Decentralized autonomous organizations (DAOs)

  • Member-owned communities without centralized leadership.
  • A safe way to collaborate with internet strangers.
  • A safe place to commit funds to a specific cause.

What are DAOs?

DAOs are an effective and safe way to work with like-minded folks around the globe.

Think of them like an internet-native business that’s collectively owned and managed by its members. They have built-in treasuries that no one has the authority to access without the approval of the group. Decisions are governed by proposals and voting to ensure everyone in the organization has a voice.

There’s no CEO who can authorize spending based on their own whims and no chance of a dodgy CFO manipulating the books. Everything is out in the open and the rules around spending are baked into the DAO via its code.

Why do we need DAOs?

Starting an organization with someone that involves funding and money requires a lot of trust in the people you’re working with. But it’s hard to trust someone you’ve only ever interacted with on the internet. With DAOs you don’t need to trust anyone else in the group, just the DAO’s code, which is 100% transparent and verifiable by anyone.

This opens up so many new opportunities for global collaboration and coordination.

A comparison

DAOA traditional organization
Usually flat, and fully democratized.Usually hierarchical.
Voting required by members for any changes to be implemented.Depending on structure, changes can be demanded from a sole party, or voting may be offered.
Votes tallied, and outcome implemented automatically without trusted intermediary.If voting allowed, votes are tallied internally, and outcome of voting must be handled manually.
Services offered are handled automatically in a decentralized manner (for example distribution of philanthropic funds).Requires human handling, or centrally controlled automation, prone to manipulation.
All activity is transparent and fully public.Activity is typically private, and limited to the public.

DAO examples

To help this make more sense, here’s a few examples of how you could use a DAO:

  • A charity – you can accept membership and donations from anyone in the world and the group can decide how they want to spend donations.
  • A freelancer network – you could create a network of contractors who pool their funds for office spaces and software subscriptions.
  • Ventures and grants – you could create a venture fund that pools investment capital and votes on ventures to back. Repaid money could later be redistributed amongst DAO-members.

DAO membership

There are different models for DAO membership. Membership can determine how voting works and other key parts of the DAO.

Token-based membership

Usually fully permissionless, depending on the token used. Mostly these governance tokens can be traded permissionlessly on a decentralized exchange. Others must be earned through providing liquidity or some other ‘proof-of-work’. Either way, simply holding the token grants access to voting.

Typically used to govern broad decentralized protocols and/or tokens themselves.

A famous example

MakerDAO – MakerDAO’s token MKR is widely available on decentralized exchanges. So anyone can buy into having voting power on the Maker protocol’s future.

Share-based membership

Share-based DAOs are more permissioned, but still quite open. Any prospective members can submit a proposal to join the DAO, usually offering a tribute of some value in the form of tokens or work. Shares represent direct voting power and ownership. Members can exit at any time with their proportionate share of the treasury.

Typically used for more closer-knit, human-centric organizations like charities, worker collectives, and investment clubs. Can also govern protocols and tokens as well.

A famous example

MolochDAO – MolochDAO is focused on funding Ethereum projects. They require a proposal for membership so the group can assess whether you have the necessary expertise and capital to make informed judgments about potential grantees. You can’t just buy access to the DAO on the open market.

Reputation-based membership

Reputation represents proof of participation and grants voting power in the DAO. Unlike token or share-based membership, reputation-based DAOs don’t transfer ownership to contributors. Reputation cannot be bought, transferred or delegated; DAO members must earn reputation through participation. On-chain voting is permissionless and prospective members can freely submit proposals to join the DAO and request to receive reputation and tokens as a reward in exchange for their contributions.

Typically used for decentralized development and governance of protocols and dapps, but also well suited to a diverse set of organizations like charities, worker collectives, investment clubs, etc.

A famous example

DXdao – DXdao is a global sovereign collective building and governing decentralized protocols and applications since 2019. It leverages reputation-based governance and holographic consensus to coordinate and manage funds, meaning no one can buy their way into influencing its future.

How do DAOs work?

The backbone of a DAO is its smart contract. The contract defines the rules of the organization and holds the group’s treasury. Once the contract is live on Ethereum, no one can change the rules except by a vote. If anyone tries to do something that’s not covered by the rules and logic in the code, it will fail. And because the treasury is defined by the smart contract too that means no one can spend the money without the group’s approval either. This means that DAOs don’t need a central authority. Instead, the group makes decisions collectively, and payments are automatically authorized when votes pass.

This is possible because smart contracts are tamper-proof once they go live on Ethereum. You can’t just edit the code (the DAOs rules) without people noticing because everything is public.


More on smart contracts

Ethereum and DAOs

Ethereum is the perfect foundation for DAOs for a number of reasons:

  • Ethereum’s own consensus is distributed and established enough for organizations to trust the network.
  • Smart contract code can’t be modified once live, even by its owners. This allows the DAO to run by the rules it was programmed with.
  • Smart contracts can send/receive funds. Without this you’d need a trusted intermediary to manage group funds.
  • The Ethereum community has proven to be more collaborative than competitive, allowing for best practices and support systems to emerge quickly.

@NFT Heritage: Educating people on DAO, Web3, Crypto, NFT, DeFi and Metaverse!

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Published: 9 July 2022

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