What are DAOs? Understanding Decentralized Autonomous Organizations

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When cryptocurrencies and blockchain technology emerged on the scene over a decade ago, they set off a cascade of new ideas and concepts. New technology has a way of opening doors — even if we don’t know exactly what those doors are or where they lead at first.

One door that was opened because of Web3 technology came in the form of Decentralized Autonomous Organizations — also known as DAOs. DAOs are collectively owned blockchain-based organizations composed of members that share common interests and a bank account or crypto wallet.

DAOs are in the early stages of their evolution, but they are already bringing people from around the world together to form new ways organizing, governing, and community building. In fact, many people in the space believe DAOs have the most potential of all when it comes to Web3 ideas.

So, what exactly are DAOs and how did we get here? Let’s take a closer look.

What is a DAO?

At its core, a DAO is a new management structure that uses blockchain technology to automate some aspects of transaction processing and voting.

DAOs can consist of groups of people anywhere in the world with an internet connection coming together to form blockchain-based communities. Through non-fungible tokens, blockchain tech, and cryptocurrencies, DAOs enable people to organize and share interests and funds in a safe and trustless manner.

Blockchains — or immutable digitalized ledgers distributed across a global network of computer systems — allow for automated trustless transactions and value exchanges to occur via smart contracts. This lets DAOs write the rules of their community into code, also known as a smart contract. These rules cannot be changed or altered unless the community votes to do so.

Unlike most companies that need to be backed by legal status, DAOS can function on their own as a general partnership. Most importantly, DAOs do not need to involve third parties in financial transactions.

Here are some other important qualities of DAOs:

  • DAOs are programmable organizations represented by rules encoded as a transparent computer program.
  • They are controlled by members and not centrally influenced. No managers or bosses are needed, removing the need for bureaucracy and typical hierarchal corporate structure.
  • All the rules of a DAO are embedded in a smart contract which is public and transparent.
  • DAOs are founded through DAO tokens, which allow members to vote and allocate funds towards projects.
  • DAOs are fully transparent and global, as opposed to traditional companies that are private and only people within the organization know what’s going on.

Ultimately, DAOs create more efficient, democratic, and transparent online communities. Some people believe DAOs could replace traditional companies, change how we govern, invest, socialize, and much more. But before we look at what’s happening with DAOs right now, let’s briefly review their history.

A Brief History of DAOs

The concept for DAOs can be linked back to the early cryptocurrency and blockchain movement. In 2013, the founder of BitShares, Daniel Larimer, proposed the first idea of a Decentralized Autonomous Corporation (DAC). According to Larimer, the corporation would run on a blockchain-based smart contract and be autonomous and democratic.

About a year later, the co-founder of Ethereum, Vitalik Buterin, presented the concept of the DAO in a whitepaper called “A Next-Generation Smart Contract and Decentralized Application Platform.” In the paper, Buterin explained a DAO that could own and manage assets for its members, as well as have a transparent voting system.

Then in April 2016, the first DAO was launched on Ethereum. It was called “The DAO,” and at first it was a huge success — raising over $150 million in Ether (ETH) from investors to become one of the biggest crowdfunding campaigns ever. But in June 2016, The DAO was hacked for over $50 million worth of ETH, eventually causing a hard fork of the Ethereum blockchain and some obvious FUD for DAOs.

However, even after the hack, DAOs continued to gain momentum. New projects like Aragon launched in 2017, and now DAOs have expanded into all sorts of areas like charity, Decentralized Finance (DeFi), investing, online communities, and more. Also, the security of DAOs has improved since the hack in 2016, and more people are confident in the future of the movement.

The Essence of the DAO

The spirit of Decentralized Autonomous Organizations is summed up in its name, which boils down to three principles. Those principles include:

  1. Decentralization. Meaning no central authority of decision-making body can control the organization. DAOS are made up of their members and by nature democratic.
  2. Autonomous. This means they are designed to function automatically and independently. The DAO does not need human oversight or intervention. Smart contracts and blockchain technology allow for self-executing contracts, enabling a high degree of efficiency and transparency in the operation of the organization.
  3. Community-driven. This means DAOs are managed by communities of like-minded individuals with common goals and purposes. The community uses DAO tokens to vote and operate the organization as they work towards common goals.

These three qualities form the ethos and core believes of DAOs. Now let’s take a look at some of their benefits.

What are the benefits of DAOs?

