DAOs - Decentralised Autonomous Organisations
The Web3 version of a corporation
TLDR:
Decentralised Autonomous Organisations (DAOs) are a new way to run an organisation through the tools available in Web3.
Key components in DAOs are: smart contracts; governance tokens; a treasury to pay for proposals; forums for discussions; and voting system for token holders.
DAOs are transparent, democratic, and global. This post mentions some examples like MakerDAO, Nouns’ DAO and FlamingoDAO.
Challenges exist around legality, taxation, general awarenesss, and setting correct incentives. Yet DAOs look set to keep on growing in number and importance.
A few weeks ago I wrote a post about MakerDAO having a savings account that earns you 5% on your DAI stablecoins.
I then realised that I hadn’t written a post on Stablecoins so I wrote one last week.
I’ve also never written a post on DAOs, so I decided I’d write about them this week!
DAOs
Decentralised Autonomous Organisations (DAOs) are a new type of organisation created in the Web3 space that are typically ran and synchronised through smart contracts on public blockchains.
DAOs are best defined by unpicking each term in the name:
Decentralised - Unlike traditional organisations they do not have a centralised authority. Decision making power is distributed among its members who typically hold tokens associated with the DAO.
Autonomous - Once rules are established and encoded into smart contracts, they can operate autonomously without the need for human intervention. Rules and transactions are then publicly verifiable by all members.
Organisation - They are organised with a collective goal in mind. This can be anything from governing a DeFi protocol, to asset management, or running a community. Members vote on collective decisions and often voting power is associated with how many tokens you hold (similar to shares in a company).
Bundling this all back together we can say that a DAO is an entity with no central leadership, governed by its token holders, who reach consensus by voting on decisions and implement them together with smart contracts. They are transparent and fast to adapt in ways that traditional organisations struggle.
How they work
Smart contracts are at the heart of DAOs. Some less formal DAOs may just rally around a community in a Discord and make joint decisions, but all the more established and well formed DAOs will manage and operate through smart contracts.
These smart contracts in principle encode the rules of the DAO. Often in practice they may encode a protocol or control funds held in a Treasury. Almost all DAOs will have a Treasury to be able to pay for their proposals to be brought to life.
Most DAOs will issue a governance token that are a kind of parallel to shares in a company. The more tokens you hold the more power you have in the governance of the DAO since voting is weighted proportionally to your tokens.
Since DAOs can be created for all sorts of purposes, decisions can be around pretty much anything. It’s common for a member or groups of members to post proposals in a DAO’s forum for other members to vote on them and then action accordingly.
Forums for discussion and voting systems are therefore crucial pieces in DAOs. Snapshot is the simplest and most used off-chain voting tool, you can see an example of it from the ApeCoin DAO below.
To join a DAO usually all you need to do is buy the DAO’s governance token. However, some DAOs can be more selective and have more stringent methods of joining, like being invited by another member.
The beauty of all this being on-chain is that it’s incredibly transparent. Even outside members can look in and see the history of decisions taken by a DAO through reading the proposals that succeeded, and then reading the blockchain to see transactions and Web3 dapps they’ve used.
Real-World examples
DAOs have been formed in all different segments of the Web3 ecosystem and for all sorts of purposes. We can find some interesting examples looking at DeFi and NFTs.
In the DeFi space MakerDAO shines, in fact they are one of the most active DAOs in the entire crypto space and a real example of how impactful a DAO can be. They were the focal point of my post a few weeks ago and show how a stable, decentralised currency can be managed without a central authority.
AMMs like Uniswap and Bancor also run their own DAOs. Bancor has always had a very active DAO, giving BNT holders the ability to make decisions on changes to their single-sided liquidity pools. They’ve been one of the most active DAOs in DeFi and you can see this from their very active forum.
Meanwhile Uniswap has had a lot of flack in the past for giving their DAO very little control over the protocol’s evolution. However, they’ve recently started shifting that, and now UNI holders are more active than ever in their forum and governance portal.
In the NFT space Nouns’ DAO are one of the most visible examples of an active DAO. To enter the DAO you must buy yourself a Nouns NFT. A new Nouns NFTs is auctioned every 24h and the amount spent on buying it is sent to their Treasury.
Today there’s around 6000 ETH (approx $13m) available to the DAO. Each Noun gives you 1 vote on proposals intended to drive and grow the Nouns ecosystem like the proposal shown below to grow a following around a Nouns-inspired duck character.
On the art front FlamingoDAO is a great example. In many ways they operate like a decentralised investment fund, focused predominantly on buying high-value NFT art to make a profit for their holders. Members are then able to vote on acquisition and investment strategies, democratising investing into expensive digital art.
The above DAOs are just a small list to give an idea of how vibrant and vast the DAO ecosystem is, ranging from managing protocols to community driven investment, although there are countless other influential DAOs out there too.
Challenges and Future
DAOs are not without their challenges. For starters there are vast legal uncertainties involved. It’s often unclear what rules or regulations they should be abiding to, meaning there are clear difficulties around liability, compliance and taxation.
Also, although they are built around the Web3 ethos, in practice DAOs often centralise control onto a small number of holders holding the majority of the tokens. Meanwhile some other DAOs have the opposite problem with very unaligned member incentives, which ends up causing decision making to be very difficult and slow.
Since they are built around smart contracts there’s also always a chance for bugs and vulnerabilities to lead to significant fiancial losses.
Nonetheless, there’s a growing amount of interest in DAOs and investment in new governance models and technologies to support them. As laws around DAOs develop and there’s more use-cases and awareness about DAOs and blockchain technology in general, we’ll likely see them grow.
In summary, DAOs face significant challenges, but they are still a very nascent concept. They can make governance more democratic, transparent and global, and there’s no doubt that as the Web3 space evolves so will DAOs and their influence in the wider world!