The Complete Guide to DAOs – What Is A DAO? (Updated 2023)

The Blockchain is a game-changing piece of technology which has a multitude of applications and enormous potential. Particularly, its role in decentralized finance. If people appreciated Bitcoin as a form of payment, the idea of a fiscal system without middlemen is positively compelling. In recent times, a new concept has emerged— The Decentralized Organization (DAO), which is a wish from dreamland, come true. Read our full guide on DAOs below.

what is a dao

Table of Contents

History of DAO

The idea of a blockchain-based organization originates in 2015 with Slock, a German blockchain innovation, and startup. They planned to create a venture capital system that allowed investors to make key decisions using smart contracts. 

This way, the need for the organic structure would be eliminated. The only human participation in the system would be that of the developers who would code the contracts. After coding, it would be run by blockchain protocols.

Thus, the DAO was born. A highly successful launch was followed barely two months later by an infamous hack who capitalized on a leak, carting away roughly $50 million. (Read also: How to protect your MetaMask) The ensuing discontent and outcry within the network pressured the developers to create a fork essentially. 

With more foolproof protocols, a new network was devised, and smart contracts were strictly coded to reimburse investors. 

The next stage in the evolution of DAOS was the creation of ConstitutionDAO. The original movement constituted thirty-one members, including Jonah Elrich. The new organization allowed users to make DAO donations on the Ethereum network. In return, the users would be granted voting rights in the organization. 

It was formed to compete at Sotheby’s at a prestigious auction of a USA political artifact. Although it lost at the auction, the media spotlight has been on DAO ever since.

What is a DAO?

DAO is one of the many innovative offsprings borne of the broader DeFi (decentralized finance). The latter was pioneered on the Ethereum blockchain and offered an upgrade on Bitcoin’s own capabilities. 

Rather than just being a means of making payments, DeFi innovations go one further by removing the need for middlemen in the form of traditional financial institutions. 

DAO is a relatively new concept but is one that is gradually gaining popularity. It stands for Decentralized Autonomous Organization, a term referring to a collective effort to pool resources together into developing the smart contracts that power decentralized finance. 

As such, the legitimacy of system governance is completely revised. In allocating these resources lies the decision-making mechanism: voting. 

As a Web 3 innovation, DAOs are similar to limited liability companies in structure and organization. 

Basically, there are decentralized organizations with close to zero centralized management. There aren’t any assigned roles, and members have flexibility to collaborate on different tasks. 

Another distinguishing trait of DAOs is that their resources are blockchain-based. That is, they are kept in the form of smart contracts. These interoperable smart contracts determine the level of access to the assets. 

Today, there’s a growing preference for DAOs in administering investments and grants on Ethereum’s blockchain. 

How do DAOs work?

As earlier stated, DAO governance rules are created by its community using smart contracts. These contracts are crucial to the foundational framework for DAOs.

They are verifiable, visible, and can be publicly audited. This way, network participants are kept abreast of protocol functions at each stage. 

After the rules have been coded, the next stage is project funding. This is where fiscal inflow and governance rights are determined. Money is raised by issuing tokens to users, who then get voting rights proportional to their asset value. After this, the DAO will be deployed. 

All organization decisions are made through consensus voting by all the members. 

How to join a DAO?

When starting your DAO journey, you should note that not all organizations serve the same function. For example, with technical governance DAOs, you should understand the proposals at stake, and voting rights. 

Several DAOs work this way. For example, Uniswap allows its token holders to vote on fee distribution. Other networks like Compound allows users to vote on the distribution of protocol fees used for system upgrades and bug fixes. 

This way, freelancers can join the network ad hoc and gain DAO rewards with access to special grant-funded projects. 

With other DAOs, there is more emphasis on other areas like allocation and treasury pooling. For instance, the SharkDAO allows individual asset holders to pool funds together to purchase special blockchain items like rare NFTs.

This is an especially useful feature, as it allows users to access blockchain assets that would otherwise be too costly for individuals. Here, there’s the ability to maximize the value of collectively pooled assets.

The very autonomy afforded within DAOs is why it’s so transparent. Proposal details are easily accessible, and continuous voting is enabled. Afterward, records of voting details are made public. 

The main communications channels for DAOs are on Discord, where the groups are organized. For folks looking for how to join a DAO, Discord chat servers are a great place to start.

Popular DAO Tokens

Here are a list of popular DAOs and their governance tokens, by market cap:

  1. Uniswap – A decentralized crypto exchange for anonymous investments and trading in virtual tokens
  2. Maker – A decentralized protocol for trading in DAI stablecoin
  3. Compound – A decentralized crypto lending protocol
  4. Curve DAO – A decentralized trading platform for stablecoins
  5. Aave – An open source, non-custodial crypto exchange with decentralization

Challenges of DAOs

One of the major challenges that DAOs face is the issue of onboarding. For non-tech-savvy enthusiasts looking to join, there’s a need to make the systems more accessible. 

In addition, certain voting governance protocols are not fully efficient. Also, there is room to improve member contribution compensations.

Finally, as with many new blockchain-based technologies, there is little by way of legal and regulatory control. 

Conclusion

It cannot be overemphasized that DAOs exist for different purposes. As the world becomes more interconnected, DAOs represent a paradigm shift for institutional organizations. 

With its inherent capability to organize and create groups more quickly than traditional mechanisms, existing legal structures must begin to recognize DAOs. 

In the end, what will determine its fate in global adoption will be its efficiency and how the groups govern themselves.