DAOs are democratic, autonomous organizations that operate efficiently and transparently without the need for a central authority. For many people, that’s a revolutionary concept that could change the world.

But regardless of what you believe, there’s no doubt that DAOs have some benefits over traditional companies and organizations. Listed below are are some of the benefits of decentralized autonomous organizations:

  • Transparent and auditable
  • Easy to spot misappropriation of funds
  • Anyone around the world can participate
  • Low-barrier of entry
  • A DAO is easier to create than a typical corporate structure
  • Governed by code, making it more efficient

In the future, DAOs could shake up traditional ways of governing and doing business, But for that to happen, certain things will have to take place in the Web3 ecosystem.

What is the potential of DAOs?

For DAOs to change the world the way some people in Web3 hope they will, some developments must take place. Here’s a look at the ways that DAOs could increase their reach around the world:

  • Increased adoption. As blockchain technology and crypto continue to mature, it’s more like people adopt DAOs for decentralized projects and companies where community input is key.
  • Increased complexity. As DAOs evolve, they will become more sophisticated and allow for advanced operational structures and decision-making mechanisms.
  • DAO to DAO interactions. The more DAOs that come into existence, the more likely there will be interaction among them, potentially increasing value and usability for members.
  • Better Web3 Integration. As Web3 evolves, DAOs will likely be more integrated and can become more powerful and important.
  • Regulatory clarity. DAOs still exist in a legal gray area. If regulations become clearer, more adoption could happen.

DAOs can be used for almost anything — it’s up to people’s imagination. One DAO, for example, brought together a group of people to try to purchase The United States Constitution — the ConstitutionDAO. Others have raised money for charities or pulled their member’s collective wisdom to make smart investments.

Most Popular Types of DAOs

Although we’re still in the early stages of DAOs, several types have already developed and risen in popularity. Listed below are some of the most popular types of DAOs:

  • Investor DAOs. Focused on raising and investing capital into different assets on behalf of its members. DAOs can invest in crypto, stocks, real estate, NFTs, the metaverse, collectibles, and more.
  • Protocol DAO. This type of DAO governs a decentralized protocol, such as a borrow/lending application, a decentralized exchange, and other applications using a smart contract. They are sometimes referred to as automated market maker DAOs. The first protocol DAO was Maker DAO (2015). Uniswap is also a protocol DAO.
  • Philanthropy DAO. This type of DAO aims to raise money and help with philanthropic causes around the world. The UkraineDAO raised over $3 million in ETH to support Ukraine in under a week. Another philanthropy DAO is Big Green DAO, which is tied to a charity that teaches people how to grow food.
  • Social or Creator DAOs. These are aimed at bringing together like-minded individuals like builders, creatives, and artists. Usually there is a barrier to entry for the community, such as owning a number of tokens, NFTs, or being invited. Friends with Benefits is a popular social DAO.
  • Collector DAOs. The purpose of this type of DAO is to pool funds together so that the community can invest treasury funds into blue chip NFT art or other collectibles. FlamingoDAO is one of the most successful collector DAOs.
  • Grant DAOs. Often these are a charitable extension of a larger project that can help to facilitate non-profit donations and deploy capital assets throughout the Web3 ecosystem. AAVE Grants DAO and MetaCartel.

There are also media DAOs, investment and venture DAOs, subDAOs, and more. The possibilities for DAOs are limitless.

The Top DAOs in Web3

These days, there are hundreds, if not thousands of DAOs in the world, and in the coming months and years there will likely be many more. But at Rarity Sniper, we have some favorites. Here is a list of some of the top DAOs in Web3:

  • Decentraland DAO
  • Friends with Benefits DAO.
  • Maker DAO
  • Uniswap
  • UnicornDAO
  • MirrorDAO
  • UkraineDAO
  • EarthFundDAO
  • Bankless DAO
  • Decrypto DAO
  • Flamingo DAO

These are some of the DAOs on our radar now, but as new DAOs are born everyday, we expect our list to evolve over time.

Final Thoughts on DAOs

DAOs look like they have a bright future in Web3, but since it’s still early in the game, it’s difficult to see exactly where they’re headed or predict when the movement will take off and become more mainstream.

At Rarity Sniper, we believe DAOs have enormous potential to reshape the world, and we’re always reading up on the latest DAO news to see what’s happening in the space. For similar articles about Web3 and NFT technology, check out some of our latest pieces: