What Is a DAO in Crypto? Understanding Decentralized Autonomous Organizations

DAO is an acronym for decentralized autonomous organizations, an organizational structure using blockchain technology instead of a central governing body. It is a new form of community governance based on predefined rules with decisions executed automatically by a blockchain. A DAO aims to run a transparent and autonomous, democratic governance system. The community collectively votes on proposals, and decisions are enforced using smart contracts.

Transparency: All governance decisions, proposals, and voting outcomes are recorded on the blockchain. While remaining visible to all participants, they are immutable, meaning they can never be edited or deleted.

Decentralization: Blockchains run on distributed ledgers, meaning no single entity is in charge. Instead, a DAO is maintained by hundreds or thousands of members.

Democratic: Proposals and votes are conducted by the community. The voting structure is based on the number of DAO governance tokens owned and anybody can acquire them.

Blockchain: DAOs operate on a blockchain to enable rigorous enforcement of transparency, decentralization, and democratic characteristics.

Smart contracts: Smart contracts automatically enforce the DAO’s rules and voting decisions. This includes rewarding contributing members and penalizing rule breakers.

Stephan Tual, a co-founder of Ethereum, first coined the term ‘DAO’. He defines it as “a decentralized organization that lives on the internet and exists autonomously.”

The launch of the Ethereum blockchain in 2015 enabled smart contracts which allowed the development of the first DAO – it launched in April 2016 and was called the DAO. Designed to be an investor-led venture capital fund, it raised over $150 million in ETH from 11 thousand members in 28 days.

The project only lasted a few months, as its funds were hacked via a smart contract code vulnerability. The hack resulted in a hard fork from the original Ethereum blockchain in an effort to restore the stolen funds.

MakerDAO is considered the first successful DAO project. In 2017 it launched on Ethereum and has shown resilience, even through challenging crypto downturns and black swan events. People who hold the DAO’s MKR token can vote on the proposal and management of the lending protocol.

Uniswap is also regarded as a pioneer in a DAO governing decentralized exchanges (DEXs). It launched in 2018 and continues to operate today, with the community managing the project. Holding the UNI token gives anyone a vote on proposals and administration.

Following these DAO successes, more DeFi protocols started developing similar governance. During the 2020/2021 crypto bull run, DAOs started hitting the news. Now, virtually every DeFi project operates a DAO governance system that manages protocols.

The importance of DAO’s comes down to decentralization. It’s a characteristic at the core of everything cryptocurrency, blockchain, and DAO-related. It’s a cool concept, but you might be wondering if it’s necessary.

Traditional organizations often need help with problems stemming from centralization, where top decision-makers are made up of a small selection of individuals. This small group holds all the power and can lead to corruption, biases, personal agendas, inefficiency, and blinkered decision-making. DAOs distribute power among a large community of members to decentralize decision-making. It reduces corruption risks to ensure decisions align with the interests of the stakeholders.

A lack of transparency also makes it hard for stakeholders to see how decisions are made or how funds are managed in an organization. The transparency of blockchain technology gives everybody a telescope into an organization to see firsthand how things are governed.

Along with transparency and decentralized decision-making, there are several more advantages of using DAOs:

Efficiency: Smart contracts are used for automated processes, which reduces operational costs and human errors.

Security: Blockchains are the most secure networks ever created, resistant to hacks and security threats, as there is no single point of failure.

Global collaboration: Anyone, anywhere in the world can be a part of DAO decision-making, all you need is a computer or phone and internet connection.

Innovation: Building using collective intelligence and diverse thinking leads to faster and more well-rounded innovation.

Empowerment: People in a DAO community feel a true sense of democracy as they’re empowered to have a direct influence on decision-making. 

DAOs are not all sunshine and roses. They are still developing forms of governance and have challenges to overcome:

Security flaws: While blockchains are incredibly secure, smart contracts can still have security vulnerabilities which are targeted by hackers to steal funds and act in malice.

Regulatory uncertainty: Traditional legal systems are still playing catch up with this style of organization. This leaves risk as to their legality across various jurisdictions.

Token distribution: Fair token distribution is still a challenge and can lead to unwanted centralization. MakerDAO faces criticism for concentrating voting power among a small selection of large token holders.

Financial stability: Long-term financial success is a hurdle for many DAOs. Like any organization, finances need to be managed correctly to survive. That’s not always easy with a large number of inexperienced governance members.

Integration: Merging DAO governance with traditional business and financial systems is still a long way off. Legal frameworks and operational models are barriers to this integration.

DAOs are built on smart contracts, which allow for decentralized decision-making with complex voting mechanisms. Using governance tokens, they give participants a say in the future direction of the project with the power to vote on critical operational factors like structural changes, prioritization of developments, finances, and more.

Everything is automatically managed using smart contracts. They are self-executing contracts with terms and procedures written in the code. This allows them to perform actions based on predetermined outcomes, including how the voting mechanism operates and facilitating the decisions made from governance votes.

Tokenomic refers to the economics of how blockchain projects operate. For DAOs, this refers to the distribution and use of the governance tokens. The tokenomics rule dictates the voting power, incentives for participation, penalizing bad actors, trading, and making money.

The final core structure of a DAO is the voting mechanism. In simple terms: people who hold a voting (governance) token can vote in favor or against proposals put forward by community members. Several variations on this now exist including quorum, delegation, token-weighted, and quadratic voting.

The explosion in DeFi projects has simultaneously led to a growth in the types of DAOs now in operation; let’s look at the different options:

Protocols DAOs are used to govern specific DeFi applications (dApps). They enable members to vote on upgrades to the application and choose how to use funds. Examples of this include MakerDAO and Uniswap.

Collector DAOs are a way for community members to crowdfund investments to invest in blue-chip NFT art and similar collectibles. Each member then owns a share corresponding to their investment level. Examples include FlamingoDAO and ConstitutionDAO.

Investment DAOs create a pool of capital to invest in exciting Web3 startups and projects. It’s essentially a decentralized venture fund. Examples include Krause House DAO and MetaCartel Ventures.

Social DAOs, also known as creator DAOs, bring together like-minded people like artists, creatives, builders, and developers. To be a part of the community members must own a specific set of tokens or NFT. Developer DAO and Friends with Benefits are examples.

Philanthropy DAOs look to progress social responsibility by pooling funds and working to create a positive impact on the world via Web 3. Examples include Big Green DAO and PleasrDAO.

Media DAOs aim to combat top-down media approaches, instead, this type of media platform produces news and content driven by the will of the community. Decrypt is a standout example of this.

To join a DAO, you need a cryptocurrency wallet operating on the blockchain, which is attached to your DAO. For example, MetaMask is a popular DeFi wallet that interacts with Ethereum-based DAOs.

Next, acquire the DAO governance token. Popular tokens are listed on major crypto exchanges to buy, or they can be found on decentralized exchanges. If you’re not sure, you should read the official project guidance on how to obtain DAO tokens.

With your governance tokens, you can now connect to the DAO voting platform to start having a say in community proposals. In addition, you’ll have access to community discussions on messaging platforms like Discord and Telegram.

DAOs are flourishing in the DeFi community as a way to govern automated protocols. This is particularly useful in an industry that can struggle with trust in leadership – especially in the wake of  the poor leadership of Sam Bankman-Fried at FTX.

Traditional businesses and finance are still working to integrate with the DeFi world. Although, the introduction of crypto ETF products is a step in the right direction. Here at CoinHint, we project that future use of DAOs in more traditional business models will likely come via the integration of DeFi protocols, which are governed using DAOs. Plus, there will need to be significant advancements in legal corporate frameworks to facilitate this growth.