Since the introduction of Bitcoin, decentralization remains one of the elements all crypto enthusiasts advocate for in the industry. It is a defining component offering much of the structural power previously reserved for so-called middlemen to ordinary users.
Hence, the idea of decentralization is now not something just reserved for politics, economics, or the law. Satoshi Nakamoto, Bitcoin’s mysterious creator, was largely successful in decentralizing money.
However, thanks to blockchain technology, their successors have decentralized many other things such as finance, social media, cloud storage, gaming, content creation, and more. DAOs (decentralized autonomous organizations) are another buzzword that’s been spurred on for several years.
Advocates of this novel invention believe it will redefine how any company structure will function as we enter the emerging web 3.0.
What is a DAO?
A decentralized autonomous organization is any blockchain-based, techno-democratic organization governed by coded rules rather than a recognized human-controlled central body. The diagram below is a simple illustration showing the structure of traditional and decentralized organizations.
The concept was first initiated in 2016 on Ethereum with a high-profile project named The DAO, a then-revolutionary investor-driven venture capital fund that was sadly hacked.
Nonetheless, Aragon, a platform allowing people to build their own DAOs, describes it best when it says that anything from ‘virtual worlds, subreddits to hacker collectives and fashion houses’ can become a DAO – it could even be a charity or a group of people pooling money to buy some expensive artwork.
So, this means a DAO will be based on a specific project where individual members collectively make crucial decisions (from the bottom-up) about its future, like feature upgrades, budget expenditures, governance power, treasury allocations, etc.
The rule enforcement in a DAO is handled by the blockchain through smart contracts. A smart contract is a self-executing contract that autonomously fulfills an operation when pre-defined conditions are met.
In simpler terms, it’s a way to digitally execute a set of instructions without any human verification. The smart contract is the backbone of a DAO and is created by the developer/s who test it extensively before launch.
This is because once it’s in place, it is said to be tamper-proof and can only be changed by group approval rather than a single entity. Moreover, the smart contract is also responsible for the treasury, the other critical component of a DAO.
Such an organization will understandably need to receive funding before launching. This comes in the form of governance tokens typically sold to investors, affording the holders voting rights. These are another defining feature of many DAOs.
The governance token is the most popular method for gaining membership and influencing key decisions in a DAO. This token represents ownership in any decentralized network where holders are afforded voting rights; the more of it one holds, the more voting power they have.
When the organization needs to vote on something, only those with the governance tokens can have a say, with more weight given to those with the most. Furthermore, a governance token can also provide some utility like compensating transaction fees.
The significance of DAOs
With DAOs, the days of C-suite and board of director-type roles are over. While such systems are, of course, not perfect, they do provide some notable benefits.
- Decentralization: This is the underlying advantage of any DAO. The structure of such networks is flat and democratized, unlikely conventional organizations where it’s hierarchical.
This means that voting changes are not required from a sole party, but rather all members participate. Such a dynamic solves the principal-agent dilemma, where the ‘agent’ makes decisions on behalf of the ‘principal,’ which may not always be in their best interest.
- Transparency: Most blockchains are publicly viewable, meaning any activity in a DAO is clear. In a non-decentralized setting, everything is more private, resulting in a lack of transparency.
- Autonomy: An autonomous system drastically reduces overhead costs and human error, saving massive amounts of time.
Without the autonomy offered by smart contracts, many operations would need manual handling, which is slower, centrally controlled, and susceptible to mistakes and manipulation.
Furthermore, such a feature allows most operations to happen trustlessly, requiring very little human verification.
- Better record-keeping: The purpose of any blockchain is to be an electronically distributed ledger of data, emphasizing the immutable keeping of such information.
DAOs are much more advanced in record-keeping than traditional bodies where lists of activities and transactions may be recorded manually, which, again, is slower, prone to errors and data loss.
Examples of some known DAOs
Here, we’ll look at examples of well-known DAOs in the industry.
Launched in November 2017, Aave (previously ETHLend) is the first crypto-based lending and borrowing service. It is one of the most popular DeFi (decentralized finance) networks where people can borrow various coins and lenders can earn above-average interest rates.
DAOs and governance tokens are synonymous with DeFi services, as many other projects like Maker, Curve, Uniswap, 1inch, and Compound have similar structures. The AAVE governance coin primarily allows holders to participate in Aave’s grants program to fund ideas suggested by the community.
Believe it or not, a DAO (now defunct) was created in November 2021 to buy an original copy of the United States Constitution. The ConstitutionDAO raised $47 million in ETH (which was turned into a token aptly named PEOPLE) but sadly lost out in a Sotheby’s auction.
Fortunately, the group managed to refund all holders, and all those in possession of PEOPLE can do with it whatever they please.
Launched in February 2020, Decentraland is one of the most well-known crypto-based virtual worlds or metaverses. Decentraland is a platform for creating, exploring, and trading the most immersive land pieces like villages, fashion districts, mazes, casinos, galleries, and more, which users tokenize into NFTs (non-fungible tokens).
True to its name of decentralization, the project has a DAO. Holders of any virtual property (using the LAND token) can have a say in several policies relating to how the world behaves, auctions, content moderation, etc.
Many projects nowadays require developers or creators to collaborate with internet strangers. Understandably so, it’s difficult to trust anyone you’ve never physically met.
Fortunately, thanks to DAOs, confidence is not an issue, opening up a previously unimaginable world of global collaboration; think politics, venture capital, social media, trust funds, entertainment, and the list goes on.
Ultimately, you should pay more attention to this invention as it will undoubtedly shake up the worlds of business, investment, and creative industries beyond cryptocurrencies.