An Introduction to DAO’s
A DAO is a Decentralized Autonomous Organization. These relatively new organizational structures are said to be a safe and effective way to work with like-minded people around the world. They are described as an internet native business that is collectively owned and managed by its members. These “DAO’s” are set up in a way so that they have a built-in treasury that no one can access without the approval of the group. Decisions are governed through proposals and voting done by token holders to ensure fairness and to maximize the voice of all participants who contribute to and own a stake in the DAO.
Another way to think about DAO’s is that they are an organization run by code that was agreed upon by the people who started the DAO but also has the ability to be updated and changed to keep up with an ever-evolving global economic and political landscape. This is accomplished through the use of smart contracts which can do almost anything they are programmed to. Decentralized Autonomous Organizations are self-sustainable and the code written in their smart contracts can replace many humans and administrators in certain situations.
In traditional big companies, there are board meetings where a small group of appointed board members get together and vote to make decisions on the future of the company. These decisions are then enforced by a CEO through the hierarchical chain of command to ensure they are followed through. In a DAO there is no CEO. When a decision is made the code of the platform is immediately changed so that the entire “company” or organization is also changed with it. This code is often able to perform many of the routine operations that big companies require to function.
DAO’s and their codebase can continuously improve and grow because their token holders can submit and vote on new changes. Usually, a DAO is launched in accompaniment with a governance token, and each of these tokens is typically equal to one vote. People who own more tokens have more voting power and this gives the governance tokens a market price and a use-case while allowing the DAO to evolve and make changes as the world around it does the same. This can include things such as voting on salaries or even hiring certain developers within the autonomous organization and paying them with cryptocurrency which is all done transparently through the blockchain preventing any questionable CEO or CFO types from cutting shady backroom deals or making spending decisions on their own whims out of the public view.
Another feature of DAO’s is that they can be set up in a way where any profit made by the organization can be redistributed amongst its token holders. This combined with the voting rights can make holding the governance tokens of certain DAO’s extremely desirable.
Another huge pro of DAO’s is that they are trustless, meaning that you do not need to place your trust in any single CEO or board and the organization will even continue to run indefinitely regardless if a single person or developer decides to abandon the project. The next thing to note is that DAO’s cannot be shut down. This is very different from traditional organizations that are vulnerable to government agencies coming in and either shutting them down completely or demanding access to sensitive information about a member or client. In theory, the only way this could be accomplished in a DAO is if the inquiring agency purchased a large number of governance tokens, submitted a proposal to be voted on, and then went through a fair voting process. A government or authority does not get to just cut the line.
Furthermore, DAO’s are open source which means their code is out there for anyone to look at or improve upon. This is a double-edged sword that has both benefits and potential downsides. The benefits are that open source is typically very reliable because there are many eyes with a vested interest in maintaining the security of the code who are constantly looking it over in search of finding any potential bugs.
The downside is that they can be vulnerable to potential attacks if a malicious actor or hacker happens to be the first one to spot a bug in the code. The code being open source also results in there being no business secrets. We previously talked about why this may be a good thing but it could also be a negative in the sense that for traditional companies R&D usually contains many corporate secrets and information that the corporation spent large amounts of money and time cultivating without any significant return in hopes that one day it will pay off in a large way by giving them a competitive advantage. This idea essentially goes out the window when working with DAO’s.
To tie this all together let us take a look at some potential use cases for DAO’s. One idea would be to create a charity DAO where the organization can accept membership and donations from anyone in the world instantaneously with no red tape and then decide as a collective through the voting process on how they want to spend those donations. Another example could be a DAO for a freelance network where a group of people come together and create a network of contractors who pool their funds together to purchase group office space or software subscriptions for members around the world.
You could even create an investment fund DAO where members pool investment capital and vote on where to invest it. Then the return on investments can later be automatically redistributed amongst the DAO members and token holders. One of my current personal favorite DAO’s is Gitcoin. Gitcoin is a DAO built on Ethereum that is designed to fund and coordinate open-source development for Web3 based projects. As of June 2021, Gitcoin had facilitated over $21 Million in grants and bounties for open source developers around the globe and helped make a significant impact on promoting the development of digital public goods.
“DAO” has become a buzzword of sorts in the crypto community as of late. Although the word is seemingly thrown around at every turn, it is still very important to understand what a DAO is and how they work in order to see the big picture of how this new internet native organizational structure could potentially disrupt many industries around the world in the coming years.
Image sourced from Bitcoinwiki. No copyright intended.