Traditional businesses are usually organized hierarchically, with a single person or group dictating the organization’s mission and values for its members. Decentralized autonomous organizations — or DAOs — decentralize governance by instead entrusting authority with a participatory algorithm. By doing away with conventional disconnects between leader and organization, cost inefficiencies and financial frictions, DAOs are set to revolutionize social coordination and innovation. 

DAOs are ever-evolving and come in various forms, but they are usually collectively owned internet-native communities that run on blockchain technology. DAOs connect people with a shared economic or social mission, while automating processes like collective decision-making, pooling of resources and deployment of capital.

“The future of corporations could be very different as DAOs take on legacy businesses,” according to a tweet by American billionaire entrepreneur Mark Cuban. “It’s the ultimate combination of capitalism and progressivism… If the community excels at governance, everyone shares in the upside.”

How It Works

A DAO isn’t governed by a single person, government or entity. Instead, the organization’s rules are encoded on blockchain technology — typically  Ethereum — and have to be voted upon by the DAO’s members. This gives all involved members complete transparency in both the organization’s structure and monetary decisions.

What allows a DAO to function is a smart contract: a collection of code that runs on blockchain. The contract defines an organization’s rules and secures its treasury. Members cannot change or violate the rules, except by vote. The group makes decisions collectively and payments are authorized automatically when votes pass. This democratizes decision-making and makes operations fully transparent and global. 

A DAO’s funding mainly comes from crowdfunding and token issuance. Interested members purchase tokens, and in return are given certain voting rights — for fund management and organizational operations — proportional to their holdings. Some DAOs give members access to an organization’s profits or losses, while other DAOs allow members to manage and transfer the resources controlled by the organization.

DAOs build communities across the globe by appealing to members regardless of their location or backgrounds.

How It Began

Historically, humans and organizations have repeatedly attempted to coordinate economic and social interactions. With recent digital advancements in most fields, it’s unsurprising to see the emergence of a technological model governing organizational structure. 

The idea of a DAO in its current form can be traced back to BitShares in 2014, which embodied the concept of a Decentralized Autonomous Corporation, or DAC. BitShares was a virtual e-commerce platform linking merchants and customers without a central authority.

In 2014, programmer and Ethereum co-founder Vitalik Buterin used the term “Decentralized Autonomous Organization” to describe an “entity that lives on the internet and exists autonomously.”

But it was only in 2016 that members of the Ethereum community announced the creation of the first DAO, called The DAO or Genesis DAO. This platform allowed people to pitch projects and potentially receive funding from The DAO. Members with DAO tokens were granted voting rights and would in turn reap rewards if chosen projects turned profits. But The DAO was hacked a month after launch due to vulnerabilities in the code, putting an end to similar projects for a while.

Despite these challenges, 2019 saw a renewed interest in similar concepts and projects. Both the explosion of decentralized finance and MolochDAO’s creation of ERC-20 — a new smart contract design — as a technical standard spurred the emergence of several new DAOs. Examples include MakerDAO, an autonomous lending platform and Aragon, a multi-chain DAO deployment platform. 

Risks and Challenges

Because DAOs avoid written agreements and other legal formalities by relying on code, they are also raising governance and regulatory concerns. These challenges include risks of distributive governance, liability limitations and concerns about securities.

DAOs aim to decrease operational and management inefficiencies through smart contracts and participatory governance. At the same time, clinical professor of law Aaron Wright highlighted the importance of “social and political dimensions of governance.” Because humans aren’t perfectly rational and have limited capacity for information, he noted that direct voting through distributed consensus may be difficult to achieve because it requires consistent engagement and attentiveness from members. 

Additionally, DAOs’ lack of formal legal recognition could create potential liabilities for members and limit their ability to engage with traditional legal organizations. Since DAOs are not created as legal entities, they might lack the ability to shield members’ assets if the organization injures a third-party or cannot pay its creditors. However, state law efforts are already underway to adapt traditional business entities to DAOs. 

Interests in DAOs may also sometimes be difficult to classify, leading to uncertainty about securities laws. In 2017, the Securities and Exchange Commission or SEC issued a report listing The Dao’s tokens as securities, subject to U.S. securities law. 

Finally, DAOs rely on people and community engagement — it’s what incentivizes  members to keep coming back. Community culture can deteriorate if the core team loses interest or if tokens and prices dominate conversation, which can halt a DAO’s progress.

Despite lingering concerns and uncertainties, analysts and investors are hopeful about the prospects of DAOs in the future. 

DAOs in 2021 

In 2021, DAOs have opened new opportunities for global collaboration and coordination. Today, DAOs are used in investment, charity, fundraising, borrowing, NFT purchases and social coordination. 

DAOs are appealing because they are accessible, can rapidly pool and distribute capital, facilitate efficient voting processes and reduce the need to manually monitor fraud. By making group decisions more transparent and autonomous, they reduce organisational frictions and chances of fraudulent behaviour. Since they are digitally native and easy to join, they allow members to collaborate peer-to-peer and easily transact value — all without a centralized body.

While the specifics of each DAO depend on the group’s goals, most DAOs fall into two general categories: Those that manage open source, blockchain-based projects and those that make investments. For instance, HerStory DAO collects and funds projects by Black women and non-binary artists, while MetaCartel Venture DAO invests in early stage decentralized applications.

The Bankless DAO Writers Guild identified a recent rise in socially-oriented DAOs, which primarily bring people together to exchange ideas and collaborate. Examples include collectives with a shared passion for artists and NFTs, such as PleasrDAO and FlamingoDAO, and social DAOs like FWB. In May, a metaverse organization called Jenny DAO purchased its first NFT — an original song by Steve Aoki and 3LAU. Recently, a group called ConstitutionDAO even attempted to purchase a copy of the US Constitution. 

According to Forbes, DAOs give all members of a collective organization a “voice.” We are only beginning to see what this voice can do. 

ABOUT THE WRITER

Freya Savla is a Tech Innovation Fellow from Yale University, where she is exploring the political economy through the lens of economics, policy and journalism.

Contact Freya at freya@identityreview.com.

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