What is a DAO?
DAO: A Revolutionary Approach to Organizational Management
In a traditional organization, the board of directors is the brainbox behind decision-making, such as projects to embark on, additional branches to open, and missions to spend on. Votings often occur while employees or delegated officers carry out the board’s resolution. These organizations rarely allow employees to influence their decision-making processes. For example, renowned charity organizations have thousands to millions of donors who are not involved in how the donated funds and resources are spent. ‘Transparent’ organizations present reports after money has been spent, but donors aren’t involved in the decision-making process.
Likewise, unicorn companies on the public stock exchange have thousands of people owning their shares worldwide. Despite this, the investors are unaware of the company’s organizational structure or its “about to be released” projects. The order is not mandatory, but what if it was redefined to create a democratized ecosystem where donors, investors, fans, etc., have a voice in any project or organization they financially support?
Besides providing businesses in this generation with inclusiveness and transparency tags, this will promote accountability and foster trust within the permissionless ecosystem built on decentralized technology. What can be done to achieve this? What does “Decentralized Autonomous Organization” technology offer regarding security, trust, transparency, and accountability?
Introduction to The Decentralized Autonomous Organization (DAO)
DAOs are entities with no central leadership, where every investor and member has a say. They are decentralized, built on blockchain technology, and all members make contributions. The rules that govern them are entirely embedded in the smart contracts that created them.
Also known as decentralized autonomous corporations (DAC), they are internet-native corporations where all members own a share. These corporations or organizations are built on blockchain and cryptocurrencies, with the aim of operating like corporate organizations with a project to embark on per time. The members of the organization have the right to vote. They can influence the outcome of every project undertaken by the organization, much like the democratic process of choosing a leader in a democracy.
A DAO is independent; the government does not govern it, nor is it based on a central database that can be shut down easily. Due to their decentralized nature, financial transaction records are transparent and accessible to the public. Also, each member’s voting history can be traced, proving that this is an open, transparent, trustless non-hierarchical system.
The First DAO: The Largest Crowdfunding Campaign in History
A German company launched an Ethereum-based project in 2016 called “The DAO.” Slock.it, the company that launched the project, was primarily focused on connecting physical transactions to the blockchain so that customers could sell, rent, or share their properties without an intermediary. You can call it a blockchain-built Airbnb.
Using blockchain nodes embedded in connected cars, homes, IoT devices, etc., Slock.it was creating a workable relationship between the decentralized world and the physical world. The end goal was to cut off intermediaries in the process of renting or sharing physical spaces such as homes and cars. This way, blockchain’s trustless and permissionless attributes can be more easily incorporated into our daily lives.
To fund this incredible idea, the founder, Christoph Jentzsch, and his team initiated “The DAO,” where the public could gather resources and have a say in how their funds are spent. Within a few weeks, history was made as 11.5 million Ether (ETH) were crowdfunded with a worth of approximately $150 million. Wikipedia, the Economist, and many media houses referred to this as the “largest crowdfunding campaign in history.” The DAO later became a venture capital fund on the blockchain with resources to invest in companies or startups agreed upon by the membership.
But the unexpected happened, there was a hack, and about $50 million was siphoned through loopholes in the code. Because of the nature of the smart contract that created the DAO, the money had to wait for 28 days in the subsidiary account. This helped the community to restore the fund to its original contract by hard-forking the Ethereum blockchain network. As a result of this event, Ethereum’s blockchain was divided into two branches, each with its own cryptocurrency, while the original unforked blockchain continued as Ethereum Classic.
Although the money was recovered, many users lost trust in DAO and the Ethereum blockchain due to the vulnerability that enabled the hack. Due to the DAO’s media booze, it was even worse for newbies trying crypto investment for the first time. They ended up speaking ill of the entire blockchain industry, similar to how the FTX Founder recently made many people criticize the crypto industry. Nonetheless, the public was educated about the power of smart contracts and the possibility of autonomous organizations through “The DAO”. The defunct company is now commonly known as “The Genesis DAO” to avoid confusion with the DAO initiative/idea that has spawned hundreds of other Ethereum-based DAO projects.
