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8. DAOs
Core message: A Decentralized Autonomous Organization (DAO) is a group organised around a shared mission that coordinates through a defined set of rules incentivised and enforced on a blockchain.
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Our 2-Cents: If blockchains and NFTs, etc., are the “what” (the tools), DAOs are the “how” of DeFi (how groups collaborate to finance projects, govern communities, and share value). The level of autonomy and decentralization achieved by a "DAO" is often unclear.
Let's break it down...
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Bitcoin is generally considered to be the first fully functional DAO, as it is a group of people (of unlimited size) working autonomously, with a common goal (secure transactions) and that is incentivised and enforced on a blockchain.
However, almost any existing organizational form can be reimagined as a DAO: developers, investors, pressure groups, charities, local initiatives, sports clubs, companies, etc.
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A short definition is that a DAO is an internet community that jointly controls a cryptocurrency wallet to pursue common goals - such as running a business or charity - without having to ask anyone for permission.
This is made possible by open-source software on a blockchain, which can lock funds in a wallet and only permit transactions if they are voted for by members of the DAO.
DAO Landscape
The various types of DAO currently in operation are:
DAO Operating Systems
Operating systems enable the creation of DAOs and offer templates, frameworks and tools for communities to pool resources as well as smart contracts and interfaces to facilitate on-chain actions for decentralized communities.
Grants DAOs
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The first real use case for DAOs were grants and were largely motivated by philanthropic reasons rather than financial returns.
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Communities donate funds and use a DAO to vote on how that capital is allocated to various contributors in the form of governance proposals.
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Protocol DAOs
Whereas the first iteration of DAOs featured non-transferable shares, Protocol DAOs were the first to issue transferable ERC20 tokens with a secondary market value.
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Protocol DAOs provided a framework for any network to issue a token that is (hopefully) owned and operated by its community.
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Investment DAOs
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With Protocol DAOs bringing new tokens into the world, it only seemed logical that groups band together to invest in them.
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After a long period of non-profit DAOs, investment clubs enabled members to focus on generating a return.
While these DAOs come with a lot more legal restrictions than a Grants DAO, they showed that any group of individuals could come together to invest larger amounts of capital with low barriers to entry.
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Service DAOs
Projects need talent. Service DAOs create decentralized working groups for individuals to work for the open internet.
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From legal to creative, governance to marketing, development to treasury management, Service DAOs create funnels to contract web3 workers. Work is often rewarded with ERC20 tokens - providing ownership over the value created for a network.
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Social DAOs
In an industry dominated by speculation, Social DAOs focus on social capital over financial capital. Social DAOs are the natural evolution of group chats, where friends become co-workers.
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Where social media turned everybody into a media company, Social DAOs turn every group chat into a digital business.
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Collector DAOs
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On the back of mainstream adoption, Collector DAOs popped up to collect NFTs. Collector DAOs seek to curate which NFTs have long-term value.
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Media DAOs
Media DAOs break down the way in which writers, streamers, and readers engage with the content they release and give that power back to those who consume the content.
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Whether it be media mining programs to incentivize contributions or governance over which topics make the front page, Media DAOs turn consumption into a two-way street.
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Progressive Decentralization
Decentralization can be hard to achieve when governing projects in complex ecosystems. Decentralization may not suit the project or a staged process of progressive decentralization along the following lines may suit:
1. Product-Market Fit
A small, focused team drives product/service iteration until they find a good product-market fit.
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2. Initial Community Participation
Once a company has achieved product-market fit, it begins to experiment - getting stakeholders involved from the community, incentivising them and introducing ‘rough’ consensus on decision-making.
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3. Sufficient Decentralisation​
After a team has successfully completed the first two steps, they’re ready to distribute tokens to the broader community. This is an alternative to a traditional IPO, SPAC, or acquisition, called “Exit to Community,” and is the point at which a project or company becomes a DAO.
This is done by triggering a smart contract that mints and distributes tokens based on predefined rules determining everything from who gets how many today, to how tokens will be distributed in the future, to what economic and governance rights token ownership confers.
From this point forward, future development of the protocol is in the hands of the community.
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Common Features of DAOs
Some of the key features that make DAOs an attractive collaborative structure:
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Transparency: A DAO provides users with a clear set of rules and regulations. Members in a DAO can see the code that governs the network, and all the transactions that take place on the blockchain.
Efficiency: DAOs allow people to collaborate globally, as the technology makes them truly borderless. The rules of participation are also explicit, and once a decision is made based on the DAO's framework, contracts are automatically executed.
Autonomy: Because DAOs are self-governed by their communities, they can operate without an overarching authority figure, empowering everyone involved.
Anonymity: Members can invest in a DAO anonymously, which often means they can be more flexible and experimental with their investments.
Agility: The ability of members to decentralize and formulate rapidly executing autonomous groups within DAOs, while also adhering to the central mission of the DAO, allow powerful network effects to begin to accumulate, as a DAO itself becomes an organization of organizations.
Challenges facing DAOs
DAOs are powerful ways to organise but there may be potential issues and they aren’t the ideal system for everything:
Learning Curve: DAOs are a new technology so terminology and user experience can be confusing. It is also difficult to understand the level of autonomy and decentralization in any given project (or the optimal level).
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Structure: Coordination and quality of participation may prove difficult to organise compared to a traditional hierarchical organisation.
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Cost: Fees to set up and operate a DAO can be relatively high.
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Vulnerability: DAOs are vulnerable to collusion attacks.
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Legality: DAOs are a new form of organisation and so a grey area from a legal perspective (this issue is greater where a ‘DAO’ is more centralized).
