As Web3 and the blockchain bleed more and more into the mainstream, new acronyms get thrown around regularly with little explanation as to what they mean, including this one: DAO.
Decentralized autonomous organizations (DAOs) are kind of like clubs for crypto enthusiasts, only they typically operate under a shared goal, give each member equal say in making decisions, and can potentially have more money than most clubs would ever know what to do with.
And yet, they’re popping up all over the decentralized internet in order to fund larger companies, raise money for blockchain-based projects, or incorrectly buy a first-edition of a book for millions of dollars with the expectation that it will also acquire the copyright for said book.Needless to say, these organizations have a lot of resources. Here’s what you need to know about DAOs.
First off, how do you pronounce DAO?
“Dow.”
So, what is a DAO?
A decentralized autonomous organization is exactly what the name says; a group of people who come together without a central leader or company dictating any of the decisions. They are built on a blockchain using smart contracts (digital one-of-one agreements). Members of DAOs often buy their way in, most of the time purchasing a governance token specifically for the DAO that gives them the ability to vote on decisions that are made around how the pool of money is spent and managed. These groups can be made up of people from around the world, who often communicate on Discord channels.
A DAO has a “completely flat hierarchy,” according to Jason Yanowitz, co-founder of crypto trade publication Blockworks. “It’s a way to govern people differently around a shared balance sheet.”
What does a DAO do?
Each DAO has a different mission, whether it is single-purpose or part of a larger project, and can be associated with any number of industries.
Some of them are based on personal interests, such as the ConstitutionDAO, which banded together in the hope of buying one of the original copies of the U.S. Constitution from Sotheby’s last year. The group ultimately found out it was not the highest bidder and ended up losing the auction, but members were able to receive a refund of their initial investment.
Others have grander goals that involve essentially operating or running a business as a group. One example is Mantra DAO, which is a community-governed decentralized finance platform that allows people to stake, lend and borrow their crypto assets.
When were DAOs first created?
The first DAO – simply called The DAO – was created by a company called Slock.it, a German-based developer that was built on top of the Ethereum blockchain and is working to connect physical world transactions to the blockchain, thus enabling people to rent, sell or share their property without a middleman.
In early 2016, Slock.it wanted to find a way to raise money, according to an interview with the company’s founder Christoph Jentzsch from 2018, and in April created a DAO, which was akin to a Kickstarter or GoFundMe. The distinguishing factor: the DAO gave all of the investors/members a vote in the decisions the company makes when spending the raised capital.
Over time, it expanded into a decentralized version for a venture capital fund and held approximately 14% of the total amount of the Ethereum cryptocurrency that existed at the time, according to The Economist. This made it the largest crowdfunding in history as of 2016, having raised over $150 million worth of Ether from more than 11,000 members between May and June, according to Coindesk.
But by June of that year, the DAO was hacked and lost about $50 million (about 3.6 million ETH at the time). Surprisingly, Slock.it didn’t dissolve after the hack, but the DAO never regained its original status.
So are all DAOs branched off from the original DAO?
No, the term DAO has since been adopted by other companies, blockchains and crypto enthusiasts and has become more of a descriptive acronym than an actual name.
Remember, DAOs have a lot of money, crypto or otherwise, that they’re willing to spend if the majority of the group has been persuaded. The majority rules are set within each DAO.
Some publishers, like Blockworks, have already begun pitching DAOs on advertising opportunities, such as event sponsorships, seeing lucrative potential.
“DAOs are becoming the new institutions. There are DAOs with more than $10 billion in their treasury [and] media companies have not recognized this,” said Yanowitz. He’s in the process of having Blockworks’ sales team learn how to sell to a DAO Discord channel.
Another added value of a DAO and web3 is the ability to build community, said Amanda Cassatt, CEO and co-founder of web3-based marketing agency Serotonin. DAOs represent “a powerful alignment engine to collapse the categories of user or buyer, company or team, and investor into a single group that’s aligned and part of a community that cares about a certain artifact or a certain experience. And [they’re] all participating together,” she said.
FAQs
A decentralized autonomous organization (DAO) is an emerging form of organizational structure with no central governing body and whose members share a common goal of acting in the best interest of the entity. Popularized by blockchain enthusiasts, DAOs make decisions using a bottom-up management approach.
