DAO stands for decentralized autonomous organization. DAO (pronounced “dow”) is a new type of organization structure that uses blockchain technology. It is often referred to as a crypto co-op or a kind of financial flash mob. You could also refer to it as a “financial Flash Mob” or “group chat with a banking account.”
DAOs can be described as groups of people who form to accomplish a common goal, such as investing in start-ups or managing stablecoins. ConsenSys, a Blockchain organization, defines DAOs “governing bodies that supervise the allocation of resources related to projects they are associated with, and are also charged with ensuring long-term success of the project they support.”
A DAO is managed by its members once it has been formed. This can often be done through the use crypto tokens. Many tokens come with certain rights, such as the ability manage a common Treasury or to vote on certain decisions.
It sounds a bit vague. Could you please give me an example?
Sure. It is. It’s unlikely to be the best example, as the group was disbanded following the loss of the auction.
PleasrDAO is a group made up of entrepreneurs, investors, and crypto artists that was created to bid on the works of high-profile digital artists. The group spent $5.4million on an NFT associated with Edward Snowden and also purchased the Wu-Tang Clan album, “Once Upon a Time In Shaolin” for 4 million.
These works were acquired by the DAO members. They can then manage them as they wish. They have the option to vote for them to be displayed, to break them up into 1,000 NFTs, and then sell them to the public or to keep them in a physical vault. All of these decisions in a traditional DAO model would be made “on the chain” through token-based voting.
It is understandable why people may want to pool their funds to purchase stuff. Why is a new crypto-based governance system necessary? They could just use any other crowdfunding site.
They could. A DAO may be better off using a crowdfunding platform such as Kickstarter in certain cases. Users who use crypto to raise large amounts can have to pay exorbitant transaction charges. For example, ConstitutionDAO raised $47 Million and its users paid $1.2 million in fees for the Ethereum network.
Ouch. Do you think there are any other disadvantages to DAOs as well?
Decentralized, blockchain-based governance can be more complicated than it appears for some DAOs. The first DAO, simply known as The DAO, raised over $150 million to create a type of crowdfunded investment company. crashed amid a host legal, governance, and security issues. Similar problems have plagued DAOs ever since.
DAOs could also be in legal trouble if regulators declare that tokens they issue as securities. This would require them to register the same way as companies selling stocks and bonds. In 2017, The Securities and Exchange Commission determined that DAO Tokens (the native token of the DAO) were securities and should have been subjected to securities law.
Regulators and law enforcement agencies are also concerned about the recent boom in DAOs. They fear that some DAOs could be fraud fronts.
“In some cases crypto investors and regulators claim that the ventures amount at least to Ponzi schemes intended only to boost the value of digital tokens they are selling,” Eric Lipton, Ephrat Livni, and I wrote in a recent piece on some of the issues facing DAOs.
Some crypto enthusiasts have argued that DAOs aren’t yet able to do more than allocate cryptocurrency to crypto-related project.
Grace Rebecca Rachmany is a DAO leader consultant (yes, they do exist) and wrote in a 2020 Article for CoinDesk that “DAO technologists failed to create compelling tech for the problems society is facing.”
Why would someone join a DAO?
It’s still a little bit unexplored and new. DAOs are still in the dial-up stage, but proponents claim that they will become more powerful in the coming years.
If you ask believers, they will tell you that DAOs can do a few more things than traditional organizations.
* DAOs are theoretically more transparent than traditional organisations, as the group’s most important decisions are made “on-chain” using governance tokens. Votes that appear on the permanent Blockchain ledger also help to make these decisions.
* DAOs are theoretically more democratic than traditional organisations because everyone can vote on group decisions and not only boards or executives.
* DAOs are theoretically more agile and quick-moving than traditional businesses, as they are often project-specific. You can also set them up quickly and shut them down quickly than traditional start-ups.
Why do you say “in theory” so often?
