NewsWhat is a DAO?

What is a DAO?

By

Algorand Foundation

A decentralized autonomous organization (DAO) is a group of individuals who come together to achieve a common goal. They follow a set of rules that are written in computer code and stored on a blockchain ledger, which is visible to all. This code is in place to ensure that the rules of the DAO are followed and that decisions are made collectively through voting. Unlike traditional organizations, no one member has all the power; instead, everyone works together to make things happen. A DAO makes use of blockchain technology to automate processes, record transactions, and facilitate decision-making. 

This article will look at how DAOs work, the differences between DAOs and traditional organizations, their use cases, as well as the benefits and limitations they present.

How does a DAO work?

A group of individuals will form a DAO. They will establish how the DAO operates, including its governance structure, decision-making processes, voting mechanisms, and fund management. Once the rules are agreed upon, they are encoded into a smart contract, which is a self-executing piece of software that automatically enforces predefined rules. 

The smart contract is deployed on a blockchain, making the rules transparent and indiscriminately enforceable. This transparency encourages accountability and makes it apparent when DAO members are not following the predefined rules. In an ideal situation, the rules set out in the smart contract would enable the DAO to function without human intervention. However, reaching a place of complete automation takes time, and there may still be exceptions to this, such as if the software malfunctions.

A DAO is run by its members, all of whom are allowed to vote on proposed measures put forward to the DAO’s governance team. It will depend on the DAO’s rules whether membership is required to submit a proposal; there are DAOs where non-members can submit proposals. As a result, decisions are not solely made by the CEO or a small group of powerful managers. While this can be effective when the DAO is small, it can prove challenging as it scales, as requiring many members to vote can slow down decision-making and the execution of proposals. 

To remedy this, day-to-day processes could be delegated to trusted DAO members, and only high-level decisions could go to a vote. Another solution is for a DAO to operate through subDAOs or workstreams, where DAO members are put in charge of specific tasks, such as marketing or customer support. This basically ensures that low-level decisions are delegated to a selected group of DAO members that constitute the specific workstream.  

DAO membership typically works on a token-based model that has voting rights determined by how many tokens they hold. For example, if a member has 200 tokens staked in a DAO, they will have twice the voting power of someone else who has only staked 100 tokens. Other DAOs may provide direct voting, in which case each participant's vote is given equal weight; a consensus approach in which broad agreement is sought; or a reputation system in which your voting power is determined by your previous contributions and expertise. It’s important to note that a DAO may use different voting types for different activities. 

The concept of a DAO is based on equal opportunity, and therefore anyone can join a DAO, much like anyone can join a community group. In this sense, a DAO is permissionless, public, and inclusive. You don't need to go through a centralized authority or ask for permission to become a member. The only requirements are an internet connection, basic digital literacy, and an understanding of some Web3 tools, like a Web3 wallet, to gain access and participate in the DAO's activities. It is important to note that some DAOs could have membership restrictions even though they are not required.

 

To achieve its goal, a DAO typically needs funding. Sometimes, individuals interested in the DAO’s mission can contribute some initial funding to the DAO. Some DAOs may choose to raise funds from venture capital, but venture capitalist ownership ought to remain below a certain threshold to maintain the decentralized structure of the DAO. Token issuance is a popular means of funding where tokens distribute ownership and voting power among the members of the DAO. Further funding can come from the DAO participating in DeFi or selling NFTs

All activities within a DAO, including voting, fund transfers, and decision-making, are recorded on a public blockchain, where anyone can review the transactions that are taking place. For example, DAO participants can view how many tokens other members have committed to the DAO or how they voted on a specific proposal. This transparency allows participants to verify the integrity of the organization's operations and encourages accountability. 

Differences between DAOs and traditional organizations

DAO Traditional organization

Voting system where members vote on proposals and initiatives.

Control distributed among participants.

Fully transparent and auditable, activities available to the public.

Some processes can be automated through smart contracts, which increases trust.

Highly scalable and adaptable.

Anyone can join a DAO.

Decisions made by a small group of individuals.

Power concentrated in leadership.

