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What Is a Decentralized Autonomous Organization (DAO)?

DAOs use smart contracts and governance tokens to enable participants to make consensus decisions on how the organization's resources are allocated.

7 min read

In brief

  • A DAO, or decentralized autonomous organization, is a business structure where control is spread out rather than hierarchical.
  • DAOs are organized using smart contracts, with participants using governance tokens to vote on topics such as fund allocation.

A new form of organization is shaking up the worlds of investment, business, and the creative industries.

These decentralized autonomous organizations, or DAOs, have no company HQ, replace traditional hierarchies with flat management structures, are governed by crypto holders, and are built on rules that are automatically enforced on a blockchain.

Advocates of DAOs claim that they'll radically alter the way businesses are run. They're already hard at work; several DAOs have already been launched, and they've created some pretty cool things.

What is a DAO?

A DAO is an organization where control is spread out across the participants, instead of being built on a top-down hierarchy.

A DAO can be seen as operating like a machine, with the job it is instructed to carry out determined by pre-written smart contracts.

How do DAOs work?

A community can adapt a DAO and program it according to its own goals.

  • 👩‍💻 Code is written in the form of smart contracts, which provides some sort of governance mechanism.
  • 🗳️ Members typically use governance tokens to vote on decisions made by the DAO, such as the allocation of funds.
  • 📊 In the case of many DAOs, the impact of a member's vote can increase based on the amount they have contributed to the project.
  • 💪 The outcome can be based on the degree of participation as well as voting preference.

What advantages do DAOs have?

  • 📖 Transparency - voting, funding decisions, and other actions are viewable by anyone.
  • 🔥 More firepower - members across the world can contribute, giving DAOs lower barriers to entry than companies.
  • 💵 Cheaper - the concept has firmly taken root in the DeFi, and there are many tools—which can be used like Legos, so little needs to be built from scratch.
  • 👨‍👩‍👦‍👦 Collaborative - giving everyone a voice pools mass knowledge for a proposal and enables experts to invest in the ecosystem they are building.

"We believe the DAO will play a starring role as the world makes the shift to Web 3.0, paving the way for fully decentralized companies."

Jademont Zheng, Waterdrip Capital

What disadvantages do DAOs have?

  • 🏢 Flat structure - by not having a clear authority figure, or chain of command, decentralized organizations are slower to operate as decisions take longer to make.
  • 😡 Disagreements - when the community disagrees strongly, it could split the organization into two.
  • 👸🏽 No change - in some DAOs, those with the most tokens call the shots, so governance looks very similar to traditional organizations.
  • ⚖️ Legality - minefields abound in relation to token projects that might be deemed to be securities.

Did you know?

Ethereum co-founder Vitalik Buterin developed the idea of DAOs in 2013. At first they were called “Decentralized Autonomous Corporations” (DACs).

DAOs come in all shapes and sizes

  • 🏗️ Crypto projects - considered to be DAOs if they are managed by decentralized governance where token holders can vote on the direction of the project. e.g. MakerDAO.
  • 💸 Grant funding - a DAO can be used to award development funds automatically based on set criteria. e.g. MolochDAO.
  • 💰 Investment - MolochDAO has been forked many times to create for-profit DAOs which can distribute and transfer shares and other assets between members. such as MetaCartel Ventures.
  • 🖼️ Collecting - the non-fungible token (NFT) boom has seen collector DAOs such as PleasrDAO flourish.

Did you know?

MetaCartel Ventures is registered as a Limited Liability Company (LLC) in crypto-friendly Delaware.

What was The DAO?

The DAO was the earliest example of a DAO. It was created by Slock.it and was built on the Ethereum network. Its code was open source, which anyone could contribute to.

The DAO was designed to work as a venture fund platform for crypto projects. A pitch would be made and anyone with DAO tokens could vote on projects to award funding. However, The DAO never made it to liftoff.

Did you know?

The DAO raised 12.7M Ether, worth around $150M at the time.

On June 17, 2016, a hacker managed to exploit a few lines of code allowing the move of 3.6 million ETH, worth $70 million. Yet the funds were moved to a “Child DAO” and couldn’t be moved for 28 days, giving the Ethereum community time to make a fix.

They made a hard fork to the chain now known as Ethereum, leaving the old fork, Ethereum Classic, behind. During this fork, they re-wrote the blockchain so that the hack never happened, meaning the blockchain was no longer immutable.

"[The DAO] raised massive awareness around the platform […] demonstrating unequivocally the need for a decentralized structure of this nature."

Stephan Tual, founder of Slock.it

Development on DAOs continued, but out of the limelight. Projects such as Aragon, DAOstack, DAOHaus, and Colony learned key lessons from the original DAO, and now build and run DAOs for some of the largest decentralized finance (DeFi) protocols. The 2020 decentralized finance (DeFi) boom brought a fresh wave of interest to the DAOs that underpinned many of the leading projects.

The future of DAOs

DAOs have seen a big revival of interest in the last few years, with hundreds of developers working on technical innovations, improvements to governance mechanisms, and voting solutions.

Decentralized autonomous organisations have been particularly active in the creative industries, with DAOs forming to create "headless" fashion brands, perfumes and filmmaking communities. In many cases, these creative DAOs retain an element of centralization; for example, while filmmaking DAO Decentralized Pictures allows token holders to vote for a shortlist of film projects to win funding, the final decision on which project receives the award is made by a board of judges.

A wave of "investment DAOs" has also sprung up, in which token holders vote on which projects to invest in. While some, such as Neptune DAO, are aiming to provide conventional venture capital funding to Web 3 projects, others are so-called "collector DAOs" that focus on acquiring high-value items such as NFTs at auction.

Perhaps the most high-profile collector DAO is PleasrDAO, originally formed to acquire work by NFT artist pplpleasr. It's since gone on to amass a collection of NFTs and real-world objects for multi-million dollar sums, including an NFT of the original Doge meme, Edward Snowden's first NFT and the sole copy of the Wu-Tang Clan album "Once Upon a Time in Shaolin".

In late 2021, a collector DAO assembled at short notice to bid on a copy of the U.S. constitution at auction. ConstitutionDAO, as it was known, managed to raise $45 million, but was pipped at the post by a winning bid from Citadel CEO Ken Griffin.

What happened next highlighted one of the issues around decentralized governance; a project that was formed with one specific goal in mind found itself at odds over what to do having failed to achieve that goal. Eventually, the DAO opted to shut down and refund contributors—though with many of those contributors having pitched in small amounts, the Ethereum gas fees meant that refunds wouldn't be worth claiming. It was a baptism of fire for many first-time contributors to a DAO.

DAOs are also moving towards official recognition; in April 2021, landmark legislation in Wyoming recognized DAOs as a new form of company, with the first DAO approved mere months later. However, it hasn't all been plain sailing. In November 2021, the SEC halted token registration for the first legally recognized DAO, alleging that it put out "misleading information" to would-be investors.

Enthusiasts believe that DAOs will soon become more sophisticated. Trends include anonymity, progressive decentralization, and better incentives towards participation. Future DAOs may employ prediction markets, and begin voting and acting as delegators in other DAOs. Decrypt itself has become a founding member of PubDAO, a decentralized crypto news wire that aims to be a first step towards a decentralized, collaborative publishing ecoystem.

Will DAOs start to change the way that companies operate and raise money? Soon you too might be a member of a DAO, voting on the right way for your business to move forward, without having a boss telling you what to do.

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