Basics about DAOs
Last updated
Last updated
——Decentralized Autonomous Organization。
Short-term decentralized self-regulatory organization, often used in the cryptocurrency space, but not always a widely understood term.
Decentralized autonomous organizations, as the name suggests, are autonomous, decentralized organizations without a central government.
Rather than being governed by a small group of executives, the DAO's rules are set in code and enforced by a network of computers running the software. This means the rules are the same for everyone and cannot be changed, no matter who they are - so there are no loopholes to get rid of your obligations or restrictions.
Since the code is the law, there is no need for a middleman to ensure compliance with the rules.
Decentralization of a DAO usually means that it is democratized, not hierarchical. For example, any changes that should be implemented are voted on by all participants, not by a group of decision makers. All votes are automatically counted and executed by the software, rather than relying on human intervention. This eliminates the possibility of vote count mismanagement or tampering, enabling transparency and full visibility.
Since other participants in the DAO no longer need to be trusted, this means that it can consist of many people who do not know each other and would otherwise be unable to coordinate their common goals. In other words, they can go beyond any physical constraints and ensure that all parties are working in the interests of the project itself.
The DAO represents a revolutionary financial technology powered by Ethereum. Before Ethereum, there was no way to decentralize an organization in a globally accessible, layerless, and interoperable way.
A DAO is a community's commitment to shared value:
Give members a voice through governance;
Flatten the hierarchy and create a smooth work communication environment;
Allocate resources to achieve core tasks;
A Decentralized Autonomous Organization (DAO) is like a well-organized and decentralized venture capital fund.
In a DAO, you can control the assets an organization collects based on the amount of governance tokens you own, rather than the control that owning shares gives traditional corporate investors.
But DAOs differ from traditional financial funds beyond just tokens and stocks.
A centralized venture fund usually has the traditional hierarchical structure we all know: A senior executive is responsible for making executive decisions as a CEO, a CTO, and a COO.
In a DAO, having governance tokens enables you to propose and vote on new rules, which are then automatically executed via smart contract method calls ——no CEO passing down executive orders, DAOs rely solely on smart contracts to get work done .
Most crypto projects are moving toward incorporating this governance utility into their token economics — just as shares represent ownership in a 2.0 company, tokens represent ownership in a 3.0 DAO.
As an internet-native organization, DAOs have the potential to revolutionize the way corporate governance works. As the concept matures and the legal grey areas of their operation are cleared, more and more organizations may adopt the DAO model to help manage some of their activities.
The rules of the DAO are established by a core team of community members through the use of smart contracts. These smart contracts lay the basic framework for the operation of DAOs. They are highly visible, verifiable, and publicly auditable, so any potential member can fully understand how the protocol works at every step.
Once these rules are formally written into the blockchain, the next step is funding: DAOs need to figure out how to get funding and how to grant governance.
This is usually achieved through a token offering, through which tokens are sold to raise funds and populate the DAO treasury.
In return for their fiat currency, token holders are granted certain voting rights, usually proportional to their holdings. Once the funding is complete, the DAO can be deployed.
At this point, once the code is in production, it cannot be changed by any other means other than consensus through member voting. That is, there is no special authority to modify the rules of the DAO; it is entirely up to the community of token holders to decide.
How to Create and Participate in a DAO
Many projects in the crypto space have a DAO behind them, as this is often one of the best ways to keep project governance fair, transparent, and accessible to all who want to participate. However, like any organization, DAOs still need to be established and funded before they can reach a wider audience.
First step
Figure out what the smart contract that underpins the DAO needs to do — then create it.
These rule sets are usually very broad and cover a myriad of things; forgetting to set something in the first stage of development means it can be changed later by voting individually, this can be a long and laborious process, especially if forgotten Rules are important to the health of the network itself. This code also needs to be tested and re-tested so that nothing is missed.
Second step
Secure funding for the launch of the DAO and its ongoing operations.
This is usually achieved through token sales, which also deal with the governance aspect of the process —— most of the time, the number of tokens owned by the governor is related to their voting rights within the organization. This is no different from a shareholder type relationship, which is why DAOs translate so well into the world of Decentralized Finance (DeFi).
Third step
The DAO itself needs to be started.
Once deployed on the blockchain, the founding team cannot make any changes without input from other participants or token holders. This is when all the rules go into effect, including the governance of the DAO. After this, the DAO functions as expected and any changes are voted on by the entire network.
Once you find a project of interest, you can directly participate in the DAO in several different ways. It's important to note that not all DAOs function the same, so the first step is to figure out the core functionality of each DAO.
For DAOs focused on technical governance, it is important to understand what voting rights are granted to token holders and what proposals are at risk.
In some cases, such as Uniswap, token holders can vote to distribute a portion of the protocol’s fees among them. In other protocols like Compound, token holders can vote to allocate these protocol fees to bug fixes and system upgrades.
This approach also allows freelancers and those generally interested in projects to join ad hoc projects and get paid for their work by funding projects (the DAO regularly posts such ad hoc projects on its Discord server).
For other DAOs, the focus is not on governance of the technical aspects of the protocol, but on pooling and distribution. One of the key takeaways is transparency within the DAO. The details of each proposal are at a glance, the voting history is continuously recorded, and even the voting records of specific token holders can be observed.
Gnosis Safa: a multi-signature wallet commonly used to manage community treasuries;
Snapshot: an off-chain voting platform that enables easy token-based governance;
Discourse: a forum typically used to discuss governance proposals;
CollabLand: a bot that provides token-gated access and prompts to community chat groups;
Coordinape: a coordination game to determine which contributors should be rewarded with tokens;
SourceCred: track instances of community engagement and reward active members;
Mirror: Financing creative projects through tokenized crowdfunding;
Tally: governance dashboard to track on-chain voting history for different protocols;
Boadroom: a governance center managed by token holders to empower key decisions;
Sybil: Create and track on-chain governance delegations;
RabbiHole: reward tokens for completing specific on-chain tasks;
Decentralized Autonomous Organizations have gained traction over the past few years and are now fully integrated into many blockchain projects. For example, the decentralized finance (DeFi) space uses DAOs to make applications fully decentralized.
The DAO represents a revolutionary financial technology powered by Ethereum.
In the second quarter of this year, we witnessed a thriving DAO ecosystem thanks to a new coordination mechanism that handles financial decisions as a whole. From fundraising to deploying funds, the diversity of DAO use cases this year has been impressive, and this explosion of ingenuity continues to this day.
Thousands of DAOs like Compound and Uniswap, media organizations like Bankless and publicly funded entities like Gitcoin use DAOs to coordinate and manage their finances. Membership in the DAO has also increased fivefold since late June.
An ever-evolving ecosystem of tools and development provides the necessary functionality to support the growth of DAOs. Current projects include many focused on token servicing, governance, treasury management, risk management, growth, community, operations, and DAO development.
As with all technological advancements worth watching, the DAO will continue to grow, strong, and diverse. The importance of DAOs will continue to increase as crypto projects continue to grow and distribute governance.
