DAO stands for a Decentralized Autonomous Organization. The definition is right there in the name; it’s an internet-native organization where the management is decentralized, and the decisions are autonomous thanks to its programmed logic.
DAOs are hosted on blockchain platforms. Blockchains enable DAOs to have decentralized leadership and management. Decisions about the governance and rules of a DAO are made by the decentralized community associated with the project. A DAO is designed around a mission or mandate like any other organization.
A DAO’s business or operational logic is programmed into it and updated by the community using governance mechanisms. The DAO is meant to act as a managerial layer that programmatically decides how to carry out real-world business or charitable operations.
How It Works
Users can get voting rights in a DAO by buying or earning a stake in it in the form of tokens. Voting rights allow the community of users to create governance proposals. Ensuring that users are invested in a DAO and have something at stake before voting on proposals helps prevent the spamming of proposals by users with no vested interests. Tokens are meant to incentivize user behavior.
DAOs, by design, have built-in treasuries. The treasuries are usually held in the form of crypto, but I think DAOs will soon also be able to hold fiat currency or fiat currency-based stable coins.
DAOs that exist on public blockchains can be viewed by anyone using a blockchain explorer; this has positive implications for DAOs built around social or charitable causes.
DAOs & Smart Contracts
DAOs operate using Smart Contracts. Smart contracts can be programmed to execute some or all their logic based on a triggering event. A triggering event can happen when a particular criterion is met, such as a stock or commodity price reaching a previously specified level or when a date and time are reached.
A smart contract can also be triggered when a signal from the external (real)-world is generated through sensors or human input and then sent to the DAO through an oracle.
Through smart contracts and oracles, data is fed into a DAO. It is then processed using the DAO’s logic and business rules, followed by which instructions are sent out to be executed in the real world.
Data and information flow into a DAO, and decisions and instructions flow out.
Legality & Jurisdiction of DAOs
As of this writing, DAOs primarily exist on blockchain platforms and can be formed through agreements between groups of users on the platform itself. No legal entity or formal incorporation in a jurisdiction is required to create a DAO on a blockchain platform.
A DAO could have operations across multiple jurisdictions; for example, it could trade commodities worldwide or engage in charitable donations in numerous countries. In such a case, the local compliances would have to be completed.
At the moment, many DAOs exist online and transact online exclusively. For example, a popular DAO exists to buy and sell NFTs. A project like that exists solely online and isn’t currently required to comply with any regional laws.
As DAOs go mainstream, I think regulators across the world could soon require them to incorporate or register themselves in some form.
How to Get Involved
If you are thinking of joining a DAO, you should find a DAO with a mandate or mission that interests you. You should also research which voting rights exist for the users of each DAO and which proposals are at stake. There are three primary ways of getting involved with DAOs:
1. Volunteer: You can get involved by working on grant-funded projects/ad hoc projects for DAOs
2. Buy In: You can buy into a DAO and add your crypto holdings to the DAO’s treasury to get voting rights in return.
3. Start A DAO: Lastly, you can start a DAO of your own with a community of people rallying around a specific cause or use case.
How to Start A DAO
Successful DAOs often emerge from online forums or groups of people that rally around a cause or mission. A passionate founding community or tribe is the starting point. After that, there are three stages to launch a DAO; development, funding, and deployment.
The first stage is development, where a developer or group of developers create smart contracts that will govern the DAO’s business logic and various functions.
Next, the DAO needs to specify how to receive funds and enact governance — usually, tokens are sold, and the holders are given voting rights.
Finally, the DAO needs to be deployed on a blockchain. Once it has been deployed, the stakeholders decide the future of the DAO, not its developers.
DAOs eliminate centralized control and opaque governance mechanisms. They offer increased transparency and auditability. DAOs will provide an automated and programmed management layer that can be used across industries and use cases.
DAOs will have significant implications for data processing, government, healthcare, law enforcement, voting, community management, charity, and digital businesses, among other industries and use cases. I think hybrid forms of DAOs to govern limited functions within larger organizations will also pop up.
While several projects exist and many more in the works, here are a few DAOs that I found interesting:
The space is evolving fast, and so are the risks and opportunities. Here are a few risks that users should be aware of:
1. If lost, a user’s cryptographic keys cannot be retrieved, resulting in dormant accounts holding tokens in a DAO.
2. Faulty or buggy code in smart contracts could lead to an output of errors instead of sets of instructions.
3. Incomplete smart contract code that doesn’t cover certain disputes or situations could lead to lengthy arbitration, decision paralysis, and general delays.
4. There are no widely accepted legal frameworks as of this writing that govern DAOs.
5. DAOs have no clear jurisdiction since they exist online. Alternatively, their operations and the implications of their actions may be distributed across multiple jurisdictions, meaning they would have to be compliant across multiple jurisdictions depending on what they are doing there.
As I mentioned earlier, this space is evolving fast, so many of the nuances and intricacies that will arise will have to be worked out for the efficient functioning of DAOs.
DAOs offer a new organizational management system that is distributed, transparent and automated. They offer collective risk and reward to their communities based on programmatically executed rules.
DAOs are evolving fast. Developments in a range of peripheral technologies such as IoT devices, connectivity, smart contracts, and cryptocurrencies will enhance the complexity of what DAOs will be capable of in the future.
We will also likely see Hybrid and Customized variations of DAOs where part of an organization such as a division or specific function is organized as a DAO while the rest of the organization follows a more traditional structure. We may also see DAOs spread across different layers of management across an organization.
The speed, automation, and decentralization of DAOs will make them powerful tools to be deployed strategically.