DAOs are internet-native, community-driven groups of token-holding members with voting power who work together for a common goal. Decentralized autonomous organizations are public and operate with no central leadership. Cryptocurrency is an excellent example of the complex and constantly changing DAO environment. Here is what else you should know.
Decentralized autonomous organizations, or DAOs, are internet-native groups built with blockchain technology and managed by members. In some ways, they are a type of “crypto co-op” consisting of members working toward a common goal. It’s much like investing in start-ups or buying NFTs.
DAOs are reorganized corporations. This means they’re not owned or operated by government institutions or banks. Power is divided among the members or investors instead. These independent entities allow investments from anywhere in the world. Therefore, the concept was initially designed for investors. It helps them anonymously send, spend, and invest money worldwide.
Let’s lean in closer to the decentralized autonomous organizations to determine their purpose and value. We’ll discuss the pros and cons, give some examples, then tell you how to get started.
Table of Contents
What is a Decentralized Autonomous Organization?
Step One: Develop the Smart Contract
Step Two: Start Funding the DAO
Step Three: Deploy the DAO on the Blockchain
Pros and Cons of Building a Decentralized Autonomous Organization
What is a Decentralized Autonomous Organization?
You can think of decentralized autonomous organizations as a club for crypto fanatics working on a project or shared goal. Anyone can become a DOA member, but supporters typically buy their way in by purchasing specific crypto tokens.
Once they’re bought in, members can vote on how money is spent within the organization. DAOs are structured with a flat hierarchy, which aims to remove any concentration of power on any single member or group. No single person calls the shots or determines how to manage money.
NOTE: This structure works because it’s insured by a smart contract.
What Are Smart Contracts?
Smart contracts are essentially the foundation of decentralized autonomous organizations. Smart contracts are self-executing computer codes that define the organization’s rules for all members involved. They also host the DAOs treasury and serve as a spot to store funds the organization pools together.
These critical elements run on their own. People who purchase the necessary governance token can become official members. Thus, smart contracts serve as protection, with each stakeholder bound by standardized rules. This prevents people from running off with funds or investing the money in ways that don’t contribute to the primary goal of the decentralized autonomous organization.
Smart contracts are hosted on the blockchain or a public crypto database. This means details of the contractual code can’t be changed without other members of the DAO noticing. Unauthorized changes to the rules or access to the DAO’s treasury cannot happen without the organization’s approval.
DID YOU KNOW: Anyone can develop a smart contract and host it on the blockchain through cryptocurrencies like Bitcoin and Ethereum.
How Do DAOs Work?
According to Cointelegraph, there are three primary steps to creating decentralized autonomous organizations:
- Develop the smart contract
- Start funding the DAO
- Deploy the DAO on the blockchain
Step One: Develop the Smart Contract
Developing the smart contract is step one. Creating and coding a smart contract can be an extensive process. The smart contracts and the rules they outline can only be changed by voting with all the members. Thus, it’s imperative to thoroughly test the arrangements before release.
Step Two: Start Funding the DAO
After your smart contracts are created, you can determine how the decentralized autonomous organization will be funded and enact governance. This is done by creating and distributing a native token in most cases.
Native tokens act as a cryptocurrency specific to the DAO and its objectives. Their purchase also helps the DAO earn more funds. NTs can be used by members and purchased by people looking to join the DAO. Possessing one means you own some amount of equity in the organization. You get voting rights as well.
Step Three: Deploy the DAO on the Blockchain
Now is the time to deploy a decentralized autonomous organization on the blockchain. Once the DAO is launched, all token holders essentially become stakeholders and can suggest how to spend the DAO’s money. The original creators of the DAO won’t have any more governing authority than other members have.
Once launched, all the details of the DAO, as defined in the smart contracts, will be public on the blockchain. This includes transactions and other activities within the organization. The unique, open-source nature of decentralized autonomous organizations helps ensure full transparency. It helps hold members accountable and ensures everyone in the DAO is working in the group’s best interest.
Pros and Cons of Building a Decentralized Autonomous Organization
The crypto community is ever-changing. New trends and investment strategies pop up constantly. You may be wondering if creating or joining a decentralized autonomous organization is worth it. Let’s look at the pros and cons first:
Pros
There are several benefits to building or joining a DAO. While decentralized autonomous organizations are still relatively new, they can potentially offer more perks than traditional corporations. Some of the advantages include:
- Transparency
- No central leaders
- Community driven
#1. Transparency
In decentralized autonomous organizations, everything happens on the blockchain. Group decisions, transactions, and everything else are public. This also includes the DAO’s smart contracts, which publicly display the organization’s guiding rules.
In many cases, these elements make decentralized autonomous organizations more transparent than traditional organizations. Transparency is vital when spending or investing money and conducting risk assessments.
#2. No Central Leaders
DAOs don’t rely on the traditional structure most corporate organizations do. There is no board of directors or executives making all the decisions for the organization. Instead, the responsibility of governance relies solely on the members.
The lack of central leadership can be an advantage for DAOs because any member can propose new ideas. Their insights also help improve the organization. It acts as an alternative to being directed by a group of disconnected leaders.
#3 Community Driven
In decentralized autonomous organizations, decisions are made by token-holding members with voting rights. However, voting rights in DAOs can be weighted depending on how many tokens any given member has. There’s still more balance in a DAO’s operation when compared to traditional organizations.
This distinct structure allows decentralized autonomous organizations to have more community focus. The community-driven aspect of DAOs enables stakeholders to focus more on the society surrounding various groups.
