DAO – What You Need to Know About Decentralized Autonomous Organizations

In the era of Web 3.0 and blockchain, a new concept is rapidly gaining prominence in the cryptocurrency community: Decentralized Autonomous Organizations, or DAOs. From creating new ways to manage projects to democratizing financial decisions, DAOs are changing the way people interact with blockchain technology and DeFi.

What Is a DAO and Why Is It Important?

A DAO is a new form of organization built on smart contracts and blockchain. Unlike traditional companies with clear management structures, DAOs operate entirely based on community participation and majority voting.

The closest real-world analogy is a venture capital fund – but instead of having a professional asset manager, all members have an equal voice. Billionaire Mark Cuban described a DAO as “the optimal combination of capitalism and progressivism,” where technology completely replaces human agents and eliminates risks from errors or fraud.

The operation mechanism of a DAO is entirely based on source code and smart contracts. All decisions, from fund expenditures to development directions, are voted on by the community. Holders of governance tokens have the right to propose and vote on important proposals, ensuring absolute transparency throughout the process.

Different Types of DAOs That Exist

Protocol DAOs – The Power of DeFi Platforms

Protocol DAOs are considered the largest group among decentralized autonomous organizations. These DAOs are behind leading DeFi protocols, powering decentralized exchanges, lending platforms, and other applications. Using a decentralized model, protocol DAOs ensure that no single entity has absolute control; instead, power is distributed evenly across the community.

Venture DAOs – Democratizing Early Investment

As the second most popular DAO group, (Venture DAOs) pool capital from thousands of individuals to invest in promising blockchain projects. Unlike traditional investment funds, project selection decisions are not made by a team of experts but are determined by community voting. This opens early-stage investment opportunities to retail investors – something nearly impossible in traditional finance.

Grant DAOs – Supporting Innovation

Similar to venture DAOs but with a different purpose, grant DAOs gather community funds to finance innovative DeFi projects. These DAOs operate with greater flexibility, allowing the community to thoroughly vet projects before allocating funds.

Social DAOs and Collectible DAOs

Social DAOs provide a platform for individuals with shared interests to connect. The most notable example is Bored Ape Yacht Club, where only BAYC NFT owners can participate. Collectible DAOs, on the other hand, enable the community to pool resources to acquire high-value digital assets like NFTs, helping small investors own a share of multi-billion-dollar works.

Real-World Examples of Successful DAOs

Uniswap (UNI) – Leading Trading Protocol

Uniswap is the oldest and largest decentralized exchange on Ethereum. In September 2020, the project issued the UNI token and granted the community control over all operations. Out of a total of 1 billion UNI tokens, 60% were distributed to the community, 21.266% to the development team, 18.044% to investors, and 0.69% to advisors.

UNI holders can not only vote on governance proposals but also delegate their tokens to others. Recently, the Uniswap community voted to integrate the exchange into the Polygon ecosystem, helping it escape high gas fees on Ethereum Layer 1.

Aave (AAVE) – Famous Lending Protocol

Aave is one of the DeFi protocols pioneering flash loans – uncollateralized loans that can be repaid within a single transaction block. In December 2020, the project issued 16 million AAVE tokens, distributing 13 million to the community and reserving 3 million.

Notably, Aave introduced the concept of “Guardians” – a group of elected users with the authority to halt proposals that could harm the ecosystem. This is a subtle way to protect the DAO from mistakes that simple voting might not prevent.

Decentraland (MANA) – DAO in the Metaverse

Decentraland DAO controls all smart contracts and assets within this virtual world, including digital land (LAND), collections, and marketplaces. Most MANA tokens are held in the DAO’s treasury, allowing the community to maintain full autonomy in managing the metaverse.

OpenDAO (SOS) – NFT Community DAO

OpenDAO launched at the end of 2021 with a unique airdrop campaign: distributing free SOS tokens to anyone who traded on OpenSea. Out of a total of 100 trillion SOS tokens, 50% were allocated for the airdrop, 20% for the DAO fund, 20% for staking campaigns, and 10% for liquidity providers. The DAO aims to use the funds to compensate victims of scams on the NFT marketplace and support artists.

ConstitutionDAO (PEOPLE) – A Bold Experiment

ConstitutionDAO gained almost instant fame upon its formation in November 2021. The project raised nearly $47 million on Ethereum with a bold goal: to buy the original U.S. Constitution at a Sotheby’s auction. Although it failed to meet its main objective, the project issued the PEOPLE token, and the crypto community continued to hold this token, giving it real value despite its meme origins.

Practical Benefits of DAOs

Democratizing True Ownership

DAOs eliminate barriers between decisions and those affected by them. Every community member has an equal voice in shaping the organization’s future, creating a strong sense of ownership and responsibility.

Absolute Transparency

All transactions, proposals, and voting results are recorded on the blockchain and can be audited by anyone. There is no room for concealment or manipulation in the shadows.

Enhanced Security Through Cryptography

Since DAOs operate via smart contracts, all rules and transactions are secured with cryptography and are immutable. This makes illegal interference nearly impossible.

Removing Investment Barriers

Traditionally, only wealthy and licensed investors could access attractive investment opportunities. DAOs have broken down this barrier, allowing anyone with enough funds to buy tokens to participate in early-stage investment opportunities.

Risk Diversification

Unlike traditional investment funds, where a bad decision can wipe out the entire fund, DAOs spread risk across thousands of members. If an investment fails, losses are shared rather than concentrated in a small group.

Challenges Facing DAOs

Regulatory Issues

The decentralized nature of DAOs creates legal challenges: who is responsible if problems arise? Regulators have not yet clearly defined how to oversee DAOs, which can pose significant risks to members.

Actual Power Concentration

Although theory advocates for full decentralization, in practice, most early-stage DAOs have most control concentrated in the hands of core developers. When enough members buy governance tokens, the “democratic” structure is mostly just a formality.

Low Voting Turnout in Large DAOs

As DAOs grow to tens of thousands of members, reaching consensus becomes more difficult. Some DAOs set minimum token holdings to participate in voting, but this tends to concentrate power among the largest token holders.

Poor Code Can Destroy Everything

A bug in smart contracts or poor development can lead to the complete collapse of a DAO. Some DAOs have experienced such disasters, causing the community to lose funds due to misplaced trust.

How to Join a DAO

If You Want to Join an Existing DAO

Start by finding a DAO aligned with your goals or interests. Join their Discord community to learn more about the project before investing. Then, buy some governance tokens to become part of the community, and you will be able to participate in voting on proposals.

If You Want to Create a New DAO

Define the purpose of your DAO, find interested collaborators, and establish a ownership structure by creating and distributing tokens. Set up voting procedures and reward mechanisms for contributors.

If You Want to Invest in DAO Tokens

Some DAO tokens have become attractive digital assets on the market. You can purchase these tokens on cryptocurrency exchanges to indirectly participate in the success of the DAO without managing or voting.

The Future of DAOs

With the rise of Web 3.0 and increased awareness of decentralized technology, the demand for decentralized autonomous organizations will continue to grow. End users will increasingly seek systems with high accountability and true decentralization.

Although DAOs still face unresolved issues, developers are working to create better solutions. The blockchain community’s responsibility is to learn from failed DAOs, avoid past mistakes, and build more sustainable DAO ecosystems for the future.