What is the purpose of a decentralized autonomous organization (DAO)? ›
It organizes and executes all decisions without a human authority. All members of a DAO vote on all decisions, and the smart contract executes the decisions automatically. Because a DAO is transparent, all members likely share a common interest in its success.
Is bitcoin a DAO? ›
Although some argue that Bitcoin was the first DAO, the term is only understood today as organizations deployed as smart contracts on top of an existing blockchain network.
What is the difference between DAO and blockchain? ›
A DAO (Decentralized Autonomous Organization) can be defined as a new type of organisational structure based on blockchain technology, often described as a kind of “crypto-cooperative or “financial flashmob”. ConsenSys defines the DAO as “a community-driven entity with no central authority.
What are the disadvantages of a DAO? ›
1 Technical complexity
Moreover, a DAO may face technical issues such as bugs, hacks, or network failures, which can compromise its functionality and security. DAOs can often be less complex than traditional organizations to start up and maintain.
How do DAOs make money? ›
1. How does a DAO make money? The initial step to raising capital in a DAO system is through trading fiat in exchange for the native token. People who invest in the tokens are incentivized by giving them the power to vote and ownership that is proportionate to their investment.
What is the point of DAOs? ›
1 The concept of a DAO is to promote oversight and management of an entity similar to a corporation. However, the key to a DAO is the lack of central authority; the collective group of leaders and participants acts as the governing body.
Are DAOs the future? ›
Proponents believe that DAOs will completely redefine corporate leadership and how it functions. Rather than a small board of directors or executive team deciding on everything for a business, organizations can invite all employees to share leadership tokens and make decisions regarding the company's future.
Can a DAO own assets? ›
By establishing a DAO LLC, a DAO acquires distinct legal personality from its members, meaning that the DAO itself can do the things a natural person is generally able to do in law – such as enter into contracts, sue and be sued, own property, incur in indebtedness, engage in legal transactions, independently and so on ...
When was the DAO hack? ›
On June 17, 2016, the DAO was subjected to an attack exploiting a combination of vulnerabilities, including the one concerning recursive calls, that resulted in the transfer of 3.6 million Ether - around a third of the 11.5 million Ether that had been committed to The DAO - valued at the time at around $50 million.
This article will explore the expansive and diverse world of blockchain technology, delving into the over 1,000 distinct blockchains that exist as of 2024, each offering unique functionalities for various industries.
Which issue is a common risk in DAO governance? ›
Cybersecurity threats under DAOs
While DAOs offer increased transparency and efficiency, they are not immune to cybersecurity threats. Cybersecurity risks in DAO, primarily in governance, stem from vulnerabilities in the underlying blockchain technology and the DAO's smart contracts.
Why is DAO used? ›
Data Access Object Pattern or DAO pattern is a way of organizing code to handle the communication between your program and a database. It helps keep your code clean and separates the logic for interacting with data from the rest of your application.
Does a DAO have to pay taxes? ›
Generally, DAOs are treated as partnerships or corporations for tax purposes, depending on their structure and operations. This classification significantly influences how they are taxed, including the taxation of income generated by the DAO and its members.
What problem does DAO solve? ›
DAOs cut out middlemen, ensuring trustless decision-making on the blockchain. The decentralized ledger allows anyone to input, but entries remain unalterable. This guarantees universal verification of all DAO transactions, including on-chain votes, asset transfers, token mints, and more.
Can an LLC own a DAO? ›
Forming a DAO is not all that different from forming any other business. Legally compliant DAOs are limited liability companies or LLCs.
What is the DAO used for? ›
Most Chinese martial arts schools still train extensively with the dao, seeing it as a powerful conditioning tool and a versatile weapon, with self-defense techniques transferable to similarly sized objects more commonly found in the modern world, such as canes, baseball or cricket bats, for example.
What is the purpose of the DAO layer? ›
In software, a data access object (DAO) is a pattern that provides an abstract interface to some type of database or other persistence mechanism. By mapping application calls to the persistence layer, the DAO provides data operations without exposing database details.
What is the goal of DAO? ›
The “end goal” of a DAO is to be fully decentralized and run autonomously without the need for human intervention or control. Its proponents suggest that DAOs provide a more open and democratic way for people to organize and collaborate.
What is the point of decentralized organization? ›
A decentralized organization is a business structure that distributes decision-making authority throughout the entire company, rather than concentrating it at the top. In a traditional hierarchical - or centralized - structure, decision-making is concentrated at the top level of the organization.
