DAOs or decentralized autonomous organizations have become one of the most powerful and widespread applications of distributed ledger technologies.
Being an innovation based on blockchain technology, DAOs are transparent, auditable smart contracts intended for the purpose of coordinating groups of individuals, with a vested interest, in making governance decisions on a unified subject matter.
Typically consisting of parameters relating to proposing, voting, and implementing structural changes to an application’s codebase or operational system, DAOs can be built around any arbitrary purpose.
They are vehicles for the dissemination of power and the coordination of a distributed group of people around a common interest.
DAOs redefine the model of arriving at social consensus. Traditionally group structures existed in a hierarchical “master-slave” model where a central organizer(s) was tasked with execution and demanded to be trusted.
DAOs supersede the traditional model by providing three key functional benefits:
1) Displace hierarchical structures with horizontal ones.
This is where the D in DAO comes in. Power over organizations is no longer centralized, rather, it is proportionately distributed amongst all participating members. This minimization of reliance on a single entity results in a more efficient flow of processes and strengthens the relationship between involved parties. *It’s crucial to note that there is still some element of centralization risk present in DAOs, namely in the form of developer/deployer key controls.
2) Equal opportunity for access
By removing arbitrary hurdles of involvement present in legacy organizations (no government approval or degree required), DAOs create a more inclusive, equitable playing field for talent to be attracted to. While capital does play a role in power accrual, some models of governance reward activity over assets, allowing for less financially equipped people to earn their stake in an organization.
3) Value/Capital allocation
As an organization, a DAO must have something of value over which to govern. That is why, nearly every DAO will have a treasury (multisig wallet) that belongs to its community. With a hard-coded set of rules revolving around its utilization/management, individuals can influence how/what those funds are used for. This is evolutionary in terms of the depth of stakeholder involvement. Think about this from the standpoint of something like Apple. Shareholders may be entitled to owning a portion of the company and some of its earnings, but they have no say in how Apple uses its war chest of money. *There can be arguments made from both sides whether it is good or bad, but the point here is that with a DAO it is at least possible.
Different Types of DAOs:
DAOs can be seen as modern-day business structures in cyberspace (the internet). Whereas in the real world, a business can be set up as an LLC or INC; in cyberspace, businesses are set up as DAOs.
But the need for coordinating people spans far beyond just business.
Also called investment DAOs, these organizations pool capital from their members and act as pseudo-asset managers. Intuitively perfect for this function due to the inherent transparency of blockchain, as of April 2023, Venture DAOs alone are holding north of $3 Billion USD in their treasuries (not including the value of deployed capital).
Examples of Investment DAOs: BitDAO
This is the most widespread model for DAO governance. Used by nearly every relevant DEFI project, protocol DAOs exist as the backbone systems of decentralizing the ownership of software applications.
A mixture of talent agencies and freelance platforms, service DAOs exist for the purpose of finding providers skilled in their crafts and then connecting them with those in need of such services. Think of service DAOs as job marketplaces. Although, services can extend to unique on-chain functions such as smart contract audits.
Arriving on the scene after the rise of NFTs, collector DAOs are exactly what they sound like. Organizations that aggregate funds from their community members to purchase valuable on-chain objects. Those objects are then deposited into a vault owned by the DAO and in turn, provide exposure to its members.
GrantDAOs are for virtuous empowerment. Funds are drawn together and community members allocate the money for causes relating to helping bootstrap promising projects. This is a nuanced model that accrues its own value over vicariously by carefully fostering innovation towards protocols that it is itself involved in.
Everything from gaming and video streaming to art IP and advertisement networks this structure of DAOs is geared for creativity and content creation.
Popular model of organization for minimally financial causes, social DAOs are focused on the inclusivity of as wide an audience as possible, basically a glorified social media platform. Building one can be made possible through the use of traditional Web 2 social platforms and a multi-sig wallet with a few ETH.
Examples of Social DAOs: Friends With Benefits DAO
OS — Operating Systems
Operating systems are purpose-built protocols that enable other organizations with tooling to deploy their own DAOs. In order to uphold their integrity, these operating systems are also structured and run as DAOs.
DAO Governance Models:
Whenever a DAO is set up there must be some way to specify membership and inclusion; this is generally done through one of two ways: tokenization and/or contribution.
At the heart of a DAO exists its token. Commonly associated as being units of account and instruments of value/influence; in the case of DAOs, tokens represent proportional shares of the right to participate in voting.
However, organizations are well aware of the possible capital constraints that can exclude promising members from joining on the merits of being able to acquire tokens alone. Therefore, incentive system rewards for active participation have become a popular tool for token emission, allowing people without money a chance to earn their way into a DAO through their efforts.
Once tokens are acquired and users can participate in a DAO, there are three general models for their involvement:
This is the most desirable form of governance as it involves all users independently, directly participating in all activities. Once a consensus threshold level is reached, the smart contract will automatically execute the specifications without the need for a single authority to intervene.
A model that has long been utilized for consensus mechanisms in distributed systems, delegation is something vaguely similar to a representative democracy. Here, community members offload their responsibilities to other community members and trust them to make decisions on their behalf. Important note, tokens are not given to other members, only their weight equivalent in influence.
A model that slightly goes outside of the natural executional automata of smart contracts, multisig governance refers to the allocation of funds into the hands of the most financially apt and trusted participants of the community that reveal their identities publicly. So even if there are 10,000 voters passing a vote, they will not be able to influence the treasury without the involvement of the multisig entities. The main reasoning behind this formulation is to deter malicious anonymous entities from subverting the system for financial gains and the minimization of inadequate voting on behalf of the community. (If a DAO control $100 million USD and some proposal garners 6,000 of 10,000 votes to spend $90 million USD on minting random NFTs, it would be best if a smaller patch of clear-minded participants never execute on that.)
Legal Implications of DAOs
Being products of geo-neutral software systems, many assume that DAOs are not subject to the same regulatory frameworks as traditional businesses. That has not been completely the case.
Government organizations, namely the CFTC, have actually transferred the burden of legal implications onto the shoulders of the token holders and the developers possessing the private keys for conducting upgrades (example with bZx & Ooki). It is still unclear as to how things will pan out, but as it stands, decentralized autonomous organizations are slowly materializing into hybrid traditional organizations. Some authorities around the world have begun to acknowledge DAOs as real-world entities by providing legal frameworks to recognize DAOs as equivalent to LLCs.
In any case, the future will be digitized, we can sit in uncertainty trying to figure out how the legal system may integrate with DAOs, or we can understand these systems better and do something awesome with them and then have governments catch up to us retroactively.
Lets opt for the latter.
From the very first iteration of the “The DAO” which raised >$150 million USD and caused the infamous hard fork split of Ethereum in 2016, to today's recognition by nation-states as legitimate entities, the landscape of DAO is quickly evolving.
AI technologies have captured to fantasies of mankind, and their applications have found direct, meaningful ways to integrate with blockchain. Delphi Labs has put out a whitepaper in which it sees the synthesis of DAOs with AI (called BORGs) to advance upon the shortcoming in the Autonomy portion of existing DAOs by introducing artificial agents.
There is no doubt in my mind that DAOs as a sector/metric for the representation of growth in the digital economy will continue to flourish and empower people around the world with the freedom to pursue radical new ideas.
Stay interested. Stay involved. There is a renaissance taking place, and everybody who can rise above the noise of negativity is invited to participate.
We are no longer at the beginning, but damn, we are still so early.
See you all on the other side 🥂
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