Although the next era of the internet hasn’t totally been defined, pioneers in the space seem to agree on an agenda — ousting the corporations behind the curtain via an applied concept known as decentralization.
What Is a Decentralized Autonomous Organization (DAO)?
A decentralized autonomous organization (DAO) is a collectively owned, blockchain-governed community whose members work toward a shared mission, independent of third-party intermediaries. Their governance structures often take shape as a token-based incentive system, where members earn ownership shares by buying or amassing credits from participation.
To actualize this, power changes hands from central authorities to the members of a distributed network. The collective hubs that inherit control and decision-making authority are known as decentralized autonomous organizations (DAOs). These self-governing, peer-to-peer communities create trustless environments for safe collaboration, actively rallying around a purpose-driven cause. Above all, DAOs are the gateway to a more democratized internet, where ownership is returned to individual citizens online.
What Is a Decentralized Autonomous Organization (DAO)?
DAOs are bottom-up, collectively owned communities powered by open-source blockchain technology that work toward a shared goal, without the need for a centralized authority. They allow for global collaboration in funding unique opportunities, pooling resources and ideas for enterprising Web3 projects and garnering ownership via participation.
Their structure challenges traditional forms of management and governance, eliminating the need for hierarchical centralized organizations that often divvy power disproportionately to executives and large shareholders.
How Much Are DAOs Worth?
At the time of writing, there are a total of 50,845 aggregated governances that collectively control an estimated $24.3 billion in assets.
Origin of DAOs
DAO first came about when a few Ethereum community members established what they referred to as ‘The DAO’ on the Ethereum network. Launched in April 2016, The DAO acted as a venture capital fund minus the board of directors, placing funding decisions in the hands of the broader community. Amidst the excitement, organizers raised around $150 million in funds to jumpstart The DAO.
However, The DAO raised security concerns, which came to fruition only a few months later. In June 2016, a hacker took advantage of fatal flaws in The DAO’s code, making off with $50 million worth of Ether, Ethereum’s cryptocurrency. Although the money was recovered through a hard fork, faith in Ethereum was permanently shaken to the point that The DAO fizzled out by September later that year.
DAOs have since gained new life through the increasing popularity of decentralized finance (DeFi), a system of peer-to-peer financial transactions on blockchain applications. DAOs serve as a vehicle for transferring assets across crypto platforms and exchanges, putting them on track to grow in numbers in the coming years.
How Does a DAO Work?
Without a central authority, a DAO’s governance system relies on its members and their active participation in developing the organization. Logistically, this is coordinated through smart contracts and token economies.
Smart Contracts
Smart contracts are self-executing programs that lay the foundation for a DAO’s decision-making protocols. They create a fully transparent, trustless environment by encoding an arbitrary set of rules on top of which these collaboration hubs automate their operations, recording every decision and transaction on the blockchain. Once the rules go live, they can only be changed by a majority vote.
Because the code is safeguarded by encryption on a public, widely distributed ledger, tampering with it — perhaps, to access the treasury stash vaulted behind it — would fail.
Tokens
Smart contracts work in tandem with token economies to facilitate electoral systems. Voting powers are relative to a member’s level of investment in the DAO, typically determined by the amount of native tokens a member holds. Other metrics, such as the amount of time spent on a network, are considered viable measurements for user contribution by some platforms.
Regardless of wallet size, all stakeholders are encouraged to vote on initiatives and proposals that shape the direction of the organization.
Decentralized Power and Decision-Making
Although there are glitches to patch, such as effective community coordination and susceptibility to oligarchy, DAOs allow the opportunity for sovereign powers to be democratized and distributed equally amongst an entire landscape of voting members, versus being controlled by the agenda of a few at the top.
Types of DAOs (With Examples)
For the most part, DAOs all share the same functionality. Their built-in purpose, however, is what differentiates one from the next. Before deciding what projects to join, candidate members should pinpoint what an organization is all about, including their shared mission.