There are few DAO success stories and many of the benefits of DAOs are yet to be proven. Some people are skeptical that DAOs can help with more complicated business decisions. Others think they are little more than thinly disguised pyramid schemes.
DAOs have been accused of being outright rug pulls. AnubisDAO is an example. It’s a DeFi project with a dog theme. The creator has been accused of taking $60 million from investors.
Additionally, leaderless corporate structures don’t really work outside crypto. Most of the successful DAOs today are “protocol DAOs”, which means they are designed to manage infrastructure-type crypto projects. The DAO model is not applicable to regular noncrypto businesses.
I am not a crypto-investor or blockchain engineer. I am just a normal person who has a normal job and lives a normal lifestyle. Why should I care so much about DAOs
DAOs are not something most people encounter on a daily basis. However, I believe it is important to understand the problems technologists are trying solve. Many well-funded technologists are searching for ways to transform all types of organizations, including those you may be a part of or care deeply about, into DAOs.
Some have even predictedthat DAOs would become a political force, allowing a loose, unregulated crypto-PAC to swarm campaigns and lobbying efforts with funds and organizing support.
A DAO, in its simplest form, is a way for people to organize money and focus their energy on a project. It could be buying the Constitution, creating a new social network or even influencing elections. This is a huge, transformative idea and you should pay attention to it as it develops.
What are some of the most exciting uses for DAOs at present?
Crypto enthusiasts are exploring “social DAOs,” a type of community-owned social club where you must pay (in tokens) to be able to join.
Friends with Benefits is the most well-known social DAO. It has thousands of members, and recently raised $10M from investors including Andreessen Horowitz.
Friends With Benefits is a decentralized Soho House that can be accessed online. It has been likened to an “online country club” and a “decentralized Soho House.” To get into the club, members must purchase a set number of $FWB tokens. A full membership costs 75 $FWB tokens (or about $4,000.). After they are accepted, they will be invited to the Discord chat room, where they can discuss crypto, trade job leads, investing tips, as well as hold town halls about the group’s future plans. Members organize meet-ups and host members-only parties at major crypto conferences.
I thought crypto was about decentralizing power, leveling the playing fields. It sounds like you are paying $4,000 to join an exclusive club. What’s the deal?
It’s a great question. It was a good question that I asked Alex Zhang, one the leaders of Friends With Benefits. He replied:
In most cases, and especially with FWB, the initial token price was low. However, it grew over time as the perceived value of being a member increased. If necessary or desired, anyone can sell their tokens at any time. It is important that DAOs continue to offer onboarding opportunities to people who cannot afford tokens. We pay FWB tokens for writers, curators and designers as well as event volunteers and any other roles that help our mission. This allows these contributors to gain ownership of the community.
It sounds like DAOs can be complicated and messy. Some are even outright scams. And, it might not be affordable to join the ones that do something worthwhile. What’s the best part about DAOs? Why are DAOs so ineffective? And why do investors fund them?
DAOs, like any other crypto project, have attracted people from all walks of life: speculative gambling and trend-chasing, as well as utopian true belief.
Collective ownership is a common theme among the most serious DAO advocates. DAO supporters believe, like Web3 believers, that the next phase of internet technology will require a completely new ownership model. They argue that DAOs could be used to create new organizations and platforms that are owned and managed by users.
For example, you could create a DAO-governed social networking where users could vote on the removal of certain types of inflamatory posts or award tokens for valuable and enlightening content. A DAO-ified Amazon Web Services version could be run as a co-op with members contributing to new features and keeping the network humming.
Chris Dixon is a crypto investor and venture capitalist. He recently stated that DAOs can help “correct the internet to its original vision: power and money being pushed to the edges and networks growing and flourishing together. A level playing field for talent around the globe, a creative middle class and a diverse and interesting place.
It could, however, become an expensive and unruly mess as DAOs face the challenges of coordinating any group of people towards a common goal, regardless if crypto is involved.