What is a DAO?
Updated: Feb 24
With the entry DAO, Wikipedia provides the following result:
“DAO is an organization constructed by rules encoded as a computer program that is often transparent, controlled by the organization's members and not influenced by a central government.”
The term DAO stands for Decentralized Autonomous Organization, an internet-native organization or community based on an open-source protocol governed by a smart contract (a self-execute set of rules) and its internal members and doesn’t follow a hierarchical structure. (What is a Smart Contract)
The idea behind that comes from the decentralization of the crypto world, where there is no central authority, and decisions are made from the bottom-up via proposals; each member votes on it (or proposes a different one) during a determined period of time.
The definition of a DAO by Binance Academy.
How does a DAO work?
The core concept of a DAO lies in creating a community with decision-making and organizational power according to a predetermined set of criteria.
In a DAO, as in any other society or community, you can make proposals, vote and make decisions. The voting process is uploaded on a blockchain where users are selected according to different options. The voting power is based on the number of tokens a user holds; The ownership of DAO’s tokens gives the opportunity to be involved in the governance and contribute to its development. This easily means that the users who are more invested in the DAO are encouraged to act in good faith, theoretically. Moreover, a proposal will only pass once the majority of stakeholders approve it according to the established rules of the smart contract.
The governance rules and the number of tokens to vote for or make a new proposal vary depending on the DAO. There is no unique rule. All details should be enclosed in the whitepaper or in the official documentation in a transparent way.
One of the best educational articles about DAOs.
5 Decentralized Autonomous Organizations examples
Uniswap is the most popular decentralized crypto exchange globally and is now the biggest Decentralized Autonomous Organization. It launched its governance token in September 2020, which made it a legitimate DAO.
Active users can apply for governance rights within the organization and become integrated members. Uniswap has firm control over the DeFi markets, leading to exponential growth in volume and membership.
The Uniswap DAO has made headlines in the crypto community in recent years, and its market capitalization currently stands at $3.6 billion, with a popular DAO token, UNI.
0x is an open-source DAO that operates on the Ethereum blockchain. In April 2021, 0x shifted towards the DAO governance model and became 0x DAO. The organization primarily functions as a decentralized network that provides peer-to-peer transactions and services.
Although 0x works on the Ethereum blockchain, it has its native currency, ZRX, which has seen a significant drop in value compared to other more popular crypto tokens.
Compound is a popular lending DAO in the DeFi space that enables holders to earn interest on their holdings by locking them in platform pools. The organization's utility token, COMP, has gained a good reputation among DAO tokens, with price fluctuations. The market capitalization of Compound currently stands at $475 million. Although not one of the most popular investment options, it has significant potential for sustained growth in the future.
Aave is a leading open-source liquidity protocol in the DeFi space, enabling users to lend and borrow cryptocurrencies. Lenders can earn interest on their deposited assets, while borrowers can anonymously loan out crypto funds as collateral for flash loans. The protocol has over $14 billion worth of funds locked in its liquidity pool. Aave offers tokens to members and is built on blockchain technology to ensure data safety and user privacy.
Aave has a DAO governance module that allows users to vote and attain governance by staking their tokens. Although not the most valuable DAO, Aave is improving and ranks well among the top decentralized autonomous organizations globally.
Curve DAO is the second most valuable decentralized autonomous organization globally and operates as an exchange liquidity pool on the Ethereum blockchain. The native currency of Curve DAO, CRV, is currently valued at $1.08 per coin.
The organization specializes in securely and quickly moving liquidity-based funds and resources across borders. As of today, the market cap of Curve DAO is approximately $496 million.
How can you invest in a DAO?
As we explained, investing and participating in a DAO is very simple. The whole is governed by a mechanism of proposals to make a common and collective decision. When you are interested in a DAO, you need to buy and own its related token because only those who own the investment DAO's governance token are allowed to make proposals. Proposals can be made depending on the number of tokens held, as well as voting depends on the internal rules of the DAO. Once the voting process is over, the decision according to the consensus is announced and implemented.
Pros and Cons of a DAO
DAOs reflect all the characteristics of the web3, such as transparency, decentralization, security and accessibility. For this reason, they gained a foothold. Among the most important benefits, we indicate:
The autonomous structure
The common drawbacks are
Time for transactions
The DAO experiment
The DAO experiment was a significant event in the development of DAOs. It was a decentralized autonomous organization launched on the Ethereum blockchain in 2016, and it aimed to create a decentralized venture capital fund that would allow token holders to vote on investment decisions.
However, the DAO was hacked shortly after its launch, resulting in the loss of approximately one-third of the funds raised, which led to a hard fork of the Ethereum blockchain. The incident highlighted the need for more robust security measures and better governance structures for DAOs.
Despite the challenges faced by the DAO, the experiment was a critical milestone in the development of DAOs, as it demonstrated the potential of decentralized organizations to disrupt traditional forms of governance and decision-making.
In the aftermath of the DAO incident, the Ethereum community began to develop new governance models for DAOs, such as the use of multisig wallets and liquid democracy, which allows token holders to delegate their voting power to representatives.
Since the DAO experiment, DAOs have become increasingly popular, with many new projects launching on various blockchain platforms. They have been used for a variety of purposes, including decentralized funding, content creation, and community governance.
The impact of DAOs on the development of blockchain technology and decentralized finance has been significant, as they offer a new paradigm for organizing and managing decentralized systems. With their potential for more efficient decision-making and increased transparency, DAOs have the potential to disrupt traditional hierarchical structures and transform the way we organize ourselves economically and socially.
In summary, the DAO experiment was a significant event in the development of DAOs, as it demonstrated their potential to disrupt traditional forms of governance and decision-making. Despite the challenges faced by the DAO, it paved the way for new governance models and inspired many new DAO projects. The impact of DAOs on the development of blockchain technology and decentralized finance has been significant, and they offer a new paradigm for organizing and managing decentralized systems.
What Is the purpose of a DAO?
DAO will probably be one of the most important developments of web3. The main purpose of a DAO is to improve, thanks to its transparency and democracy, the traditional management structure of enterprises.
Instead of relying on the choices of a single individual or a group of people (CEO and Boards of directors, for example), a DAO wants to give everyone a voice, vote and opportunities to make proportions and decisions. With its stricter governance rules established by the code and smart contracts, initiatives and decisions will be publicly viewable, and the so-called principal-agent trilemma doesn’t exist more.
To summarize, DAOs are decentralized autonomous organizations that operate through smart contracts on a blockchain. They offer a new way for individuals and groups to collaborate and make decisions without the need for intermediaries, such as traditional hierarchical structures or centralized authorities.
DAOs have the potential to bring about significant changes in the way businesses, communities, and even governments operate. They offer increased transparency, accountability, and efficiency, while also enabling greater participation and ownership for members.
However, DAOs are still a relatively new concept, and there are challenges and risks associated with their use, such as regulatory uncertainty and vulnerability to hacking. Nevertheless, as blockchain technology and the wider crypto ecosystem continue to evolve, it is likely that DAOs will become an increasingly important and influential aspect of our society and economy.
Many good projects in the DeFi world have a DAO behind them; for this reason, it is important to know and study the characteristics of a DAO that we consider valid and try to take part and start to get your hands dirty.
Have you ever been part of a DAO? Share your experience within the community on Discord and Telegram.