Often limited visibility, activities hidden from the public.

Human intervention required, which runs risk of dishonesty and fraud.

Can be constrained by hierarchy.

Permission must be requested to join.

Governance and Web3

Web3 brings a different approach to traditional corporate governance. In Web3 governance, discussions, proposals, and voting occur openly on platforms, giving anyone with digital literacy a chance to participate. This stands in stark contrast to corporate boards, where decision-making often occurs behind closed doors and revolves around regulatory compliance. As an evolving experiment, Web3 governance strives to enhance decision-making processes and promote equality in governance. By embracing decentralization and inclusivity, Web3 aims to create a more participatory and equitable landscape for governance. 

An example of a DAO

Let's create a DAO called "EcoVote DAO," which focuses on community-driven environmental initiatives. Anyone can join the EcoVote DAO by purchasing its digital governance tokens, named "EcoTokens." Each EcoToken represents a stake in the DAO and contributes to voting power. For example, when Sarah buys 200 EcoTokens, and John buys 100 EcoTokens, Sarah's vote holds twice the influence of John's vote due to her higher token ownership.

Now, let's say EcoVote DAO wants to decide on a new environmental project, such as planting trees in the local park or organizing a neighborhood cleanup event. Any member can propose an eco-friendly initiative by submitting it on the DAO's platform. Once a proposal is submitted, the voting period commences. During this phase, all members, including Sarah and John, have the opportunity to cast their votes on whether they support the proposed environmental project or not.

Voting is executed on the blockchain. Each vote is recorded immutably, ensuring the integrity of the voting process. After the voting period concludes, the DAO tallies the total number of EcoTokens cast in favor of the proposal and the total number of EcoTokens cast against it. If the majority of EcoTokens support the initiative, the EcoVote DAO approves the environmental project.

In the EcoVote DAO, members can also withdraw their EcoTokens whenever they choose to step away from the environmental community. The smart contract ensures that if they decide to leave, they will receive a fair share of any remaining funds or resources in the DAO's treasury based on the number of EcoTokens they hold.

EcoVote DAO provides a platform for eco-enthusiasts and organizations to unite, propose green projects, and drive positive change in their community through decentralized and transparent governance. EcoVote empowers its members to collectively take action for a greener and more sustainable world. 

Use cases for DAOs

Decentralized governance: DAOs can facilitate community-led decision-making in various sectors, including art, music, gaming, and social impact initiatives. Participants can collectively shape the direction of projects, allocate resources, and reward contributors. An example of this is Algorand Governance, where Governors make decisions around Algorand Foundation governance reward allocations, such as awarding funds to DeFi protocols or NFT platforms. 

Decentralized finance (DeFi): DAOs have emerged as a powerful mechanism for managing decentralized finance protocols, allowing participants to collectively govern lending, borrowing, asset management, and other financial activities. 

Collaborative networks: DAOs enable the formation of decentralized networks where participants can collaborate, share resources, and collectively create value. Examples include investment groups, content creation platforms, developer and freelancer guilds, and shared economy ecosystems.

Real-world examples of DAOs

Crowdfunding: DAOs provide a community-driven approach to crowdfunding, empowering small businesses, startups, artists, or social projects to access funding from a global community. Members collectively decide on funding allocation and project development.

Charity: DAOs can facilitate transparent and efficient charitable initiatives, allowing communities to collectively contribute funds, make decisions on how the funds are allocated, and track the impact of their donations.

Collective ownership: DAOs enable collective ownership of assets, including both digital assets like NFTs and physical goods. Members can pool their resources to collectively purchase and manage assets, fostering shared ownership and governance.

Renewable energy projects: DAOs can facilitate the development and management of renewable energy initiatives. Community members can contribute resources and participate in decision-making, promoting sustainable energy solutions.

Benefits of DAOs

Transparency: DAOs promote open and transparent decision-making processes, which can enhance trust among participants. You can see how people voted publicly, which in theory should incentivize people to act in good faith and do what is best for the community. 

