A primer on DAO (Decentralized Autonomous Organization)

A primer on DAO (Decentralized Autonomous Organization)

Traditional organizations have a centralized governing structure, meaning there is a central leadership that makes all the decisions required to run the organization.

For example,

  1. A government is ruled by a president or a prime minister.
  2. Companies are governed by CEOs.
  3. A school is governed by a principal.

What is a DAO?

DAO is short for Decentralized Autonomous Organization and is a type of organization structure that is popular with web3 startups. The core idea behind a DAO is the lack of any central leadership.

  1. All decisions are made by all the members of the governance team.
  2. DAOs are backed by a governance token and all the holders of the token automatically become a part of the governance team.
  3. The decisions made are saved in a computer program within the blockchain. This program is called the smart contract and it is responsible for enforcing the decisions made.

How is the DAO set up?

The blockchain technology powers the DAO and helps set up an organization with relative ease. The following are 2 major steps involved in setting up a DAO for a startup:

Setting up smart contracts: All the rules that govern a DAO are written into smart contracts on the blockchain. At the beginning a set of rules are coded as smart contracts.

Once the DAO is set up, new rules will need to be brought to a vote for adoption. Any new rules that have been voted in by the DAO members will be coded into the smart contract for enforcement.

Token sale: DAOs will create a token sale to raise funds for the project or startup. The tokens are backed by the blockchain and will serve as the governance token for the DAO.

Aragon DAO platform

Aragon is an easy to use DAO platform that can be used to create and govern a DAO. It is used by virtual worlds, DeFi protocols and other web3 communities to launch, raise and govern their respective DAOs. The platform features services for DAO launch, governance, voting  and dispute resolution.

Aragon platform stats as of 2022:

  1. $190 Million in treasury
  2. 1900 DAOs built on Aragon
  3. 60,000+ members in Aragon powered DAOs
  4. $500 Million+ total value locked

Benefits of a DAO

DAOs are popular with web3 startups and offer several benefits over a traditional organization. Their governance mechanisms are evolving and getting more sophisticated as more startups successfully adopt the model.

Here are some of the key benefits of a DAO:

Decentralized: A DAO is a decentralized organization where the power of governance is distributed to all its members. Membership is given to all the holders of the DAO's governance token and voting rights are proportional to the number of tokens held by a member.

Any member can bring a proposal to the DAO and all members will vote on the proposal to decide the outcome and possible adoption.

Cost: The bulk of the governance and rules to run the startup is coded in a smart contract. This is very cost effective and efficient compared to traditional organizations where different departments and personnel are required to enforce the rules of the organization.

Community Driven: A proposal to add or change the governance rules can be brought by any member of the DAO. This opens up innovative and fresh possibilities for an organization compared to the traditional model where all new proposals and rules are driven by the top leadership.

Trustless: Traditional organizations have well defined roles and hierarchies to make sure that there exists a system that offers a trusted environment for the organization. Any breach of trust will be identified and penalized. Elaborate personnel, processes and rules need to be set up to create the organization.

One of the main advantages of a smart contract enabled blockchain is its ability to function in a trustless state. The smart contracts do the job of enforcing the rules and maintaining the trust, hence DAOs are referred to as trustless organizations.

Disadvantages of a DAO

While DAOs offer benefits to certain types of organizations, they are still in the early stages and have some issues that need to be addressed.

Here are some of the disadvantages of a DAO:

Security: Digital smart contracts form the core of a DAO's functioning and there are security risks associated with the smart contracts.

Prioritizing proposals: A DAO's rules can be modified or additional rules can be added through proposals submitted by the members of the DAO. Since a proposal can be submitted by any member, prioritizing proposals can be a challenge and hence there can be costly delays in addressing important proposals.

Decentraland: Decentraland is a virtual universe owned by its users. A DAO is a decentralized organization where the power of governance is distributed to all its members. Membership is given to all the holders of the DAO's governance token and voting rights are proportional to the number of tokens held by a member.

Decentraland is governed by a DAO that decides how the land is governed and developed.  The DAO owns the smart contracts and assets that make up Decentraland – the LAND Contract, the Estates Contract, Wearables, Content Servers and the Marketplace. It also owns a significant amount of the  $MANA token that will be used to subsidize various operations and initiatives.

PieDAO: PieDAO is a decentralized asset management DAO on the Ethereum network. Their stated mission is to bring automated wealth creation opportunities to anyone with an internet connection.

A decentralized group of asset managers hand pick assets. The assets then make money through active yield-generating strategies like staking, lending, yield-farming. The entire yield generation process is completely automated.