The DAO operated in murky territory about whether or not it was selling securities, as well. Further, there were long-standing issues regarding the way that the DAO would function in the real world. Investors and contractors alike needed to convert ETH into fiat currencies, and this could have impacted the value of ether.

In brief

The DAO was an organization that was designed to be automated and decentralized. It acted as a form of venture capital fund, based on open-source code and without a typical management structure or board of directors. To be fully decentralized, the DAO was unaffiliated with any particular nation-state, though it made use of the ethereum network. 

“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

Why make an organization like the DAO? The developers of the DAO believed they could eliminate human error or manipulation of investor funds by placing decision-making power into the hands of an automated system and a crowdsourced process. Fueled by ether, the DAO was designed to allow investors to send money from anywhere in the world anonymously. The DAO would then provide those owners tokens, allowing them voting rights on possible projects.

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.

So 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.

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.

Fun Fact

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.

What was The DAO?

The DAO was the earliest example of a DAO. It was created by 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.

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.