Types of DAOs
- Protocol DAOs
- Grant DAOs
- Philanthropy DAOs
- Social DAOs
- Collector DAOs
- Venture DAOs
- Media DAOs
- SubDAOs
Protocol DAOs
Protocol DAOs are the no-frills, generic DAOs used as ownership and governance mechanisms in decentralized protocols. These essentials-only entities oversee and direct the future of borrowing and lending applications, decentralized exchanges and decentralized apps (dApps). Their sole purpose is to maintain and evolve the platform in a fair and decentralized manner.
Examples
- MakerDAO: Nicknamed the “central bank of crypto,” MakerDAO is a peer-to-peer lending platform that uses overcollateralization to protect against crashes in the crypto market. Its native coin, the DAI, is a stablecoin pegged to the United States dollar while its governance token, the Maker, allows members to vote on protocol updates.
- Uniswap: An automated Ethereum-based crypto exchange that currently ranks among the top 12 DeFi platforms, with $3.42 billion worth of crypto assets locked on its smart contracts. Its unique automated liquidity protocol, which processes exchanges without intermediary interference, positions the platform as the gold standard for decentralization.
- Yearn Finance: A yield aggregator designed to optimize member earnings on crypto assets in the hopes of simplifying DeFi and promoting decentralized collaboration.
Grant DAOs
In grant DAOs, communities contribute capital to a grant pool, then vote on how the funds are allocated and distributed. These DAOs fund innovative DeFi projects, with organizations submitting their applications for support.
Examples
- Aave Grants DAO: A DeFi lending platform that enables users to deposit digital assets into liquidity pools, earn interest in the form of aTokens, and borrow digital assets through over-collateralized loans.
- MolochDAO: A DAO built with the purpose of funding public goods projects to improve the Ethereum ecosystem.
- MetaCartel: A for-profit organization that aims to fund and support projects that advance usability, user experience or further experiment with new Web 3.0 use cases.
Philanthropy DAOs
Where altruism and crypto intersect, these DAOs make use of the signature advantages that necessitate digital assets — low-cost, international transfers at high speeds — to create meaningful impact. Philanthropy DAOs generate endowment funds while democratizing the spirit of giving.
Examples
- Big Green DAO: A 501c3 non-profit that believes “growing food changes lives.” As stated on its website, Big Green DAO is an experiment in democratizing and decentralizing the grantmaking process.
- UkraineDAO: An initiative by punk-activist outfit Pussy Riot, digital artist Trippy Labs and PleasrDao, a collective that acquires culturally significant art for charity, designed to raise funds in the form of Ethereum non-fungible tokens (NFTs) to support the Ukrainian people during the Russian invasion.
Social DAOs
Also known as creator DAOs, these collaborative platforms bring together like-minded individuals in the likes of social networking. There is typically a barrier to entry, depending on the community. This can come in the form of holding a specific number of tokens, owning an NFT or holding an invitation to join a particular collective.
Examples
- Developer DAO: A community of thousands of Web3 builders on a mission to onboard, educate and support Web3 developers to accelerate the impact of a new wave of builders, emphasizing their role in creating a “better, more equitable future.”
- Friends With Benefits: A crypto-backed social club designed for creatives with the purpose of cultivating culture and creative agency in Web3.
Collector DAOs
The purpose of collector DAOs is to pool funds together so that the collective community can share costs and increase the chances of acquiring premium collectibles in the Web3 space. NFT art that earns blue-chip status, for example, gains desirability as it demonstrates high and stable market value despite turbulent downswings. Each member co-owns a digital asset, often won during competitive auctions, holding shares respective to their personal investment.
Examples
- FlamingoDAO: An NFT-focused DAO that wants to give its members the opportunity to invest in newly developed and freshly deployed NFT-focused projects.
- ConstitutionDAO: Now defunct, the single-purpose digital hub pooled together $47 million in Ether cryptocurrency with the sole intention of purchasing an original copy of the U.S. Constitution — and nearly got it. Refunds are now available.
Venture DAOs
These communities pool capital for early-stage investment in Web3 projects — startups, protocols, off-chain investments and so on. They can offer an equality of opportunity unavailable in the world of traditional finance, expanding access to portfolio additions to otherwise ineligible investors. Venture DAOs are alternatively known as investment DAOs.
Examples
- DAOhaus: Powered by community coordination, this organization facilitates the transition of traditional organizations into DAOs. Its developers are building a DAO-to-DAO economy and social network for the metaverse.
