All You Need to Know About Decentralized Autonomous Organisations
The world is going through a major shift as businesses have become much more complex and dynamic than ever. Such scenarios are opening new gates of endless possibilities and some fearsome factors that might cause many businesses to collapse. The major thing this shift requires from us is to simply adapt, and it will force people to do so to survive in these uncertainties in the business sector.
So naturally, this shift will always favor those who adapt early. Think for a second, wouldn’t it be great to organise with other people worldwide without knowing each other, establish your own rules, and make autonomous decisions based on blockchain technology? This is becoming a reality thanks to Decentralised Autonomous Organisations (DAOs). DAOs will be an important part of the metaverse and could revolutionize how democratic processes work and communities are formed.
Let’s start by learning how and when this idea came for the first time.
When Was the Idea of DAO First Coined?
DAOs are like cooperatives, which have been around for years. In fact, one of The Netherlands’ biggest banks, the Rabobank, is a cooperative with nearly two million members. However, today's know DAOs were invented in 2016 by developers inspired by the blockchain. DAOs are put in place to manage and oversee an entity, similar to corporations. The key to a DAO is that there is no central authority; the voluntary group of participants governs itself. So, these developers were thinking of a relatively new way of business transactions that is much safer than conventional ones.
An Overview of DAOs
Decentralised Autonomous Organisations are independent organisations with rules encoded in transparent computer programs—or blockchain,—and controlled by members instead of a central authority. No managers are needed since the rules are embedded in the code, and stored on a blockchain, so bureaucracy and hierarchy are removed. The blockchain facilitates the automated exchange of value and trusted transactions.
In other words, DAOs are community-driven entities whose operations and resources are not controlled by any central authority.
Due to the power of BigTech, it has become increasingly relevant for internet users worldwide to organize themselves safely and effectively, move away from centralized entities controlling our lives, and take back control ourselves. This is the new world we are entering in. This is the ultimate scenario and the bright future of business we can perceive. Just to emphasize what we are dealing with, a DAO is all about crypto, web 3.0, and the ultimate shape of a social business setup that connects like-minded people worldwide.
Smart contracts play an important role in DAOs. Logically coded agreements dictate how decisions are made based on underlying blockchain activity. The circulating token supply may be increased, reserve tokens burned, or rewards given to existing token holders if a specific code is implemented based on the result of a decision.
DAOs have a blockchain-based voting process. The number of tokens that each user holds determines their voting power. For example, one user who owns 100 tokens of the DAO will have two times the voting power as one who owns 50 tokens. Users often must choose between mutually exclusive options, so everyone has a voice, and the voting power is fairly distributed among the users.
Supposedly, users with a greater financial stake in the DAO are more likely to act in good faith due to this practice. Think about a user with a 25% share in the overall voting power. The user may engage in immoral behaviour, but their 25% holding will be at risk if they do so.
A DAO's Treasury typically houses tokens that can be exchanged for fiat currency. In some DAOs, members can vote on whether to relinquish treasury funds in exchange for assets to acquire, for example, rare NFTs, in order to make a better investment of the funds and obtain better long-term benefits.
For instance, in 2022, BendDAO launched as an NFT lending treasury, in which users could collateralize their NFTs to borrow ETH. Although the harsh bear market plummeted NFT prices that year, the treasury showcased the expansion of digital assets beyond cryptocurrencies—a trend other companies have followed.
The Role of Communities within the Development of DAOs
In a DAO, people with common interests band together to form virtual organizations governed by rules established through everyday democratic processes.
In a DAO, the focus shifts from a hierarchical and vertical structure to one that is more community-led and independent of its members. This allows rules to be encoded that allow the organization to perform independently, even with no managers.
Decentralized governance involves distributing authority to different locations in the organization. This contrasts with centralized entities, where shareholders and executives have power over everything going on within an organization.
Due to this different approach, DAOs have been heralded as a way of encouraging companies with more collective ownership and less focus on profits than traditional businesses.
A Guide to the DAO Types
DAOs come in many forms, each following the community's best wishes. And whether you love sports, music or investing—or anything at all—there is a DAO waiting for you to join it.
Let’s explore some of the most popular kinds of DAOs, and highlight some innovative ways to use them.
AMM or Protocol DAOs
Automated Market Maker (AMM) DAOs use smart contract protocols to provide decentralised financial services.
