If you have spent any time in crypto and Web 3.0 communities online in recent months, you can’t have missed people talking about decentralized autonomous organizations, or DAOs for short. To most people, this may just sound like the latest in a long line of crypto buzzwords, but to others, DAOs represent a movement that will change the governance of the Internet and organizations within it forever. In this quick start guide, we will explain what a DAO is, outlining some of the benefits they have over traditional organizations, how they operate via smart contracts, and provide an overview of the steps to create or start one yourself. We will also take a look at some of the biggest players in the DAO space so you can better understand the scope of DAOs and how they might impact your engagement with Web 3.0 in future.
What is a DAO?
A decentralized autonomous organization (DAO) is an organization that runs on the blockchain and does not have any central authority as its governance structure. Put another way, a DAO can be thought of as a group of people who have come together to form an entity with specific pre-determined and automatically implemented sets of rules and regulations that all members follow. These rules govern everything from the way the DAO is structured to the way it makes decisions.
In some ways, DAOs are a natural progression in the use of technology to decentralize important structures. That said, there has been a lot of very deliberate engineering and thought to create DAOs as a means of combating many of the problems with traditional centralized organizations, which is what most of us are used to dealing with in our daily lives. Take banks, for example. Banks hold our money and ultimately make decisions based on what’s best for their shareholders rather than what’s best for their customers or society. DAOs, on the other hand, operate without any central authority and rely on decision-making and governance by their members, which enables members’ interests to be more fairly represented.
In addition to governance benefits, DAOs also are robust as legal structures. They have no single point of failure, which means that no individual part of the system can stop the entire system from working. It is also possible for every decision to be audited publicly and at any time. In this respect, they are much stronger than traditional company legal structures that are susceptible to all manner of malfeasances through vulnerabilities in their legal setup (loopholes, etc.). To ensure efficiency and transparency in this governance, DAOs use smart contracts to automate their operations.
How does a DAO work?
It is clear that DAOs are a radical new form of social organization, so knowing how they work is important if you want to be able to anticipate how Web 3.0 will change our lives in the future.
DAOs are mostly being built on Ethereum, but they can be on other blockchains, too. Consisting of one or more smart contracts written on a given blockchain, DAOs aim to cut out third parties and create a decentralized organization (often a business) that will run autonomously without the need for human implementation of key company decisions and activities.
In this regard, a DAO is a company that works without a CEO, CFO, CIO, CTO, etc.; there are no employees and no offices. Instead, DAO members act as employees, shareholders, board members, managers, and other figures all wrapped into one without actually implementing a hierarchy that would probably silence voices lower down the totem pole. Company ownership is distributed among the token holders proportionate to their shares, which, as mentioned, means that the holders’ votes directly affect how the business is run.
To execute this, a DAO relies on smart contracts. A smart contract is a piece of computer code that can automatically execute the terms of an agreement between two or more parties. With smart contracts, the blockchain is used as an incorruptible and unchangeable database that makes sure both parties fulfill their roles and settle any disputes arising during the process. Because the DAO is set up on transparent networks like the Ethereum blockchain, anyone can publicly verify records and ensure that decisions are actually being implemented the way everyone voted.
The potential use cases and advantages of DAOs are already quite evident when it comes to governance and structure. Merely the way a DAO works technologically, however, also comes with benefits. By removing unnecessary third parties, DAOs are able to carry out their operations with significantly lower transaction costs. Additionally, and perhaps more importantly, the members of a DAO are co-owners and beneficiaries of the DAO’s assets as well as its decisions. Again, this is in stark contrast to traditional companies that make all the decisions at the top and impose outcomes on members lower down in the hierarchy, and take a handsome percentage of any assets or profits as compensation for doing so.
To become a member of a DAO, users first need to buy its token or cryptocurrency. Holding the token gives them voting rights on proposals and updates proportional to their holdings, much like shareholder votes in traditional companies. The more token you have, the greater your influence over the direction of the DAO.
What are some DAO examples?
Founded by Dan Larimer in July 2014 after he initially outlined the idea in late 2013, BitShares is the first known example of a DAO, although it was more commonly referred to as a decentralized autonomous company (DAC) at the time of its founding. BitShares was built on the Microsoft Azure blockchain-as-a-service (BaaS), which retired in September 2021.
As an interesting side note, the first DAO created on the Ethereum blockchain was named, very straightforwardly, ‘The DAO’, and ended up marred by controversy as hackers found a loophole in the code.
Other DAO examples include:
- Decentraland – a 3D virtual reality world with games and activities.
- DASH – an open-source cryptocurrency created from a fork in the Bitcoin protocol.
- HerStory – an art collective committed to sharing stories of Black woman creators in NFTs.
- MetaCartel Venture – a for-profit DAO used to make investments in early-stage decentralized applications (DApps).
- Nexus Mutual – a blockchain platform that allows users to share risk without the need for traditional insurance.
How do you create a DAO?
Creating a DAO does involve some complex technologies, but thankfully there are more and more resources available online to help people understand how to create their own DAOs, which can be used for anything from creating a new company to formalizing fan relationships in the creator economy. There are three basic steps to setting up a DAO:
- Firstly, the smart contracts that will operationalize and automate the DAO need to be created. Setting these up correctly from the start is important because once the dAO has been launched, the smart contracts can only be modified through the governance system – it is impossible for the contract developers simply to recode the contracts to enact a change. Robust testing is necessary at this stage to ensure the smart contracts are working correctly for the intended DAO.
- Secondly, the means of receiving funds to the DAO must be established. Funds are usually exchanged for tokens, which in turn can be used to influence the governance of the DAO, so it is just as critical to get this part right as it is to code the smart contracts correctly.
- Thirdly and finally (at least for a basic overview), the DAO needs to be launched. This occurs – as a technical matter – through the deployment of the DAO on the relevant blockchain. Once this happens, the DAO members are the only ones who can make decisions about the DAO’s activities and future. The founders themselves are irrelevant in so far as their initial influencer is concerned – they join the rest of the members with influence proportional to their ownership percentage in the DAO.
There are several ways to implement these steps. Here are some suggestions if you’re interested in starting your own DAO:
Where to find out more about DAOs
DAOs promise to revolutionize the way that people come together to achieve common goals through formal structures, and their benefits greatly outweigh the costs of setting them up. If you are interested in DAO news and want to be at the forefront of community discussions on the topic, create an account at Traderverse. Our DAO resources are unparalleled elsewhere on the Internet and our extensive community platform features mean you can get help and feedback on your ideas in minutes. For more information, sign up at Traderverse.io or join us on our Discord or Telegram group.
