The world of cryptocurrencies is evolving fast - from catching the attention of mainstream businesses and institutional investors in 2021 to innovating ways to put crypto holdings to work; there is a lot of churn in the industry and several exciting developments already underway. The DAO (Distributed Autonomous Organization) is one such term already trending and likely to go big among the mainstream audience shortly. Here's everything you need to know about DAOs.
What Is a DAO?
DAOs are one of the leading applications of decentralized finance (DeFi), supporting DeFi apps' management. Likening them to real-world examples, you can think of DAOs on the lines of venture capital funds, although in a more decentralized manner of operation, without a conventional management structure or board of directors to handle legal agreements and financial transactions.
Behind the idea of the DAO was the developers' vision for eliminating human error or manipulating investors' funds by leveraging an automated system for decision-making and a decentralized, crowdfunded model. DAOs let investors conduct transactions globally anonymously and offer holders tokens to empower them with voting rights on potential projects supported within their platforms.
Billionaire Mark Cuban has praised the concept of DAOs, predicting that they could take on legacy businesses. In 2022, he talked about how they represent the "ultimate combination of capitalism and progressivism" and leverage a decentralized, completely transparent, and trustless approach for effective governance and maximum ROI, eliminating the need for a central authority.
What Does DAO Mean?
DAOs are the ultimate form of decentralized investments, pooling capital from interested users keen on backing blockchain projects, funding them, and sometimes, even going the extra mile by managing promising startups. DAOs can have varied structures, rules, and governance, all based on their respective communities and goals. They leverage the power of smart contracts to enforce the DAO's rules and assign voting power to participating members for governance purposes.
Developers or central authorities usually establish such decentralized organizations to hand over control and implement true decentralization into their dApps, including DEXs, marketplaces, lending/borrowing platforms, games, and more. Several DeFi projects leverage the decentralized autonomous organization model to hand over control once the project is up and running successfully, ensuring complete decentralization of control over the application's functioning and management.
DAOs have built-in treasuries, and community members authorize spending-based decisions through voting. Community members can introduce proposals put to the vote over a specified period and then upon. This ensures complete autonomy and transparency within such member-owned communities.
However, some DAO operating systems have struggled with this concept when too many of their governance tokens are held by a small concentration of members, giving them more power in dictating the outcome of the voting process. Notwithstanding this challenge, DAOs are not only here to stay but also to grow the Ethereum community. DAOs offer higher trustless operations and decentralization than smart contracts and blockchain technology.
Different Types of DAOs
Protocol DAOs
Protocol DAOs form the largest group among DAOs, powering the DeFi market. Leading DeFi protocols to employ the DAO mechanism to power their lending platforms, yield farming operations, and more in a completely decentralized and transparent manner.
Such DAOs leverage the principles of decentralization towards ownership and governance of the DeFi operations to bring in higher levels of fairness - a key issue traditional organizations in the finance sector face. Examples of protocol DAOs include Uniswap, Maker, and Aave.
Venture DAOs
Venture DAOs, or investment DAOs, are the second most popular category of decentralized autonomous organizations within the cryptocurrency sector. Such venture DAOs operate by pooling capital from multiple users towards investing in upcoming dApps and projects in the blockchain and crypto sectors.
Instead of the conventional model of investment funds, the decision to select projects to invest in is collectively owned by the DAO community. The community can vote and select projects to fund, giving users a more significant say in early-stage investing in promising projects.
In the traditional model, this power rests solely with venture capitalists and angel investors, preventing retail investors from early capitalizing on exciting opportunities.
Grant DAOs
Like venture DAOs, grant DAOs also pool funds from a community of users who share common interests and goals. The only difference is that these DAOs grant funding to innovative DeFi projects and other applications, giving new projects a convenient way to raise funding to develop their ideas.
The decentralized community behind a grant DAO functions with greater flexibility and transparency in vetting and voting on projects to grant funding.
Grants DAO protocols help foster innovation in the DeFi market, allowing users to put their crypto holdings to work. For project developers, such platforms offer a reliable method to borrow funds and raise money to build their initiatives.
Social DAOs
With DAOs being a community of like-minded people, it’s not surprising that there are DAOs that offer a platform for social interaction. Social DAOs take on the concept of social networking but give them a decentralized spin. Prospective members can join social DAOs after paying an entry fee, which could also be used to purchase the DAO’s native tokens.
Such platforms serve as a virtual social circle, allowing the community to share ideas and interact. One of the most popular social DAOs is the Bored Ape Yacht Club, a DAO that only admits owners of a BAYC NFT into the community.