MakerDao's stablecoin DAI is the first of its kind and has received widespread attention for changing how decentralized applications are built. At this point, MakerDAO is one of the most successful apps on Ethereum—with over 1,000 projects integrating DAI into their own unique systems.
One of the defining characteristics of AMM DAOs is their use of decentralized governance, which gives participants a type of hybrid cryptocurrency known as a “governance token.” This hybrid crypto can be used to make decisions that impact the network overall.
Grant DAOs are one of the earliest forms of decentralised autonomous organizations. In a Grant DAO, also know as DeFi DAO, members donate funds into a pool and then collectively vote on how those funds will be distributed.
DeFi DAOs are decentralised organizations that fund innovative new DeFi projects. And this flexibility is what makes them so practical: they distribute funding more effectively than traditional institutions.
Aave Protocol is one of many DeFi projects taking advantage of the Grants infrastructure in order to grow its community.
Aave's lending pool ecosystem gives users the option to contribute their own funds or borrow from other members' pools. Community voting rewards successful proposals with additional funding and encourages people to contribute their best efforts towards getting them passed.
These types of DAOs are not constrained by the tools and parameters we use to create our traditional investment portfolios; instead, they can raise hundreds of millions or billions in a matter of seconds, thanks to the huge demand for investing in cryptocurrency.
Investment DAOs are more inclusive than traditional firms—anyone can participate, regardless of location or bank account balance.
Venture DAOs, like The Krause House, allow us to invest in anything we want, even an entire NBA team. This fan-governed organization, which calls itself "a community of hoop fanatics just crazy enough to buy an NBA team," identifies its mission as bringing the first fan-governed basketball team in league history.
Media companies rely on advertisers to make money, so they produce content that will appeal to the largest possible audience.
A media DAO restructures the way content is made, allowing it to be driven by the community rather than advertisers and creators are rewarded with tokens.
Bankless DAO has created a user-friendly support platform to help people learn about decentralised finance. It uses media, learning channels, and culture to create windows of opportunity for curious users.
Another example is ForeFront, which is developing a crypto education hub for its community members. Through the hub, users will learn about social tokens—and be able to celebrate both community and growth initiatives of incubated projects.
As media DAOs continue to grow in popularity and influence, it’s likely that these decentralized organizations will become major players—and beneficiaries—in the new digital economy.
Social DAOs are gaining popularity among crypto enthusiasts. They are community-owned social clubs you can join by purchasing tokens (in the form of bitcoin). In addition, they aim to bring together people with common interests to participate in projects they share a passion for.
One such example we can see is a social group named Friends With Benefits, which can be considered a collective experiment for how web3 applications can enable new ways of thinking and creating. This social DAO recently raised $10 million from investors, including Andreessen Horowitz.
It is comparable to a decentralised Soho House and functions similarly to the online country club. The only way to get in is to purchase a certain number of FWB tokens. Members pay 75 $FWB tokens ($4,000) to join, and once they do, they are invited to chat in a Discord chat room where the group discusses crypto, trades job leads, and deals, and holds town halls. Group members organize local meet-ups in their towns and cities and members-only parties at major crypto conferences.
As you can see, there is a DAO for almost every conceivable type of business. The point is that these companies are designed to remove the obstacles faced by ordinary people trying to enter new markets.
With the help of a distributed autonomous organization, or DAO, people who would otherwise not have access to investment opportunities can pool their money and invest as they see fit.
What Are the Most Exciting Uses of DAOs in the Current Scenario?
As for the time I am writing this article, and there are many businesses currently working on this model, there is a huge flow of business toward this shift. Here we will discuss some remarkable and prominent examples of business models based on DAOs.
In today's crypto world, Uniswap is the world's largest Decentralized Autonomous Organization and has taken the top spot as the biggest decentralized crypto exchange. It became a legitimate DAO in September 2020 after launching its governance token. In contrast to the centralized exchanges that only offer a few hundred coins, it is the most active decentralized autonomous organization today. Since its launch in 2018, it has facilitated over $1 trillion worth of crypto trades.
You can apply for governance rights within the organization if you have been an active user for some time. Because of its good positioning over Decentralised Finance (DeFi) markets, Uniswap's membership and volume have grown exponentially.
There has been a lot of buzz in the crypto community over the last few years about Uniswap DAO. Uniswap is currently worth $5.2 billion, and its DAO token, UNI, is extremely popular.
BeetsDAO was created with the aim of pooling funds for investment in various projects. But it’s also made a few commissions of new art and music.