What are Smart Contracts?
A smart contract is a piece of code or computer program that can be executed automatically when the involved parties or players abide by the terms of the agreement. A smart contract executes itself once the agreement terms are met; these terms are explicitly incorporated into the lines of code that form the smart contract. The advent of smart contracts has made transactions between buyers and sellers more trustless, permissionless, and with intermediaries removed. Smart contracts power Ethereum Blockchain, making the Ethereum network a vital part of Decentralized Apps (DApps). DApps projects are disrupting many industries, thanks to the embedded trustless and permissionless technology. One of such development is the DAO, which uses Ethereum smart contract technology – a blockchain.
Smart contracts are built on the “IF-THEN” semantics of programming languages. As long as the conditions stated in the codes are met, they can send, store, and receive funds. They can “call” on other smart contracts’ codes or programs if needed, making them autonomous, thus removing the human factor and decision-making process. Considering that the human factor in contracts is important, but can lead to bias and errors. Smart contracts entirely remove this, giving the power to the program, therefore, turning pieces of codes into laws that govern contracts. Since smart contracts power decentralized autonomous organizations (DAOs), codes are the new laws that govern organizations. Anytime humans attempt to make changes to this self-executing system, it must result from the consensus of all parties and members of the DAO.
How DAOs Work?
Smart Contracts remain the backbone of DAOs, as described above. It is impossible to edit them once they have been written and published, not even by their founders. A change or development in the technology is subject to the consensus of its members, allowing members to vote before any changes are made. The members play the role of the board of directors in the traditional organization.
The voting power of each member is based on the number of tokens they own, similar to how the percentage of shares owned by a member of a board of directors is directly proportional to their voting power. A member with 200 tokens holds more power than one with 50 tokens; likewise, a user with 1,000 tokens holds five times more power than the user with 200 tokens. Different voting mechanisms have been developed over the years, ensuring that financial power does not give bad actors more voting power.
The Token System and DAO Voting Mechanism
The sale of DAO tokens is the primary means of funding DAO projects. To raise capital, the native token is traded for fiats, Ethereum, or other widely accepted coins. Members with these native tokens have proof of ownership as co-owners, and if the DAO is successful, the value of the token increases, benefiting the early adopters.
As established previously, members of a specific DAO community can also participate in the governance process of a DAO community through its native token. They can vote and decide on projects to embark on. Different DAOs have different voting methods, as there are ongoing discussions about loopholes in some of these voting mechanisms and necessary solutions to bring these governance systems close to perfection. Below are some of the existing voting mechanisms (some of which are still in the testing phase):
- Token-Based Quorum Voting Mechanism
- Conviction Voting Mechanism
- Rage Quitting Voting Mechanism
- Quadratic Voting Mechanism
- Liquid Democracy Voting Mechanism
- Holographic Consensus Voting Mechanism
- Multisig Voting Mechanism
- Permissioned Relative Majority Voting Mechanism
- Weighted Voting & Reputation-based Voting
- Knowledge-extractable Voting (KEV)
The Benefits of DAO
Organizations are structured so that decision-making occurs from the “top-down,” from the executives to employees, customers, and fans. DAOs changed the game to “bottom-up,” i.e., from the fans, customers, employees, to the executives (even the executives must have been selected with the consent of all members). In addition to this, the DAO has many other benefits:
- No Central Authority — Decentralization brings about no central authority, not just for executives, as mentioned above, but also for the contributed funds. DAOs can have their funds as contributed by the members, but operating on a decentralized technology means everything about the entity is not stored on a central server, including smart contracts, voting records, funds, and acquired properties. Not only does this cut away intermediaries and governmental interference, but it also increases security.
- A Global Community —First, the DAO is decentralized. By using a device and an internet connection, people from all over the world can connect and have one goal and be motivated towards building a positive impact on society. Communities have never been this empowered before. There is power in a gathering of people who can contribute their resources without government interference and run their organization, club, etc., in a democratic manner from the comfort of their homes.
