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What is DAO? Decentralised Autonomous Organisation Explained

What's a DAO and what are its advantages over traditional companies? Learn more about what DAOs really are, and their strengths and drawbacks.

Posted April 14, 2023

Graphic to illustrate decentralised autonomous organisation DAO alternate
Graphic to illustrate decentralised autonomous organisation DAO alternate

The success of our species depends on our ability to work as a group. With many brains working together as one, the one “boss” brain is often needed to coordinate the masses. This is the top-down model, a traditional organisational system that we’re all familiar with.

Decentralised Autonomous Organisations, or DAOs, take on a different approach — a bottom-up model, in which each community member has a voice, and some decision-making influence on the entire organisation or community. This model is not foreign; democratic states have been applying this model to elect leaders who, in theory, would act in the interest of the majority.

Let’s dive deeper into DAOs, how they work, and their strengths and drawbacks as an approach to organise and work.

What is a Decentralised Autonomous Organisation (DAO)?

DAO, or Decentralised Autonomous Organisation, is a community-driven and democratic organisation that operates without an official board of directors or legal entity that owns and directs it. Instead, the ownership and right to govern are entitled to those who own the governance token of that DAO. 

Graphic to illustrate decentralised autonomous organisation DAO

The governance token usually has monetary value, which can be bought and sold, and enables the holder to vote on community proposals.

This idea is not detached from reality. To use an analogy, governance tokens are like shares of a public company — a stakeholder who owns a large number of shares could become one of the majority shareholders, who could then wield significant influence on company decision-making. 

What is the difference between a public company and a DAO?

One major difference is that a DAO employs decentralised ledger technology (DLT), such as a blockchain, to enable complete strangers to collaborate online without trusting one another, and without trusting a legal intermediate to facilitate contractual agreements.

Instead of signing a contract which can be presented to a court of law, DAO members use smart contracts, which is computer code that executes crypto transactions automatically when specific conditions are met. For example, it’s possible for a DAO to set up a profit-sharing scheme through its governance tokens. 

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A smart contract can be programmed so that whenever the DAO Treasury has made the necessary transactions to cover its debts, any remaining funds can be disbursed proportionally to each token holder. 

Can an employee work at a DAO?

Another difference is that a DAO is not a recognised legal entity, unless it is in the token holders’ interest to register as a company in a nation state.

This means many rules governing the ownership and operations of companies don’t apply to DAOs. For example, anyone can buy governance tokens and vote on DAO proposals  — even employees, customers, suppliers, and competitors (for whatever reason). 

Graphic of two people shaking hands to illustrate decentralised autonomous organisation DAO

DAOs can ’employ’ freelancers or even long-term contractors by setting up a smart contract to pay them. The DAO (i.e. the token holders) will determine the rate for which the work is valued. This creates space where every cost, transaction, and bonuses are transparent, for better or worse.

Here is an interesting feature article from CoinDesk about what it’s like to work at a DAO.

Can DAOs generate profit?

Other than the way the organisation is structured, and how decision-making is done, a DAO should be no different from a regular for-profit or non-profit. 

A DAO can be as simple as a small hedge fund with 50 faceless members who message each other on Discord, and handle billions of dollars in trade volume.

Each trade parameters must be agreed upon by, say,  35 out of 50 members, and members can unanimously replace a member who does the DAO harm.

In fact, early DAOs consist of groups like these. Nowadays, DAOs can consist of niche artists, affluent groups of early NFT investors like Bored Ape Yacht Club, or even the highly successful DAI stablecoin issuer MakerDAO. 

What are the weaknesses of DAOs?

DAOs, like any other innovation in the decentralised space, are far from perfect. There are still inefficiencies to fix, and many important questions to answer. 

Firstly, there are many instances where a DAO still acts like any traditional company. Its power structure would resemble a hierarchical one where majority stakeholders (including the founders) have disproportionate governing power compared to the rest of the community. 

While this is a normal occurance seen as a company transitions to a DAO, some owners try to maintain power by setting the voting mechanism to be 1 voice = 1 token.

This creates a disadvantage to a mass of community members who have not yet owned a lot of governance tokens, and they may feel as if their voice is not being heard. 

Graphic to illustrate decentralised autonomous organisation DAO network

To overcome this, DAOs are starting to adopt voting strategies, such as Quadratic Voting, Conviction Voting, and Sociocracy to ensure fair and ethical governance for all token holders.

Secondly, with DAOs literally standing on their own as a non-legal (NOT illegal) entity, many worker protections that are guaranteed by national law must be applied on the basis of ethical responsibility, and not out of obligation, by the token holders.

There are still many DAOs that don’t uphold the same standards as a traditional company with human resource policies. Thus, working for a DAO, either as a freelancer or a long-term contractor, is still viewed as risky.

A more modern DAO could still collaborate with the DAO equivalent of a health insurance, for example. But if the DAO world remains separate from its counterpart in the “official and legal” world, there may be a need for a DAO-equivalent for everything. 

The takeaways

While the concept of a decentralised autonomous organisation has long existed since the rise of Ethereum in 2016, it is still a relatively new concept. That is, compared to the concept of an “organisation” that our world has grown used to.

This means, a lot of mistakes will be made with DAOs before it is recognised as one of the reliable ways to work, to organise, and make money.

Further reading: Explore more topics on all things crypto.

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Disclaimer: Information is current as at the date of publication. This is general information only and is not intended to be advice. Crypto is volatile, carries risk and the value can go up and down. Past performance is not an indicator of future returns. Please do your own research.

Last updated April 11, 2023

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