Decentralization: With distributed power, there is no need to rely on a central party and risk a single point of failure. A DAO will continue to operate even if part of the system is compromised. 

Inclusive participation: DAOs allow anyone with internet access to contribute, influence decisions, and benefit from the collective efforts of the organization, which empowers individuals and fosters a more inclusive and globalized approach.

Enhanced efficiency: Through automation and smart contracts, DAOs streamline operations, eliminating intermediaries and reducing administrative costs and friction.

Bringing people together: Since a DAO doesn’t require trust, people across the globe who don’t know each other can unite in a DAO to achieve a common goal. 

Meritocratic: A DAO can incentivize members to stay active and make good choices by providing users with more voting power over time and/or a larger share of the managed assets. This can all be governed by predetermined rules written in code. It is important to note that when code is law, failure of the code can bring the whole DAO down.

Limitations of DAOs

Regulatory uncertainty: The legal and regulatory frameworks surrounding DAOs are still evolving, presenting challenges and potential risks in certain jurisdictions.

Slower decision-making: Achieving consensus among a large and diverse group of participants can be complex and time-consuming, potentially leading to slower decision-making processes.

Educating and informing participants: a DAO is likely to comprise people with varying degrees of expertise, understanding, and education. While the participants may be diverse, they all must learn how to work together to achieve the best outcome. 

Examples of DAOs on Algorand

Algorand Governance is facilitated by the Algorand Foundation and governed by its participants (the Governors). This is a further step toward the decentralization of the Algorand network, where users can vote on measures to develop the ecosystem and allocate treasury funds. Its first governance period (Sept-Dec 2021) made it the largest DAO in the world by participants, with 50.1K taking part in the opening session. 

Updog DAO governs the Updog DAO platform, which enables you to join a DAO or create your own DAO. Once you have joined your chosen DAO, you can commit tokens, vote on active proposals, and create your own proposals. 

Coop DAO is a community DAO set up by Cooper Daniels to govern the COOP token. Donors to the community rewards vault can put forward proposals to be voted on by the wider Coop DAO community. Coop DAO can be joined on Updog

Algogems gives the $GEMS token holders control over certain aspects of the Algogems marketplace. Members of the Algogems DAO can vote on measures around content moderation, marketplace curation, and fee structure on the platform. 

STOI (Song That Owns Itself) is a music-based DAO that works through fractional song ownership. Artists, collaborators, and fans can own a portion of a song, delegated in STOI tokens. The amount of STOI tokens represents the portion of your representation in the DAO. Token holders are given the power to make decisions around licensing, distribution strategy, derivative works, and remastering. 

PRDAO works to support blockchain startups, helping them build community, connect with freelancers and crowdfunding efforts, and use tools that facilitate decentralized decision-making. Instead of token stake-based representation, PRDAO provides a token called HIVE that is fully owned by the community.  

DAO voting and management

Algorand xGovs vote through the xGov Portal, a web portal built by MakerX. It comprises a smart contract that manages the voting sessions and records the results on-chain, as well as an xGov status page. It is important to note that the xGov Portal is still in its experimental stage. Learn more about Governance, xGov, and the xGov Portal.

Many Algorand-based DAOs are managed through the Updog platform, where it’s easy to join a DAO by connecting your wallet, staking tokens, and voting on the proposals.  

Conclusion

DAOs are characterized by their ability to bring together individuals in a permissionless manner with a common purpose, whether it's supporting startups, managing digital assets like stablecoins or NFTs, or even collectively purchasing real estate. The transparent nature of blockchain technology allows DAOs to challenge traditional top-down hierarchies, creating more inclusive and participatory decision-making.

Despite this, a DAO is still a new concept, with different models of DAO management still being tested. Many DAOs are not yet truly decentralized, fully automated, or completely on-chain. Compliance is another issue faced by DAOs, with many spanning across regional jurisdictions and geographies. Nevertheless, DAOs have the potential to change the world of governance in the long term, with decentralization being a core component of a more inclusive, pluralistic society. 

Further reading:

What Is a DApp? Decentralized Apps Explained

Web2 vs Web3: What's the Difference?

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