Collector DAOs
Collector DAOs are decentralized autonomous organizations that bring together a community to procure a high-priced asset. This concept is a unique way for users to obtain fractional ownership of expensive digital assets, such as NFTs.
A collector DAO community pools funds from the members to purchase expensive digital art. Such articles obtained are then collectively owned by all members within the DAO, giving retail investors access to opportunities to invest in expensive NFTs.
Other DAOs
While the types of DAOs listed above are the most common, several other kinds of DAOs are established for various purposes, e.g., media DAOs and service DAOs. However, the common thread is the intent - to bring together like-minded individuals to connect and work together towards a common goal.
The goal may vary - from owning a high-priced asset or investing in upcoming projects to interacting with users with similar interests. However, DAOs stand apart in their unique governance model, involving the entire community by giving them a vote when making decisions.
Examples of Popular DAOs
Uniswap (UNI)
Uniswap, the largest and most established decentralized exchange on the Ethereum network, has its own DAO model, which supports the governance of its operations using the native token UNI. The governance token was launched in September 2020, giving the Uniswap community total decentralized control over the operations and development of the DEX.
Holders of UNI tokens can participate in voting or delegate their tokens to other participants on governance proposals concerning the development of Uniswap's infrastructure, services, and more. The team of developers behind Uniswap issued 1 billion UNI tokens distributed among its core contributors, community members, investors, and advisors. 60% of UNI tokens were assigned to community members, 21.266% to team members and future Uniswap employees, 18.044% to investors, and 0.69% to advisors.
Uniswap’s DAO lets its members control the platform's governance, manage the community treasury, protocol fee switch, and more within the ecosystem. Most recently, Uniswap's governance was in the news after its community voted to integrate the DEX into Polygon's ecosystem, helping Uniswap realize higher levels of efficiency and combat the high gas fees and network congestion challenges plaguing the Layer 1 Ethereum blockchain on which it operates.
Decentraland (MANA)
Decentraland, one of the most prominent players in the metaverse, has its very own DAO - the Decentraland DAO, which owns all of its ecosystem's smart contracts and assets. The DAO oversees the LAND Contract, Estates Contract, Wearables, Content Servers, and Decentraland's Marketplace. In addition, a significant portion of the ecosystem's native token MANA is held in the DAO's reserves, helping it maintain its autonomy in operating the metaverse and managing operations and initiatives underway and coming up within Decentraland.
Set up to make Decentraland the first completely decentralized virtual world, the DAO empowers the community to control the policies, what kind of NFTs and digital collectibles can be featured within the marketplace, and managing policies and auctions related to LAND and content moderation.
The DAO community proposes and group votes on updates to Decentraland policies, has a say in LAND auctions within its ecosystem, and even whitelists contracts in the World, Builder, and Marketplace. The Decentraland DAO is supported by the Security Advisory Board (SAB), which guarantees the security of smart contracts and responds to any bugs reported within the system. The Aragon DAO controls who makes up the SAB and uses wMANA as its governance token for presenting proposals and voting decisions.
MANA, the native token in use within Decentraland, not only powers the DAO from a governance perspective but is also used as currency to make purchases of LAND and other digital collectibles within the marketplace and ecosystem.
Aave (AAVE)
Aave (AAVE) is another established DeFi protocol that leverages a DAO for governance, letting users participate in its management and development. The Aave governance protocol, Aave Governance DAO, was released in December 2020 with its governance token AAVE launch to bring true decentralization to its operations. Before this, only Aave's developers could introduce new proposals recommending changes to the leading DeFi project.
Aave is an open-source and non-custodial DeFi protocol that lets users earn interest on crypto deposits with the platform and borrow assets from its ecosystem. Aave was one of the first among the biggest names in DeFi to introduce the concept of flash loans, uncollateralized loans in the world of decentralized finance.
Flash loans by Aave allow developers to borrow capital instantly and conveniently without presenting any collateral as long as they return the liquidity within the pool within one transaction block. Aave's flash loans have several essential use cases, including arbitrage, collateral swapping, and self-liquidation.
All AAVE token holders can propose changes to Aave's platform, all thanks to the power of the smart contract. The DAO also allocates a unique dual voting right to every token holder, letting them delegate their voting and proposing rights separately. To safeguard the tenets of the DAO, Aave's developers also introduced the concept of The Guardians - a group of elected users who have the right to halt the implementation of any malicious proposals which could lead to catastrophic losses for the project and its community.