- Engagement and Participation —As practiced in America today, democracy gives each citizen the power to change and choose a leader, but this shouldn’t be limited to politics. DAOs return control to the people over how their resources are spent, what new projects are launched, who commits to them, etc. In addition to engaging members and bringing participation, each member feels empowered because, as humans, we feel important when we have a voice. A Decentralized Autonomous Organization gives everyone “a say” (a voice).
- Public Transparency — Since DAOs are built on a decentralized technology, the details of each DAO are public on the blockchain, as are the votes cast by members. One perceived disadvantage of some DAOs’ governance systems is that users with more tokens can have higher voting rights. Still, with public transparency, which makes each member’s voting history visible on the blockchain, members are compelled to act in the organization’s best interest. Thus, protecting one’s reputation serves as a moral incentive to discourage bad actors from acting against the community’s interests. It is important to note that there are different voting mechanisms in use and many more in development to improve the voting experience and protect the best interest of the DAO communities.
Different Types of DAO
DAOs offer a rare opportunity of giving power to the users and an opportunity to build communities, businesses, charity organizations, etc. Members collaborate resources and set rules that become autonomous once it is added to the written codes that govern the DAO or smart contract. As DAOs grew in popularity and developed, different types of DAOs were created. There are various DAOs for different purposes and objectives. While this article might not cover all the DAO projects in the crypto community, you should take a quick look at the most established and popular ones:
1. Investment and Venture DAOs
This type of DAO gathers funds through its members and invests in emerging companies agreed to by the DAO members. Restrictions could be to invest only in blockchain-related startups or a strict focus on dApps, etc. A particular DAO can be considered an owner or shareholder; indirectly, all DAO members own a piece of the business. For example, MetaCartel Ventures (MCV) DAO invests only in early-stage Decentralized Applications (dApps). BitDAO is another growing investment DAO with $1.1 Billion and hundreds of millions presently invested in the gaming industry. One more example is DAOVentures which focuses on different established assets that investors can invest in. It describes itself as a “DeFi ETF Index Fund for fund managers and crypto investors.”
2. Grant DAOs
In the traditional financial system, grants have been very effective in funding ideas or supporting entrepreneurial projects/startups. Grant DAOs seek to replicate the same in the crypto ecosystem, focusing on DeFi projects. A community of believers donates money to a grant pool. These funds are then strategically distributed to different innovative DeFi startups/projects according to the members’ votes.
Grants DAOs are closely related to the above Investment DAOs. Both focus on funding projects, but their methodologies differ. Investment DAO projects are funded by owning share(s), while this project uses the lender and borrower protocol. Aave is a popular example of a Grant DAO, a project with infrastructure enabling those with excess funds to lend funds to different DeFi projects. Funded projects are not limited to initiatives or ideas within the Aave ecosystem.
3. Protocol DAOs
They govern decentralized protocols, such as decentralized exchanges (DEX), borrow/lending applications, and some DApps projects. They are also known as automated market maker DAOs, which help users exchange tokens with well-established liquidity pools that reduce slippage during transactions.
Examples of Protocol DAOs include Near Protocol, MakerDAO, Yearn Finance, and Uniswap. MakerDAO is built on smart contracts with MKR governance tokens, enabling users to vote on new developments for the Maker Protocol. Similarly, Uniswap launched its governance token, UNI, which allows users to recommend changes in the exchange operation and governance, with the recent voting of 2022 that took place between December 14 – 21.
4. Philanthropy DAOs
This is all about public good, as the word “philanthropy” represents, only now it’s taken a notch higher with the use of blockchain. Previously, philanthropic acts were limited to individuals, billionaires, and organizations after settling their shareholders, investors, etc. With the help of a decentralized organization, it is now possible for thousands of people worldwide to join together and express kindness towards a cause or individual. First, these autonomous organizations look for public causes to commit funds to in the development of Web3. Still, on a larger scale, this goodness is extended across many areas, as seen in the UkraineDAO, which raised over $3 million worth of Ethereum to support Ukrainian soldiers.