BeetsDAO is building a platform to help create and sustain decentralized apps. With LABS, they offer creators an experience in learning about blockchain technology by focusing on their interests instead of technical jargon.
LABS have a decentralized network built in. They are supported by the treasury and membership and exist to support, engage with, produce and distribute cultural work.
PODS, BeetsDAO's fund and incubator program supports several web3 projects that are working to disrupt the status quo. In addition, BeetsDAO also collects and creates artwork.
In March 2021, the DAO purchased four rare EulerBeats Enigma NFTs— which are algorithmically generated audio files. One month later, they organized a collaboration between the original artist who created The Nyan Cat and Snoop Dogg to create a new token: "Nyan Dogg." From the moment it was released, it made around $250K in investments.
The decentralised autonomous organisation BitDAO is committed to providing a decentralised tokenised economy as part of an ecosystem. By investing in other projects and partners in the DeFi field, the organization supports other projects and partners. Furthermore, the organisation facilitated several initiatives that could benefit the industry.
BIT serves as the project's governance token. BIT holders can propose every decision affecting the project and have the power to vote on them. As such, all decisions are approved by the community and voted upon properly.
BitDAO allocates funds for the growth of DeFi by developing BitDAO products and supporting other projects. The foundation's funding may also help BitDAO contributors, such as for the development of a special governance module or community management efforts.
This DAO aimed to buy a copy of the U.S. Constitution. Although ConstitutionDAO was not able to win the bid for a highly rare copy of the U.S. Constitution auctioned by Sotheby's in 2021, and the primary role was not a success, they succeeded in vaulting the concept of DAOs into mainstream culture.
This campaign showed how community organizing and speed could lead to success, revealed crypto donations' power in achieving a goal, and inspired other organizations/people to follow or copy its model.
ConstitutionDAO has proposed a system in which all contributors to the constitution would receive governance tokens called $PEOPLE proportionally.
PleasrDAO also broke the Doge meme image into fractional NFTs, with a more than $300 million valuation. Before that, the DAO could mint paper tokens representing its digital holdings—making it possible for members to hold “a piece of the U.S Constitution” on their smartphones and in physical wallets.
Strangely enough, ConstitutionDAO’s token, PEOPLE, jumped to an all-time high since the project ended, and its price was much higher than it was before. It is currently behaving like a meme coin.
As one of the most popular lending DAOs in the DeFi space, Compound allows holders to earn returns on their investments by locking them into platform pools. COMP is one of the utility tokens of Compound that has earned a decent reputation among DAO tokens that have seen price fluctuations.
Compound’s price is expected to be $298.41 by the time 2022 ends and have an average of $267.94 throughout the year. The currency still shows considerable potential for sustained growth in the future, despite being one of the least popular investment options.
The Compound DAO was developed by Compound Finance to govern its protocol. It allows token holders to make proposals, queue them for voting and execute the ones that pass.
In terms of the development of the DAO of this large DeFi network, it includes some built-in features to manage this process: a minimum number of tokens is required in order to make a proposal. Proposals are open for voting by the membership, and a minimum number of votes is required to pass.
PleasrDAO is another example involving crypto artists, entrepreneurs, and investors bidding on high-profile digital works. Spending $5.4 million on an NFT affiliated with Edward Snowden, in addition to $4 million on the Wu-Tang Clan album called "Once Upon a Time in Shaolin," the group spent $4 million on another album from the Wu-Tang Clan.
The members of PleasrDAO recognize and appreciate the value that Snowden's leaks have for programming. The auction combined a donation to the Freedom of Press Foundation (which works to protect and promote journalism in an open society) with bids that allowed individuals who were unable to attend conferences or workshops.
PleasrDAO distributes tokens, each of which represents a fractional ownership share in the company. That means every member has a share of the DAO's assets. Each participant in the group chat can take part directly in governing the organization, and if someone were to leave (selling their token on an exchange), that person would no longer have voting rights within it.
The Correlation Between DAOs and Cryptocurrency
To join a DAO, users must first buy the group's cryptocurrency. The more of that currency they own—typically by owning tokens distributed in an initial coin offering (ICO)—the greater their voting power within the organization.
BitShares was the first successful example of a DAO—a virtual e-commerce platform that connects merchants and customers without a central authority. BitShares' creator, Dan Larimer, coined the term DAC when he created Bitshares.
