing conventional venture capital funding for Web 3.0 projects. Others are so-called collector DAOs that focus on acquiring high value assets including NFTs. Perhaps the best-known example is PleasrDAO, an organization created by NFT artist pplpleasr. The community has amassed an NFT collection and real-world items worth several million USD. Among others, PleasrDAO owns Edward Snowden’s first NFT and the only copy of Wu-Tang Clan’s album Once Upon a Time in Shaolin.
In March 2021, a group of 54 strangers who met on a Discord server founded BeetsDAO. They raised ETH 300 (over USD 500,000 at the time) to buy EulerBeats NFT at the OpenSea auction. The group continues to hold a strong position as an art investor community.
In late 2021, the collectible DAO gathered to auction off the first edition printing of the US Constitution. ConstitutionDAO raised USD 45 million, but Citadel CEO Ken Griffin made the winning bid. What happened next highlighted one problem with decentralized governance. The project, which was created with one specific goal but couldn’t achieve it due to certain resistance, has to decide what to do if it fails. In the end, ConstitutionDAO decided to shut down and return the funds to its contributors. However, Ethereum’s gas fee meant that refunds would in some cases be lower than the amount of contributed. It was a sort of baptism by fire for many people who signed up for a DAO for the first time.
More recently, DAOs have moved beyond buying digital art or creating online designs to address broader global issues. UkraineDAO, which was founded by members of the Russian punk band Pussy Riot, raised USD 1.7 million for humanitarian aid to Ukraine, which has been defending itself against the Russian invasion.
One of the challenges that both starting DAOs and companies planning to become DAOs are facing is the regulatory complexity surrounding their legality—a potentially powerful barrier to universal utility. Although there is no law that prohibits anyone from gathering online with others to complete a project, things get complicated when money is involved. Some DAOs require a real-world connection. For example, you need bank accounts or physical assets that operate outside the Internet space.
In this direction, Wyoming has become a world leader in the DAO legal recognition. In March 2021, lawmakers passed a law allowing a DAO to officially register in their state. The law grants DAOs the same privileges and obligations as limited liability companies. Following the law’s entry into force on 1 July 2021, US CryptoFed, a DAO with a mission to implement a new monetary system, became the first legally recognized DAO in the United States. However, not everything went smoothly. In November 2021, the SEC suspended the registration of CryptoFed native tokens. The committee said the organization provided “misleading information” to potential investors.
Fortunately, US domestic politics is also slowly entering the world of DAOs. Andrew Yang, former US presidential candidate and New York City mayor, created the Lobby3 DAO. JIts purpose is to “show people the benefits of decentralized technology” in the real world.
Future of decentralized organizations
DAOs are sometimes referred to as group chats in a wallet, but that doesn’t really capture what they are and how popular they have become. According to DeepDAO, a platform that tracks DAO analytics across all networks, DAO vaults currently hold approximately USD 10 billion in total.
Will the DAO concept start to change the way companies operate and raise money? In theory, anyone can become a member of such an organization, cast their vote and influence the company’s future. Enthusiasts believe that the DAO technology will continue to evolve. Current trends include anonymity, progressive decentralization, and better incentives to participate in this business model.
Some companies decide to transform from a traditional structure into a DAO. An example is ShapeShift, which has no senior management since March 2022. There are still new ambitious DAO initiatives whose actions pursue specific goals. FriesDAO is looking to buy a fast-food franchise. Its ranks include Kory Spiroff, former vice president of Domino’s Pizza. Some DAOs have goals that literally transcend our world – MoonDAO wants to send some of its members to outer space.
It is possible that we will soon see the creation of DAOs for virtually every purpose. This modern organizational structure reduces unnecessary bureaucracy and helps people easily unite with a common vision.
Sources: beincrypto.com, wiki, blockchain.news, oKrypte.sk