This article aims to provide an overview of Decentralized Autonomous Organizations (DAOs). It references smart contracts, native tokens, and membership types in DAOs. If you are unfamiliar with crypto, read our articles on blockchain, crypto, and DeFi before reading this article.
What Are DAOs?
A DAO, or Decentralized Autonomous Organization, is a leaderless collective based on the blockchain, governed by a set of transparent rules. They are an essential part of the DeFi ecosystem, helping many DeFi communities with governance structure. The premise behind DAOs is to distribute decision-making power amongst its members through voting procedures. DAO members collectively make critical decisions on the treasury allocation, future development of the project, and technical upgrades.
The distributed framework of a DAO incentivizes its members to place the project’s best interests before individual interests. As members hold DAO tokens, it is in their best interest to vote forward proposals which benefit the DAO as a whole, as there is a direct relation between the success of the DAO and the DAO token price.
The first-ever DAO created was known as the Genesis DAO, founded by a few members of the Ethereum community in 2016. Genesis DAO was built as a smart contract on the Ethereum blockchain. During its initial creation phase, Ethereum users could send Ether to the DAO wallet address in exchange for DAO tokens. These tokens were to be used by the DAO members to vote on plans, proposals, and potential project funding. Shortly after the launch, a hacker exploited a coding loophole in the smart contract. The hacker was able to steal a total of 3.6 million ETH (Ethereum), which is now worth a little over 11.2 Billion USD at the time of writing. This hack led to the DAO hard fork of the Ethereum network, giving rise to Ethereum Classic (ETC). This now-famous DAO attack has been etched in crypto history and provides invaluable lessons on the importance of security on blockchain platforms.
Why Do DAOs Exist?
A common cause or passion amongst a group facilitates the gathering of resources. The framework of DAOs allows for collaborative endeavors to flourish. A prime example is the attempted purchase of a rare physical copy of the United States Constitution by Constitution DAO back in November 2022. The Constitution DAO successfully crowdfund an equivalent of $47 million in Ethereum (ETH) in under a week. Though the DAO lost the bidding war against another bidder, this incident clearly displayed the hyper-speed at which DAOs can mobilize funds. Due to the transparency of a DAO, members can start a funded organization around common narratives. In the case of Constitution DAO, members were essentially exchanging their contributed ETH (Ethereum) for a governance token called $PEOPLE. This token’s initial use facilitated the governance process when voting for future proposals. DAOs serve as on-chain replacements of traditional organizations, which work to be fair, reliable, and efficient in the world of work.
How Do DAOs Work?
The rules of a DAO are written into smart contracts, which lay the foundational framework for its operation. These rules are usually set into precedent by the founding members of the DAO. These smart contracts can be verified and audited by all the public blockchain.
DAOs usually fund their treasury through the issuance of their native token. The public can exchange fiat or a protocol token such as ETH for the DAOs native token. These token holders are allocated voting rights in proportion to their token holdings.
The future of the DAO and its proposals now rests on its token holders, who now need to go through voting procedures whose result is determined by consensus. Once the DAO has secured funding through governance token issual, it proceeds with fulfilling its specific purpose on the blockchain.
Smart contracts exist in DAOs to ensure the execution of automated processes. These automatic processes take place as a result of interactions between predefined conditions and predefined actions. To illustrate an example, we can look at ERC-20 smart contracts on the Ethereum blockchain. ERC-20 is a token that has become the technical standard for token implementation for smart contracts on the Ethereum blockchain. Rules for crucial processes such as transaction approval, token transfer, the total supply of token, etc. are defined by the ERC-20 standard. A single standard simplifies the process for future developers as compliance with rules ensures that their newly developed token or contract is compatible with the specific blockchain.
Getting Involved With DAOs
Each DAO has its own function and purpose, which is why it is important to find one which aligns with your individual goal. The DAO landscape is diverse, ranging from protocols, social media, grants, and media, among others. Members can participate by token and share-based membership. Token-based membership allows for users to trade the DAO’s native token on exchanges or earn these tokens through the provision of a service (liquidity provision or other forms of proof-of-work). Share-based membership involves offering value (tokens or work) in return for ownership and voting power in the DAO. Users interested in working on various projects listed by the DAO can apply to receive grants or compensation for their contributions.
The Future of DAOs
The thesis that DAOs are the next big bet on the future of collective human organizations centered around culture and purpose is exciting. Due to their transparency and distribution of power, a strong case can be made for why they could replace existing hierarchy structures. Shouldn’t structures that can rally strong-knit and dynamic communities around their purpose be the future of work? It might not be that simple in reality. In the current landscape, DAOs govern many DeFi and NFT projects. But familiarity around the concept of DAOs is still quite foreign to outsiders of the world of crypto. Not only is mainstream adoption and understanding a long way away, but defining DAOs for corporate legislation requires lawyers who are digitally savvy and possess a high level of computer literacy. DAOs also currently operate in a legal grey area where they are not yet recognized as legal entities, posing a significant risk for members and developers of the community.
Despite the apparent shortcomings of DAOs, it looks like users and regulators are at a stage where they are trying to figure out the aspects which need to be allocated between man and machine. Along with giving time to an organizational structure that is the re-imagined version of traditional organizations, determining the structure and governance will undoubtedly play a vital role in the evolution of DAOs.
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