As a result, many DAOs have implemented internal capital systems designed to incentivize and reward actors who contribute to the platform. Once a DAO is established, and its rules have been programmed within smart contracts, it enters a "funding phase" that allows anyone wishing to contribute to access it.
It makes sense why people would want to pool their money to buy things. Then why do we need a whole new governance structure based on cryptography? Isn't a crowdfunding site a better option?
They certainly could.
However, the answer is very simple. It is because of the transparency and autonomy this kind of investing offers, it is growing in popularity—and may change how people invest. Above all, it is a shift away from centralized entities that control who has access to what to a more democratic process.
Then, Why Would People Join a DAO?
Despite their rapid growth, DAOs are still in the dial-up phase, and proponents believe better, more powerful examples will appear in the coming years. Most people join DAOs because they are in need of independence and do not want the interference of intermediaries and centralised companies.
DAO believers, however, say that traditional organizations cannot compete with DAOs in a few areas:
- DAOs use governance tokens, and votes are recorded in a permanent blockchain ledger; DAOs are theoretically more trustworthy than traditional organizations.
- Every participant has the right to vote on group decisions, therefore, DAOs are more democratic than traditional organizations.
- DAOs are often project-specific, so they are flexible and quick to respond. With significantly less red tape, you can set them up and wind them down more quickly than forming a traditional start-up.
You can code your smart contract in such a way that every time an NFT is sold, a percentage of the proceeds automatically goes to fund your DAO. This helps the organization achieve its mission, one of the goals on its roadmap or launch a new project.
By using blockchain-based tools, businesses can cut out a lot of red tape—the "if this, then that" logic baked into each contract means they only trigger when certain conditions are met. If the work is complete, they receive payment without waiting for someone else's approval or enduring bank fees.
The bottom line is that DAOs can help emerging NFT creators cultivate a sense of community and foster collaborations with investors to invest in gated events. With NFTs offering people ownership of virtual assets and DAOs providing new pathways for asset-based investing, the convergence of these technologies will certainly lead to continued innovation.
Risks and Challenges of DAO
DAOs have many advantages over traditional business models, but they also come with their own set of challenges. Here are some of the main risks associated with DAOs:
One of the main risks are related to programming errors and attack vectors, which are likely to have plagued The DAO in May 2016, according to IEEE Spectrum6. The DAO was a decentralized, open-source investment fund that used a smart contract to facilitate transactions. The DAO gathered around $150 million in funding; its crowdfund made it the most successful ICO ever at that time.
Voters with DAO tokens could cast their vote on propositions and receive rewards as long as those outcomes resulted in a net gain. However, the DAO's contract contained serious flaws that allowed attackers to drain its funds. The programmer created a loophole that enabled requestors of funds to make multiple withdrawals before their balance was updated by the smart contract.
The organisation was likely venturing into new territory in terms of regulation and corporate law. The organisational structure of the DAO could have numerous ramifications: Investors were concerned they would be exposed to liability for actions taken by the broader organization as a whole.
Let’s see other setbacks DAO can have.
Lack of Control
DAOs were designed as investment vehicles where token holders could vote for investment proposals. A 2017 SEC investigation into the early DAO, called "The DAO" — which suffered a security breach that resulted in approximately $50 million worth of ether being stolen—discussed some of these DAO liability issues. The SEC, however, examined The DAO's operations and determined that, in reality, much of the DAO's activities are centralized through a board of curators selected by The DAO's creator.
As a result of their distributed nature, the token holders of the DAO could not exert any real control over the hand-picked curators who presented them with curated proposals. The curators were chosen without their input.
According to the SEC, the DAO resembled a corporation rather than a general partnership due to its dispersed token holders and curated proposals: As a result, DAO Token holders could not exercise meaningful control over the enterprise through voting, resulting in their voting rights similar to corporate shareholders. A DAO's token holders may not all be liable for the acts of a DAO, according to the SEC's conclusion in The DAO Report.
So I highly advise you to do your proper research like starting any new business.
High Operational Costs
Most DAOs operate with cryptocurrency funding, and every crypto transaction carries a small fee referred to as “gas.” These fees are compensation for the work that miners perform to validate transactions. To execute a transaction in the second-most valuable cryptocurrency after Bitcoin (by market capitalization), Ether, users must pay "gas fees" to validate and store the transaction on Ethereum.
The worst part about this situation is that token holders are charged for gas fees even if their transaction does not go through. Because of this, the 17,000 individuals who sought to purchase an original copy of the U.S. Constitution at auction were exposed to downside risk.
