What Is a Decentralized Autonomous Organization (DAO)?

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.

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, or 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, on target to restoring ownership 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 and coordination in funding unique opportunities, pooling resources and ideas for enterprising Web3 projects, while garnering ownership via participation.

Their structure challenges traditional — even antiquated, arguably — forms of management and governance, eliminating the need for hierarchical centralized organizations that often divvy power disproportionately to executives and large shareholders.

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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 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.

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.

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 controlled by the agenda of a small unit of 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, specific mission.

Protocol DAOs

These collectives 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 borrow and lending applications, decentralized exchanges and decentralized apps, shorthanded as dApps. Their sole purpose is to maintain and evolve the platform in a fair and decentralized manner.

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.

Philanthropy DAOs

Where altruism and crypto intersect, these DAOs make use of the signature advantages that necessitated digital assets — low-cost, international transfers at high speeds — to create meaningful impact. Philanthropy DAOs generate endowment funds while democratizing the spirit of giving.

Social DAOs

Also known as creator DAOs, these collaborative platforms bring together like-minded individuals in the likes of social networking. Typically, there is 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.

Collector DAOs

The purpose of collector DAOs is to pool funds together so that the collective community can share costs and increase 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.

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 of portfolio additions to otherwise ineligible investors. Venture DAOs are alternatively known as investment DAOs.

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 the 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.

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 to 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.

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How Are DAOs Being Used?

Real-world use cases of DAOs assert a level playing field disrupting industries across the board — venture capitalism, insurance, real estate, music, fashion and even Hollywood, to name a few — in the best way possible. Their programmable utility and general low maintenance creates 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.”

Characters of Klemmer’s gamified, interactive community are tank-like, humanoid machines that mine ore to collect the native crypto currency, Forge Token. Members of the DAO can use this token to stake pools and provide liquidity.

“DAO’s inherently put the power in the hands of their community.”

“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,” he added. “DAOs are supposed to elicit a more wholesome approach to how business is conducted.”

Klemmer lists a barrage of kinks still being worked out among DAOs is the developing Web3 space — low participation, lack of education, understimulating assembly — but one in particular calls for cautious consideration by candidate members.

As it stands in the United States, there is no consistent regulatory framework for DAOs, Klemmer points out, welcoming a barrage of legal challenges.

Because they are unincorporated, DAOs default to partnership status. According to online legal repository JD Supra, members are at risk for unlimited liability and, because DAOs are not recognized as a legal entity, they would not be granted protections enjoyed by corporate shareholders.

Incorporating, though, could be a viable workaround for some DAOs, now recognized in Wyoming, Vermont and Tennessee.

DAOs As a Bridge Between Centralized and Decentralized Entities

In another example, physician-turned-technologist Drea Burbank is leveraging emerging technologies to benefit indigenous communities and rollback 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.

“We’re designing a DAO to be used by indigenous people for receipt of funds for, and governance of, collectively held lands,” she explained. “I believe DAOs represent a critical interface between Western governance structures, like corporations, and collectively held resources for groups that are more egalitarian.”

By 2032, the project aims to employ one billion small farmers to 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.

“I believe DAOs represent a critical interface between Western governance structures, like corporations, and collectively held resources for groups that are more egalitarian.”

“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,” she 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.”

Burbank, who also 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. The compromise DAOs provide cut the red tape dividing modern enterprise and indigenous communities, Burbank said.

‘DAOs Are the Next Stage’

Willy Ogorzaly, member of ShapeShift DAO and Giveth DAO, has accumulated 7.5 years in the Web3 space. Currently, he helps projects launch DAOs and advises organizations during their structural remodel into decentralized autonomy.

“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, noting the non-stop launch of new tools, experiments and platforms. “Pandora’s Box has been opened. … 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.”

Ogorzaly currently serves as the head of decentralization for the Fox Foundation, a European, not-for-profit organization that’s supporting the Shapeshift DAO in fully decentralizing.

“There are only a couple of things DAOs can’t do that centralized organizations can,” he said, listing incapabilities such as signing and enforcing contracts and opening a bank account. Even so, there are dozens of projects competing to solve these issues, he added. “But there are infinite things DAOs can do that centralized organizations cannot.”