Decentralised Autonomous Organisations are organisations that are governed by an algorithm, rather than a hierarchy of human beings. They establish trust between people who don’t know each other, allowing them to pool resources for a shared cause.
Here’s Binance’s definition of a DAO:
An organizational form that coordinates the efforts and resources of members via an a priori binding, formalized and transparent set of rules that are agreed upon in a multilateral fashion
What are they used for?
For the first time, they allow large groups of people to pool resources and make decisions as a group in a transparent way. Here is a small subset of use cases:
- Research - crowdfunding research into underfunded causes people care deeply about
- Charity - coordinating large charitable projects (e.g. building wells or distributing food), or simply allocating funds to existing charities
- Arts - fans collectively owning their favourite artist’s work
- Commercial - a common use of current DAOs is for coordinating investments into private projects, but many people see DAOs as the LLCs of the future. Chris Dixon suggested DAOs could even be used to fund an alternative smartphone, one that’s owned by the people.
How do they work?
Founders set up a vision and governance structure, and then members can join by buying tokens (or voting rights). Once a DAO has been launched, it’s completely independent of its creators. Members submit proposals to allocate capital or to change the governance structure. The proposals are then voted1 on by the members. The final step of many proposals is to do something in the real world. In this case, a contractor is hired for the implementation. This appointment is done through a similar voting process.
There are two defining aspects of this type of organisation:
- Autonomous - when conditions are met, a smart contract is executed. The organisation’s administrative burden is reduced thanks to the autonomy built into the system
- Decentralised - this refers to the political nature of the organisation, as well as the physical distribution of hardware. DAOs run on blockchains (I’ve avoided using the word until now)
Some closing thoughts
DAOs are still early in their history, and many focus on DeFi and general blockchain projects. For example, The LAO is a for-profit DAO that invests in blockchain startups and gives members access to the returns. Their documentation page is a good example of a DAO’s governance structure.
One of the major benefits of a DAO is ensuring consensus amongst members. Consensus isn’t always good. Yes, it allows everyone’s voice to be heard, but this doesn’t always lead to the best decisions - sometimes you need a visionary leader to make bold decisions. Another important point: just as DAO’s can be used to coordinate good, they can also be used to coordinate evil.
Going forward, I’d expect DAOs to remove intermediaries from many industries (e.g. in financial institutions, charities) but I’m still to be convinced that they can replace a lean, innovative corporation that needs to move fast and take bold leaps. Innovation often comes from very small teams2, whereas DAOs are mainly useful in coordinating large groups of people who don’t know each other.
1 There will, of course, be mechanisms in place to avoid manipulation of votes (i.e by ensuring that no single entity has a disproportionate amount of the vote) 2 e.g. WhatsApp only had 55 employees when Facebook acquired them for $55bn