5. Social DAOs
Social networking and global collaboration of people with common interests are made possible in the crypto space through Social DAOs. People of like minds in different careers and skills gather to create communities where they can benefit from each other, share opinions, and vote on issues. DAOs that facilitate these are also known as Creator DAOs, and some of these DAO-enabled communities have criteria that must be met before you become a member, e.g., Developer DAO brings Web3 developers together to share ideas and contribute to the future of Web3. To join this community, you must hold one genesis NFT unless you are a Pro or a lucky developer who receives a private invitation. Social DAOs or Creator DAOs thrive on their exclusivity by ensuring that not everyone has access to the community. Those that do not require owning an NFT require a certain number of tokens, such as Friends With Benefits ($FWB).
6. Media DAOs
Content creation is the supply chain for information distribution in the internet age; as user-generated content attracts attention, platforms such as Facebook, Twitter, Tiktok, and Youtube profit immensely and can advertise effortlessly. Beyond the profits, social media platforms have been significantly responsible for education, culture influencing, indoctrination, etc. Many people have been enlightened through information presented on traditional media such as CNN, CNBC, BBC, etc.
Media DAOs are taking power away from these centralized organizations and giving it to individuals belonging to Media DAO communities. In this way, user-generated content will still play a crucial role in educating users. Still, contributors, i.e., creators, will also earn a piece of the platform’s profits. These aren’t just media platforms with users creating any content they like; these are communities where users are at liberty to create content that contributes to the DAO community’s general goal. For example, BanklessDAO – is a decentralized community on a mission to educate and onboard one billion people into the Web3 world regarding financial transactions. BanklessDAO wants to create a community of 1 billion people that do not rely on the traditional financial system.
7. Collector DAOs
“If it is too expensive for me to own, then we can all own it together” – this is the psychology behind Collector DAOs. This type of DAOs enables the gathering of funds by its members to invest in blue chip NFT art and other collectibles. Ordinarily, each member might not be able to purchase these collectibles, but now each member can boast of ownership without breaking the bank. This shared ownership is according to the investment size of each member.
Some examples of Collector DAOs fall under Investment DAOs since the purpose of the community and treasury funds is to invest in NFTs. For example, PleasrDAO, a DAO community that purchased the Wu-Tang Clan album, Once Upon a Time in Shaolin. This purchase made PleasrDAO stay in the headlines for some days, attracting more community members. The community later spent $4 million to purchase the original Doge meme NFT. Other examples of Collector DAOs include Flamingo DAO, which collects extremely expensive NFTs, not forgetting Constitution DAO, which attempted to buy the United States constitution by raising $47 million worth of ETH in less than a week.
As the crypto community keeps expanding, DAOs keep growing, and different types of DAOs are being created. Some of the DAOs not explained above are:
- Service DAOs
- Entertainment DAOs
- Social Media DAOs
Decentralized Autonomous Organizations (DAOs) demonstrate the power of blockchain technology, which isn’t just revolutionizing financial transactions and Web3, but also transforming every aspect of our daily lives. DAO sends a silent message that if this technology can be used in organization management, and the democracy-like voting feature can give every user a voice in the development of projects, ideas, or organizations, then DAO can be introduced in the world democratic system in the future to make voting processes more transparent and records more permanent. When you look at DAO, you will know that the future of blockchain technology holds so much more for the world. This is just the beginning.
As Web3 technologies are based on decentralization, the solution presented by DAO is exciting, as it will make Web3 development more efficient. It is impressive to see Identity.com contributing to this future via identity management systems and as a member of the World Wide Web Consortium (W3C), the standards body for the World Wide Web.
The work of Identity.com as a future-oriented company is helping many businesses by giving their customers a hassle-free identity verification process. Identity.com is an open-source ecosystem providing access to on-chain and secure identity verification. Our solutions improve the user experience and reduce onboarding friction through reusable and interoperable Gateway Passes. Please refer to our docs for more info about how we can help you with identity verification and general KYC processes.