Cons
Because the concept of DAOs is relatively new, there is much hesitation when building or joining one. While there are several pros to consider, not everything is perfect. Here are the cons to consider:
- Slow decision making
- Security
- Location
#1. Slow Decision-Making
The decentralized, community-driven nature of DAOs is one of their biggest appeals and advantages. However, it could also have downsides. That’s because decentralized autonomous organizations require a voting process to make any changes and determine spending.
Organizing a community vote can be time-consuming, especially if the DAO has a lot of members spread across different time zones. This means if there was a serious, time-sensitive issue (security breach, etc.), members could lose valuable time while trying to organize and count the vote.
#2. Security
DAOs require a significant amount of technical expertise to maintain. Over time, it can also get expensive to keep all the best security practices in action. Meanwhile, the crypto world is an expansive, fast-changing environment.
Since DAOs are still relatively new, their security foundation and the tools required to maintain them are continuously improving. The novelty of DAOs could potentially open them up for security concerns. Exploits, phishing scams, and other online threats are very real possibilities, especially if your DAO has a lot of money on the line.
#3. Location
One of the appealing angles of DAOs is the fact that anyone in the world can join. For example, you could build and launch one in the United States and have members from as far away as Europe. This is because all the dealings happen in a virtual space, significantly lowering the barrier to entry.
However, if the DAO runs into trouble, there are currently no laws explaining where the DAO legally exists. Legal jurisdiction could be based on where members of the DAO are located. However, most DAO members remain anonymous in the group, making it hard to effectively nail down their geographic location.
All these ambiguities impact the rules DAOs must comply with and make them hard to regulate at this time. The location concern also contributes to uncertainties surrounding taxes and what the DAO may be required to pay.
DAOs and Web3
DAOs have the potential to be successful in a variety of instances. One concept in particular that has recently been picking up speed in the crypto world is Web3. Some say Web3 represents the future of the world wide web.
Decentralization is one of the key elements of Web3. It is built on the blockchain and with crypto, taking many forms like decentralized social platforms, video games with crypto token reward systems, and NFT platforms.
Because Web3 is a decentralized form of the internet, there’s a need for some kind of management system to handle governance. This is where decentralized autonomous organizations can come in handy. In the Web3 world, general operations are managed by the consensus of users’ decisions, similar to the voting process in DAOs.
DAOs have emerged to help manage Web3 operations’ continual growth and development. They have also been used to fund other projects and govern communities with a common goal.
Examples of DAOs in Action
With all this information regarding DAOs and how they work, you may want to see a decentralized autonomous organization in action. Here are some examples:
- Bitcoin
- DASH
- Uniswap
#1. Bitcoin
Bitcoin is a decentralized autonomous organization. With this cryptocurrency, people enter agreements to buy and sell assets according to set terms. The Bitcoin blockchain then publically tracks everything.
With it being decentralized, easily accessible, and essentially community-operated, Bitcoin meets most of the criteria for being a DAO. It’s also possible that Bitcoin could be classified as the first-ever.
#2. DASH
DASH is an open-source, peer-to-peer cryptocurrency with instant payments, hence the name. A unique feature of DASH is that it offers private transactions, but it’s still considered to be a DAO as all the group’s decisions are made collectively via a set of guiding terms.
However, there are concerns that DASH isn’t as decentralized as other DAOs. The reason is that when the governance tokens were distributed, they concentrated wealth among a small group of stakeholders, giving them an unbalanced amount of voting power.
#3 Uniswap
Uniswap is a leader in the decentralized finance or, DeFi space. DeFi is a new technology that removes third parties like brokerages or banks in financial transactions. Uniswap is decentralized, community-run, and allows members governance power with the purchase of a token called UNI.
Uniswap is open-source and fully public and is currently the fourth-largest DeFi platform with over $3 billion worth of crypto assets secured.
The Future of DAOs
As the crypto world and the internet continue to expand and change over time, decentralized autonomous organizations have the potential to have a part in that innovation. While DAOs are still a new and emerging concept with room to improve, there have already been several successful DAO projects.
DAOs are at an advantage for the future because they’re internet-native organizations. Everything happens publicly on the blockchain, which offers benefits that traditionally run organizations don’t. As DAOs continue to expand and gain popularity, they can potentially build more community and attract new crypto enthusiasts with their potential for anonymity and low barrier to entry.
Conclusion
Decentralized autonomous organizations, or DAOs, are internet-native groups built with blockchain technology and publicly managed by their members. DAOs have no central leadership and are completely community-driven by token-holding members with voting rights, all working toward a common goal or project, like investing in start-ups.
DAOs allow members to be anywhere in the world while bidding and communicating with other members and also offer members anonymity. Decentralized autonomous organizations are still a novelty concept and will likely continue gaining traction as the internet and crypto scene continue evolving.
About the Author
Jonathan Hung is one of the most active angel investors in Southern California, his mission is to drive value creation within each portfolio company. In support of this mission, he serves as Co-Managing Partner at – Unicorn Venture Partners.
He and his team target investments in US companies that have global market potential with a focus on long-term growth expansion to East Asian markets.
Jonathan developed his investing prowess as a Managing Member for his family office fund, J Heart Ventures, which made investments in start-up companies such as Gyft, ChowNow, Miso Robotics, Clover Health, Bitmain, to name a few startups he funded.
Jonathan has various degrees from the University of Southern California, London School of Economics, Massachusetts Institute of Technology, and The Wharton School at the University of Pennsylvania.