As part of creating the DAO, developers issued 16,000,000 AAVE tokens, of which 13,000,000 AAVE were distributed within its community of users, while the remaining 3,000,000 AAVE were set aside for its reserve.
OpenDAO (SOS)
OpenDAO is one of the newest additions to the world of DAOs, launching in late 2021 and distributing free tokens (SOS) to users of OpenSea - the largest NFT marketplace. OpenDAO and its native SOS token have been designed to support the NFT community. Any user who has conducted transactions on the OpenSea marketplace before December 23 is eligible to receive free SOS tokens, with token distribution based on the number and value of transactions conducted on the NFT platform.
Of the total supply of 100 trillion SOS tokens, 50% has been kept aside for airdrops to OpenSea users, 20% will be maintained within the DAO, 20% will be set aside to offer staking incentives, and the remaining 10% has been allocated for liquidity provider incentives.
OpenSea users can claim their free SOS tokens until June 30, 2022. After this deadline, the tokens remaining from the 50% allocated for the airdrops will be absorbed by OpenDAO's treasury. The DAO aims to use 20% of its share to compensate victims of scams on the OpenSea marketplace, promote artists and NFT communities, and even offer grants to developers.
ConstitutionDAO (PEOPLE)
ConstitutionDAO shot into popularity almost immediately after it was formed in November 2021 as it envisioned a decentralized way to raise funds to purchase an original copy of the US Constitution at a Sotheby's auction and place it in the hands of the general public - its intended audience. Regarding crowdfunding, ConstitutionDAO came about thanks to the efforts of Jonah Erlich and 30 other people. They formed the DAO and raised around $47 million on the Ethereum blockchain to participate in the auction.
Although the DAO was unable to realize its original vision of purchasing the US Constitution's original copy at the auction, the high level of interest it generated among the crypto community helped its developers decide to keep the token minted by the DAO, PEOPLE, around after it rallied for several weeks. While the origins of PEOPLE are based on a meme, there's no denying that it has captured the attention of several crypto enthusiasts who continue to buy the token and keep its price high.
Since then, PEOPLE has gone on to become a community-owned token. The founders behind ConstitutionDAO have offered full refunds to users from the smart contract held at Juicebox at a rate of 1,000,000 PEOPLE:1 ETH.
How to Get Involved With a DAO
If the concept of DAOs sounds exciting, you can get involved with them in several ways. Let’s take a look at them below:
Join a DAO
Once you know your goal or interest, you should research to find a DAO that matches it or caters to it. There are plenty of options, and an excellent way to narrow down your list is to study their mission and guidelines to understand the DAO’s purpose better. You can also join the DAO’s community on Discord to test it out before membership.
As a next step, you should buy some of the DAO’s tokens to get recognized as part of its community. Join the DAO’s governance forums to vote on important decisions regarding the DAO’s undertakings and developments to contribute.
Setting Up a DAO
Identify your goal for the DAO and find more people interested in collaborating with you on the initiative. Establish ownership for your DAO’s members by creating and transferring tokens to them via airdrops or rewards.
The next step is to confirm the method of governance of the DAO. This will determine how the voting process on decisions will occur. You can also establish the process of determining rewards and incentives distributed to members for their contributions.
Invest in a DAO
Some DAO tokens perform very well in the crypto market and are attractive investment instruments. If you wish to partake in the success of a DAO in an indirect manner, the most effective and simplest way to do this is by investing in DAO tokens via a crypto exchange.
Benefits of DAOs
DAOs have several advantages, leveraging the power of smart contracts and blockchain technology to transform conventional industries and foster innovation across multiple walks of life. The benefits of DAOs include the following:
Democratization of Ownership
The decentralized model of a DAO ensures that every member within its community feels a sense of ownership and responsibility toward its purpose. By participating in the DAO’s governance, its token holders can vote on shaping its future openly and completely transparently while making exciting opportunities more accessible to the general public.
Transparency
Based on the blockchain, DAOs offer complete transparency into the entire decision-making process. All community members have complete visibility into the voting process and how decisions are made within the ecosystem. This brings about greater fairness in the operation of the DAO toward achieving its goal.
High Levels of Security Within a DAO
All actions taken within a DAO use a smart contract and are cryptographically secured and immutable. As a result, the governance system cannot be tampered with by malicious actors within the system without the awareness of other DAO members.
