What is a DAO and why should you care about them?

The term “DAO” pops up every now and again in cryptocurrency and it might be one of those terms that might not have the same recognition as “Bitcoin” or “smart contract”, but it’s becoming more important in the grander blockchain industry and it might be worthwhile getting to grips with the idea as it becomes more prominent across other scopes.

What is a DAO?

A DAO stands for a decentralised autonomous organisation. To break that down, this means it’s an organisation, or a group of people that come together, without any central governance or one controlling entity to fulfil a mutual purpose. As a decentralised organisation, it is completely community-led and decisions are made by the members of the community. Unlike other organisations, which tend to have top-down hierarchical structures, DAOs have a bottom-up approach.

The “autonomous” part of a DAO comes in with the way they function: A DAO operates using smart contracts which are coded into the blockchain network of the organisation. The code executes when the right criteria are met, making a contract automatically and reliant on an algorithm rather than a person or company carrying it out.

The smart contracts drawn up in a DAO are what establish the rules of the network. Members involved have some sort of stakes in the organisation (generally this is through buying the network’s native cryptocurrency) and are given proportionate voting rights to the network. This is how consensus determines where the organisation might go; those with voting rights can influence how the organisation operates by voting on governance proposals.

As a blockchain-based network, a DAO is fully transparent. They are built on open-sourced blockchains and so anyone can view their code and see all transactions that have been recorded. The details of the transactions might be private or anonymous, but the transactions themselves are available for all to see. The benefit of this is that the lead team behind a DAO can’t crowdfund using the network and then hide money into their own wallets without anyone seeing it. It puts the trust in the system.

The benefits of a DAO

There are still things to iron out and regulations to resolve with the emerging systems, but there are several advantages that DAOs have over traditional organisations.

A lack of trust between parties

Because they rely on blockchain technology and smart contracts, DAOs lack the need for trust between members. If someone is funding an organisation using traditional investment, they need to trust that the funds will be used responsibly and as stated by the organisation. With a DAO, only the code needs to be trusted.

A horizontal hierarchy

With traditional organisations, we see the top-down approach with leading members calling the shots and making decisions. Important decisions can be influenced by key shareholders or investors, which might put profit or short-term success over longer-term decision-making. With a DAO, there is no hierarchical structure and all decisions are voted on by all stakeholders or members of the organisation. This means protocols are run according to majority consensus and every vote counts towards the success of the project.

The transparency

As mentioned, as a blockchain-based network, DAOs are transparent in their records. This means everyone sees the same thing on the network and no one can make a decision without the buy-in and acceptance of the group.

Different types of DAOs

Here’s why DAOs are important: How people can actually use DAOs.

Investment/crowdfunding DAOs

Projects can use a DAO to raise funds to carry on building and expanding the project. Instead of going to a VC, a project might look to members of the cryptocurrency community to resource their work and reward them with (a) tokens and (b) voting rights on the project.

AMM (automated market maker) DAOs

AMM DAOs use the technology locked into smart contracts to offer services to users. For example, decentralised exchanges (DEXs) are a type of AMM DAO.

Grant/donation DAOs

Grant DAOs are designed for a platform that accepts donations from the community who then votes on how those funds are allocated. These are typically used to help raise funds for new DeFi projects.

Why should you care about DAOs?

While they’re still emerging, DAOs stand as a possible way to resolve a lot of the issues we see in industries like investment and social media, where we have a group of major corporations with a lot of power. DAOs put the governance in the hands of the people and give them control over how an organisation runs.