Although donors were promised a refund if they lost the auction, members still had to pay gas fees of 3% on top of the total cost. These expenses amounted to more than $1.5 million out of nearly $47 million raised in donations.
Since the transaction fee structure is built into many decentralized blockchains, DAOs are less likely to use them for fundraising.
Chances of 51% Attacks
A 51% attack occurs when a single person or group of people gains control of over 50% of the total mining power for any given blockchain. This is usually achieved by renting hash power from third parties. Unfortunately, these attacks represent a latent threat to DAOs due to the nature of the attacks based on blockchain technology.
Attackers can prevent new transactions from being confirmed and re-order the sequence in which they're processed. Malicious agents can rewrite parts of the blockchain, reversing their own transactions and creating an issue called double-spending.
As the size of a blockchain network grows and acquires more mining nodes, it makes attacks that attempt to gain control over 51% of hashing power less likely. One of the reasons is that a 51% attack is more expensive to pull off on a network with lots of miners and hash power because it requires the attacker to control over half of the total combined computing resources.
However, within a DAO, a 51% attack could happen if a person or group of people would achieve more than >50% of the votes within a DAO - for example by purchasing the cryptocurrency that governs the DAO - it could alter the direction of the DAO potentially contrary to the wishes of the community.
A Look at the Future of DAOs
There are endless hope and possibilities for a decentralized future. A Web3 network is similar to the "read/write/own" version of the internet since users can link programs and content directly without relying on a central server. Rather than centralized applications controlled by tech giants, Web3 tries to do what the internet hasn't been able to do so far: promote open services powered by decentralized protocols.
Due to its decentralized nature, Web3 services' resilience, fairness, and ethical character are considerably higher. Tech platforms are no longer accessed in exchange for a monthly fee and users' personal information. The participants are not just customers or products that economic pressure exploits but are real network stakeholders. Decentralised networks allow users to access, govern, and own decentralized tokens or cryptocurrencies. Web3 places you in the owner position, unlike the product in Web2.
Experts predict that within the next 10 years, DAOs will manage assets of the same value as corporations do now. Imran Khan, founder of the pre-seed crypto fund Volt Capital and a founding member of Web3 accelerator Alliance, predicts that DAOs will have one trillion in AUM—Assets Under Management—by 2032.
The hype surrounding DAOs has been fueled by their potential to deliver an unparalleled value proposition.
What are the Benefits for Businesses?
All contracts, decisions, and transactions are publicly viewable and verifiable since they are built on an open blockchain, and owners remain anonymous. With a DAO, it becomes possible to bring together a community of users with similar interests to work together toward a common goal without centralized control or a single point of authority.
As a consequence of DAOs such as PleasrDAO, NFTs can be shared equitably and more inclusively, reinforcing the decentralised ethos of accessibility and inclusion.
The popularity of DAOs will continue to grow and spread into nonprofit organizations, decentralized finance, and NFT collections, allowing them to thrive in the future. The DAO model also provides an effective governance structure for Web3 that boosts participation, reduces corruption, and reduces censorship risks. A DAO also allows instant decisions once all participants reach an agreement instead of being slowed down by hierarchical structures.
Furthermore, business organisations such as charities could benefit significantly from DAO structures. Fund allocations and administrative tasks often consume more time and money than charitable activities. Here DAOs again provide a solution. Funds can be distributed to the right channels efficiently and quickly. As a result, charities can exploit their end causes more effectively.
A DAO can also act as a direct pathway for investments and accelerate the adoption of DeFi. DAOs enable low-cost, nearly real-time peer-to-peer transactions without adhering to traditional financial restrictions. By lending or paying transaction fees, they can earn better returns. This space is rapidly growing with no signs of any slowdown soon.
Considering this generation's high emphasis on social media and content creation, NFTs and DAOs will further allow the creator economy to flourish. Creating works of art directly benefits the creator since their brand, fan base, and organization are all connected to the value of the products.
Today, most people aren't exposed to DAOs every day. Nonetheless, I believe understanding the problems technologists are trying to solve is essential.
DAOs are a polarizing topic for discussion. Some enthusiasts want to see them implemented for everything from government services to internet forums, while others see their potential as limited. Regardless, it is important that individuals who are given decision-making power over decentralized entities regulate themselves enough to carry out these decisions fairly and democratically. Rules dictated through the blockchain is the only way DAOs can avoid the pitfall of centralization, both for-profit and non-profit levels of governance in society.