Moreover, decisions undertaken are all enforced by smart contracts, a far more resilient mechanism than what a traditional organization can offer against DAOs.
Building Greater Engagement In the Community
A DAO’s community is rewarded for contributing to its development. As a result, it is far more engaged with the overall vision and purpose of the DAO.
The higher the level of engagement, the higher the value and potential of the DAO and its token. Building engagement is key to ensuring a DAO’s long-term success, and incentivizing members to play their part is one of the most efficient ways.
Decentralization of Risk
Just as a DAO distributes ownership and responsibility, it also spreads the risk. The decentralized nature of its workings ensures that each member is exposed to a far lower level of risk via fractionalization.
If the investment decision undertaken by community members within a DAO fails, losses are limited and handled automatically among the members. This is especially true in the case of venture DAOs in comparison with traditional venture capitalists who stand to lose far more on an unsuccessful investment.
DAOs are More Inclusive
Anyone who can afford to buy tokens can become a part of a DAO and contribute towards achieving its goal. DAOs have made retail investors capable of aiming higher - whether getting into early-stage investment towards promising startups or owning high-end digital assets.
The traditional financial industry has stringent checks and balances, keeping away several exciting investment opportunities from smaller investors with limited capital. However, DAOs have come a long way since their early days and are now working to level the playing field by lowering the barrier to entry for investors.
Disadvantages of DAOs
DAOs Pose Regulatory Challenges
While decentralization offers benefits of risk distribution, it also makes a DAO highly challenging to be held accountable from a regulatory perspective. Authorities cannot identify an individual entity responsible for any possible misconduct, which could pose extreme risks for all participating members within the ecosystem.
DAOs May Not be Completely Trustless
Most DAOs find it difficult to achieve complete decentralization, especially in the initial stages after being set up. Until more members buy up its governance tokens and join the community, most of the control will still lie with the core team of developers, who can potentially use the majority stake to dictate its direction. This could lead to challenges in governance as the community members’ stake may not be large enough to enforce democratization.
Some DAOs Need Large Vote Share for Governance
As a DAO gets more popular and more members join, governance can become difficult. In response, some DAOs set a minimum threshold for token ownership to participate in voting mechanisms. While doing so eliminates issues related to reaching a consensus, it can reduce the flat structure of a decentralized autonomous organization, concentrating power in the hands of stakeholders who own the most tokens. This development can compromise the original vision of true decentralization within the DAO.
Poor Code Can Bring Down a DAO
A DAO is an automated entity relying on smart contracts for its functioning and security. However, poorly executed code or poorly realized vision can spell downfall for the initiative, resulting in immense losses for the community that put its faith in the project. Several DAOs have suffered such a fate, closing down without achieving success due to poor development and execution.
Future of DAOs
With the advent of emerging technology like web3, there will be a greater level of awareness among end users about the capabilities and prowess of decentralized technology in the coming months and years. This could drive the demand for decentralized autonomous organizations as viable online communities.
Although DAOs have several drawbacks, increasing consumer awareness could drive innovation. There could be greater demand for systems high on accountability and can offer true decentralization. The onus will then be on developers to meet these demands and create DAO ecosystems that tackle the existing challenges and deliver more resilient and long-lasting solutions.
Key Takeaways
1. A Decentralized Autonomous Organization (DAO) is a decentralized, self-governing entity that operates through smart contracts and blockchain technology, with decision-making power distributed among its members.
2. DAO stands for Decentralized Autonomous Organization, emphasizing its decentralized nature and autonomous decision-making processes.
3. There are various types of DAOs, including Protocol DAOs, Venture DAOs, Grant DAOs, Social DAOs, Collector DAOs, and others, each serving different purposes and functions within the blockchain ecosystem.
4. Some popular examples of DAOs are Uniswap, Decentraland, Aave, OpenDAO, and ConstitutionDAO, showcasing the diversity and potential of DAOs in the crypto space.
5. To get involved with a DAO, individuals can join an existing DAO, set up their own DAO, or invest in a DAO through its native tokens or governance tokens.
6. Benefits of DAOs include democratization of ownership, transparency, high levels of security, increased community engagement, decentralization of risk, and greater inclusivity.
7. Disadvantages of DAOs may include regulatory challenges, potential trust issues, the need for large vote shares for governance in some cases, and the risk of poor code causing the collapse of a DAO.
8. The future of DAOs is promising, with the potential to revolutionize various industries and governance structures. However, addressing the challenges and risks associated with DAOs is essential to ensure their long-term success and widespread adoption.