- Mantle Network: One of the world's largest DAOs on a mission to create an accessible, decentralized, token economy by funding the development of decentralized technologies with grants.
- MetaCartel Ventures: This is a for-profit DAO that positions its community members at the forefront of investment ventures, allowing “radical flexibility” in its members’ participation in sourcing, conducting due diligence, proposals and voting to back early-stage decentralized applications.
- Bessemer DAO: An invite-only, Web3 community that has branched out of the traditional, American venture capital firm Bessemer, which funds early-stage private tech companies, to take advantage of decentralized opportunities. Of its $2.5 billion fund, $250 million will be allocated to sectors including cryptocurrency, Web3 infrastructure and DeFi.
Media DAOs
Media DAOs flip the script on current content creation standards by designing ecosystems where the content is delegated by the community without the influence of advertisers or forfeiting the rights of original content to corporations governing centralized, publishing platforms. Instead, product owners of content — members of the DAO, which includes both creators and consumers — are paid in native tokens simply for participating. These systems allow a way for individuals of a media network to actively earn a piece of the decentralized organization’s profit for their contributions.
Examples
- Black Flag DAO (formerly BanklessDAO): Instigating an internet-scaled, bankless revolution, BanklessDAO was a decentralized community coordinating and propagating bankless media, culture and education. The organization continues its mission but has rebranded as Black Flag DAO.
- Decrypt: The news site demystifying all things Web3 launched its own DAO to submit direction over its content to its community. Votes are casted via decentralized voting system Snapshot.
SubDAOs
SubDAOs are smaller, autonomous groups that exist within a broader DAO. As these sub-groups pop up, they mature the main DAO into a “super” or “parent” DAO. SubDAOs can provide sufficient autonomy or raise funds externally for an experiment or project while staying economically and relationally aligned with the parent DAO. They can facilitate speedy execution, no longer needing to pass every proposal by the majority DAO members.
Examples
- Balancer Emergency SubDAO: Established through a community vote, this subDAO allows a small group of members to “kill” pools and gauges if other members are at risk of losing funds or falling victim to malicious activity. The decision came after previous incidents involving malicious activity.
How Are DAOs Being Used?
Real-world use cases of DAOs assert a level playing field disrupting industries across the board — venture capitalism, insurance and real estate, music, fashion and even Hollywood — in the best way possible. Here are a few examples of how DAOs are reshaping how organizations do business.
Supporting Entrepreneurial Projects
The programmable utility and general low maintenance of DAOs create limitless potential as communal counterparts to entrepreneurial pursuits.
“DAO’s inherently put the power in the hands of their community,” said Kyle Klemmer, the COO of NFT-based, play-to-earn game portal Mech.com. “Whether that be the direction of the project or if it’s some sort of allocation of funds, the DAO is a mechanism to essentially ensure the best use of those resources as the community sees fit.”
Enabling Community Involvement
Characters of Klemmer’s gamified, interactive community are tank-like, humanoid machines that mine ore to collect the native cryptocurrency, Forge Token. Members of the DAO can use this token to stake pools and provide liquidity.
“The whole purpose behind decentralization is to make sure that one single person’s agenda isn’t pushed in how these companies and organizations work,” Klemmer said. “DAOs are supposed to elicit a more wholesome approach to how business is conducted.”
Connecting Governments and Indigenous Communities
Physician-turned-technologist Drea Burbank, who serves as an ambassador to BitDAO, sees great value in using DAO structures to solve the problem of business negotiations between centralized, industrialized groups and decentralized, communal groups. While a company needs one account to pay to and a central authority to negotiate with, a tribe needs distributed funds, autonomous decision-making for individuals and the ability to change its collective mind.
For this reason, Burbank is leveraging emerging technologies to benefit Indigenous communities and roll back climate devastation. As a founder of Savimbo, the former Stanford University School of Medicine fellow designed a DAO that directly pays tropical subsistence farmers for their preservation and reforestation efforts using fair-trade carbon credits.
By 2032, the project aims to employ one billion small farmers in carbon sequestration projects, according to its site. Carbon sequestration methods combat climate change by way of carbon-capture technology, engineered to pull carbon from the atmosphere and restore it underground.
