“If you want to go fast, go alone. If you want to go far, go together.”
– African proverb.
DAOs or Decentralized Autonomous Organizations{target=_blank} are member-owned communities with a built-in treasury, no central leadership, where rules of engagement are codified into smart contracts. They can be a safe way to collaborate with internet strangers while committing funds towards a specific cause. DAOs are a mechanism for social scalability{target=_blank} since they allow members to organize and direct capital towards goals in a trustless and fluid manner. The use of smart contracts allows for the transparency of funds, the rules of operation, and the creation of incentive mechanisms to provide security guarantees around member actions. Thus the economics and control of an organization are laid out transparently, allowing for “trustless” peer to peer participation in open and insecure networks.
Aragon further explains DAOs,{target=_blank} a DAO framework we will soon explore. An excellent visual description of DAOs can be found here{target=_blank}. Finally, you can find a list of interesting DAO resources via DAOtalk.org{target=_blank} and metagame.wtf{target=_blank}.
Simply, DAOs are internet-native organizations.
DAOs are just new way of running projects, similarly to what companies do in non-web3 world. As such DAOs:
- gather community of contributors that work on a project/product.
- establish a token and it's economic model
- fundraise and distribute the funds
- establish governance framework - develop the project through collective decisions based on discussions and voting.
- establish the operational network - maybe the DAO/token is a starting point for another side chain.
- decide on the initial conditions for a network/network design - maybe there are certain aspects of the network that could be voted on.
- create partnerships
- create grant programs that is used to further develop the project.
- pay employees - yay, Opolis{target=_blank}, Coordinape{target=_blank} and Smart Invoice{target=_blank}!
DAOs hope to address the Principal-Agent Problem{target=_blank}. As organizations grow, in order to deal with the complexity costs of managing large groups of people{target=_blank}, delegation of power is introduced. However, due to assymetry of power, information, and incentives, the delegates can end up serving themselves at the expense of others. For example, a Chief Financial Officer can misappropriate the funds, or a charity’s executive board can devote the majority of donations to salaries instead of its stated mission. This is more pronaunced in large, cenrtalized organizations, which suffer from a general lack of immediate accountability due to poor transparency of rules, incentives, and financial information, arbitrary execution of policies and poor ability to voice concerns.
Through smart contracts, DAOs provide transparency, self-reinforcing rules, clear incentives and disintermediate control. Decisions are made by public votes, and resuts are automatically executed. DAOs also provide an open and programmatic means of viewing the community’s finances and voting history. Smart contracts can also be used to design incentives that limit the principal-agent problem, increase security, direct member actions towards a goal, and increase collaboration between members.
DAOs have been called the future of work. The token represents a shared ownership (and responsibility) over a project; the DAO helps to coordinate humans around it. However, DAOs are still "the future of work" not "the way we work". This means that they need ancors into non-web3 world, which is usually done by a DAO LLC{target=_blank}, creating a link between the internet native organization and a local jurisdiction (like Wyoming, which has laws around DAOs){target=_blank}.
Token engineering{target=_blank} can be applied to create the guardrails which can concentrate member actions towards a goal. Token engineering is defined as a discipline focused on designing the self-organizing systems enabled through cryptographic peer-to-peer networks{target=_blank}. Since individual motivations can vary, one starts with the assumption that economic incentives and disincentives can motivate members towards a particular action. These levers can be used to scope participant actions, creating predictability absent social cues on the internet or understanding each entity’s intent.
An economic assumption creates an upper bound on an attack or counter-incentivized actions. This is because, if costly enough, the attacker will at some point run out of funds. Thus, we limit the scope and number of potential hostile actors and actions by raising the cost of negative actions. This idea also underpins how [Cryptoeconomics]{https://en.wikipedia.org/wiki/Cryptoeconomics}{target=\_blank} works. Cryptoeconomics is the use of economic incentives to provide guarantees about applications in open and adversarial networks. In the context of DAOs, the application is social collaboration towards a goal. This economic assumption can also be extended to social capital{target=_blank}.
Through the application of tokenomics, communities can scale collaboration through the careful management of their treasury. Cryptoeconomics is the hamburger bun, tokenomics is the meat of a community{target=_blank}. Cryptoeconomics can provide security, while tokenomics provides the additional layer of incentives to grow and manage the community.
You can use tools and services by BlockScience{target=_blank} like CadCad{target=_blank} to begin to reason how to design and stress-test a token.
Some level of social capital can be captured into a social token or community token. A good breakdown of both can be found here{target=_blank}.
Learn about social tokens and how DAOs{target=_blank} help enable them. Listen to a16z’s perspective on social tokens{target=_blank} with Kevin Chou from Rally{target=_blank}. Rally is like WordPress for social tokens. Another platform can be Fyooz{target=_blank}.
An excellent community token example can be FWB{target=_blank}. An example of a social token can be Portugal The Man’s Social Token{target=_blank}. An interesting example of a social token is r/cryptocurrency{target=_blank}’s MOON token. These tokens can be the building block to a creator economy of producers. However, just having a social token doesn’t create a DAO.
Decentralization can be considered a spectrum and, to many aspiring projects, a goal. However, just because a project is on a blockchain or has smart contracts does not mean it is decentralized. For example, projects like Circle's USDC or Tether's USDT are major projects controlled by centralized entities. Although they use smart contracts, they are developed by a traditional company and leverage traditional banking infrastructure to hold the underlying collateral.
Similarly, just because a project has a governance token does not make it decentralized. This could be due to the concentration of governance tokens in a few wallets. Another reason could be how the smart contract is designed, centralizing through the amount of "admin-only" permissions in the code. A project could be centralized through the governance structure itself. One manner is by requiring a high minimum of tokens to make a proposal. If this proposal is higher than what 99% of token holders have, this effectively centralizes control, like in the case of first Uniswap governance vote{target=_blank}. A project could also restrict control at the final decision level, similar to Sythentix's Spartan Council{target=_blank}, where proposals are voted on by a rotating committee of people elected by token holders.
There are legal mechanisms that can restrict participation as well. The restriction could be through the open-source project's license, which limits the scope of what can be forked{target=_blank}. If a project has a formal corporate entity to develop the underlying protocol and project, then the shareholders and possible investors could sway the project. Examples can be Uniswap or Compound, which have companies that act as stewards of the protocol. This is not to be confused with any intention control projects in a disingenuous manner. Many projects start Foundations{target=_blank} that support decentralized growth and long-term sustainability of their protocol.
Due to the newness of DAOs, the legal codification of this new structure of organization is not widespread, with the state of Wyoming being one of the few that has laws around them{target=_blank}. Having a legal entity helps with off-chain things like taxes, bank accounts, paying bills, etc. Additionally, industry patterns are emerging around using multi-signature wallets to allow teams to have checks and balances{target=_blank} over code updates and treasury spending. There are even some new ideas around using a network to help manage wallets{target=_blank}. That way, one person can't run off with the funds like what occurred early on with SushiSwap{target=_blank}. Or have the concentration risk of one person having a massive amount of power.
Transparency is the core of DAO principles, that's why most code runs under open source licenses. However, often information can be limited (intentionally or not) through having too many informal or off-chain governance mechanisms which exclude some of the token holders. Off-chain governance means agreements without a vote that is executed on-chain. It is a popular mechanism in Ethereum based DAOs foe decisons that are not "very important" because every on-chain activity requires gas.
With all this being said, complete decentralization is a target goal for many projects. Most projects start somewhat centralized, as the people that make up the teams are experimenting with a new form of organization. Usually, projects will express their intent to decentralize and issue a roadmap with goalposts to meet.{target=_blank} As patterns and tools are refined and people share experiences, we can expect to see more projects initially start with a higher level of decentralization.
As of 2022, we have seen many projects achieving some high level of decentralization, like MakerDAO{target=_blank} and Synthetix, among others.
DAOs are emerging in many places. See an overview of DAOs in the 2022 DeFi and Web3 for Organizations report{target=_blank}. In the DeFi space, MakerDAO{target=_blank} focuses on creating a stablecoin for the world. Yearn Finance{target=_blank} works to help automate yield farming with crowdsourced strategies for its members, similar to a decentralized hedge fund. Uniswap and SushiSwap are both Decentralized Exchange Protocols aiming to help users trade digital assets. Nexus Mutual{target=_blank} is a decentralized insurance protocol that offers policies to guard against exchange and smart contract hacks. BadgerDAO{target=_blank} creates products and infrastructure to bring Bitcoin to DeFi. IndexCoop{target=_blank} creates indexes of crypto assets and aims to become a decentralized BlackRock. Finally, TheLAO{target=_blank} is an example of the first decentralized for-profit DAO backed by a legal framework pioneered by OpenLaw{target=_blank}. LexDAO{target=_blank} is made up of legal engineers creating bridges between legal code and smart contracts.
DAOs also found the world of art and media. BanklessDAO{target=_blank} aims to practice what they preach and organize to create a decentralized newsroom and set of financial products. FlamingoDAO{target=_blank} invests in NFT, games and the Metaverse. Bored Apes Yacht Club{target=_blank} and Pudgy Penguins{target=_blank} focus on selling limited edition art around NFTs{target=_blank}, to pretty good success. Finally, Audius{target=_blank} is creating a decentralized music service.
DAOs can emerge around social causes like Meta Gamma Delta{target=_blank}, an inclusive and empowering society supporting women-led projects{target=_blank}. Or Gitcoin, which is focused on advancing public goods funding{target=_blank}. They can be used to organize developers around creating developer tools like RaidGuild{target=_blank} and Radicle{target=_blank}.
Learn more about the latest DAO developments at DAOTalk.org{target=_blank}, p2pModels.EU{target=_blank} or subscribe to Boardroom's substack{target=_blank}.
Read more about DAOs via DAOHaus{target=_blank} or Aragon's list of DAO in 15 different industries{target=_blank}.
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Article: Organizational Legos, The State of DAO Tooling (Nichanan Kesonpat){target=_blank} Excellent overview of available tooling for DAOs from Fall 2021
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Whitepaper: Decentralized Autonomous Organizations: Beyond the Hype (World Economic Forum){target_blank}A comprehnisve resource to learn everything in depth about DAO's, right from understanding what is a DAO and how it works to its legal and regulatory challenges.