“A lot of people think tribal governance is like a nonprofit, where everyone kind of agrees about everything — but in reality, everyone kind of makes up their own mind, and the chief collects the consensus opinion,” Burbank said. “Also, people change their opinion a lot and so a consensus is kind of like an alive, ongoing active thing. Not a democratic ‘vote,’ but a living autonomous emergent state. DAOs should copy it.”
Benefits of DAOs
The decentralization promoted by DAOs offers major upsides to groups looking to establish more democratic organizations.
Decentralized Nature
No chief executive officer (CEO), board of directors or other centralized authority runs a DAO. Instead, decision-making is distributed among all members. This supports a more democratic way of conducting business.
Broad Participation
The collective participation that DAOs cultivate can empower individuals. Even if they don’t have a major influence, every member gets to vote on decisions and exercise their voice. This can lead to higher levels of engagement among all DAO members.
Emphasis on Transparency
Voting and other actions are made public in the DAO, discouraging malicious intentions and holding accountable any bad actors. The transparency of DAOs can then produce greater levels of trust among members.
Sense of Community
DAOs can unite people across the globe behind a common goal or mission. Add in the democratic and transparent nature of DAOs, and it’s easy to see how a DAO can foster a sense of community within its membership.
Challenges of DAOs
Despite the clear advantages promised by DAOs, there are still some downsides that need to be taken into consideration.
Slower Voting Process
While DAOs promote wider participation, this means it takes longer to finalize and implement decisions. Gathering votes from all members could cause delays in introducing new features or protocols to the DAO.
Varying Levels of Education
Different members may have various levels of knowledge when it comes to DAOs and blockchain technologies. They may also not fully understand the goals or objectives of a DAO, which can lead to disagreements and other conflicts later down the road.
Security Concerns
Like any blockchain technology, DAOs remain vulnerable to phishing attacks, cryptojacking and other types of cyber attacks. If a DAO isn’t equipped with additional security on top of the usual encryption methods, this can leave it exposed and sow distrust among members.
Lack of Recognition and Regulation
The U.S. has no national regulatory framework for DAOs, which can only be incorporated in Wyoming, Vermont, Tennessee and Utah. Otherwise, DAOs default to partnership status, meaning members are at risk for unlimited liability and are not granted protections enjoyed by corporate shareholders.
Future of DAOs
Willy Ogorzaly is a member of ShapeShift DAO and Giveth DAO, and he’s the head of decentralization for the Fox Foundation — a European not-for-profit organization that’s supporting the Shapeshift DAO in fully decentralizing. Currently, he helps projects launch DAOs and advises organizations during their structural remodel into decentralized autonomy. Through these experiences, he believes DAOs are an integral part of the future.
“The organizational and regulatory models of the past were designed not only before the first blockchains, but before the internet. DAOs are the next stage in the evolution of human coordination,” Ogorzaly said. “It’s hard for me to imagine a future in which DAOs don’t replace legacy centralized organizations as the most popular form of new business created.”
It seems Ogorzaly’s intuition is on point. Despite going through ups and downs, blockchain is picking up steam once again, thanks to more accessible tools. The Trump administration also promises a more hands-off approach to crypto, which it reaffirmed in its latest executive order on crypto. These developments hint at greater blockchain growth and position DAOs to play a larger role as groups look to regain public confidence in the blockchain industry as a whole.
Frequently Asked Questions
What is a decentralized autonomous organization?
A decentralized autonomous organization (DAO) is a blockchain-based community that consists of members united around a common goal or purpose and that lacks a central authority. Instead, members of a DAO collectively vote on decisions — which are verified through smart contracts — and receive token incentives for participation.
What is an example of a DAO?
A common example of a DAO is Decentraland, a virtual world built on Ethereum. Members collectively run Decentraland and are involved in the decision-making, with the size of one’s crypto wallet determining how much voting power each individual has.
How do DAOs make money?
A popular way for DAOs to raise money is to sell their native tokens on various crypto exchanges. DAOs can also make money by partnering with other blockchain projects to share resources, using crowdfunding platforms and creating sellable products, among other revenue-generating methods.
