DAO

DAOs: What are They & Why Should You Pay Attention?

Disclaimer This article is for general information purposes only and isn’t intended to be financial product advice. You should always obtain your own independent advice before making any financial decisions. The Chainsaw and its contributors aren’t liable for any decisions based on this content.

DAOs: If you’re an avid follower of cryptocurrency, ‘decentralisation’ is one word you see mentioned repeatedly. If you’re unfamiliar with crypto and Web3, think of decentralisation as a self-governing, no-executive leadership system where all participants call the shots. Although the analogy is simplistic, it explains the concept of decentralised autonomous organisations (DAOs)—pronounced “dow”—where community, decentralisation, and the blockchain converge in corporate governance.

In 2021, American billionaire entrepreneur Mark Cuban labeled DAOs as the “ultimate combination of capitalism and progressivism”. During the 2021 MCON conference in Denver, contributors described DAOs as an “even bigger thing.” However, regardless of DAO popularity amongst crypto enthusiasts, its operations aren’t mainstream yet. 

In this article, you’ll learn what DAOs represent and why you should pay attention to them.

What are decentralised autonomous organisations (DAOs)?

Devoted crypto investor Cooper Turley loosely described DAOs as an “internet community with a shared bank account.” From an organisational perspective, the description is accurate — a DAO is a community-driven initiative where members have control over organisation operations. Like traditional organisations, DAOs are bound by laws. But unlike centralised structures, the laws are written on software code.  

DAOs first emerged in the 1990s but became fully functional in 2016 when select members of the Ethereum community created The DAO (also known as Genesis DAO). The DAO raised 12.7 million ETH (or US$4.4 billion) as it sought to create a democratic, leaderless digital community. However, the success was short-lived as threat actors stole a significant portion of the cash through a loophole in the smart contract. In 2021, DAO treasuries increased 40 times between January and September 2021. 

Despite the setback, the DAO industry and infrastructure continue to grow, increasing 40 times between January and September 2021, according to DeepDAO. DAO evolution has also spread beyond Ethereum, with many DAOs today powered by crypto and non-fungible tokens (NFTs). A good example is PleasrDAO, which collects and invests in NFTs.

Now we know what DAOs are. But how exactly do they work, anyway? Let’s take a quick look.

How DAOs work 

“How do DAO members make decisions?” The answer is the blockchain, which powers the ‘autonomous’ aspect of DAO businesses. Blockchain technology is a distributed ledger that records digital transactions using cryptographic hashing. Smart contracts, the engine behind DAO operations, run on blockchain-powered platforms. 

Smart contracts are a form of trustless technology that automates agreements. In this sense, smart contracts are like vending machines where you either get a drink or a cash refund if drinks are unavailable. Like vending machines, smart contracts automate digital transactions based on predefined agreements (or “if/when…then…” statements) without centralised authorities or third parties such as banks. But unlike vending machines, the consensus is written as software code on the blockchain, which enables automation when you trigger the predefined conditions.

“But how do smart contracts know about off-chain activities?”. Put differently, if a smart contract makes reference to something that happens elsewhere, how does it know what the ‘truth’ is? This is where oracles help. Blockchain oracles are external services (aka blockchain APIs) that send authenticated data to smart contracts. When community members set off any consensus, the oracle sends the data to smart contracts to generate a response. 

Use cases of DAOs   

When DAOs launched in 2016, they offered a different approach to the conventional hierarchical and centralised management structure. But the growth of decentralisation technology platforms expanded the applications of DAOs.  In this section, we’ll examine some of the real use cases of DAOs. 

Crowdfunding and VC funding

Former Twitter founder and CEO Jack Dorsey reignited the debate about venture capital (VC) and business ownership. “You don’t own ‘Web3.’ The VCs and their LPs do… it’s ultimately a centralised entity with a different label,” Jack tweeted in December 2021.

While Jack’s comment on centralisation is open to debate, VCs generally have a stronghold on startups’ operations because of the financial, operational, and institutional support they provide. 

Former Twitter CEO and founder tweeted about the negative effects of VCs and LPs in web 3.0.
Jack Dorsey criticises the centralised authority of Web3 in a tweet

However, DAOs’ user-first approach can swing the pendulum to entrepreneurs regarding capital investment and control. A notable example is the defunct ConstitutionDAO. In November 2021, the group announced their intention to acquire the remaining original printed copies of the US Constitution at a Sotheby’s auction through crowdfunding.

After a few days, it raised US$47 million worth of ether from 17,437 contributors. In return, contributors received $PEOPLE tokens that gave them the right to vote about the organisation’s future and the constitution once acquired. While ConstitutionDAO ultimately failed in its bid, the speed of crowdfunding and transparency lays the groundwork for startups to raise capital with less control from VCs.

Decentralised finance (DeFi) platforms and NFT investments 

DeFi, peer-to-peer finance on the blockchain, is the foremost application of DAOs. Unlike traditional financial systems, DeFi doesn’t use intermediaries (such as  banks and insurance organisations). Instead, the open-source financial system uses private keys to protect digital wallets.

Decentralised apps (Dapps) provide access to DeFi services, such as crypto staking, where users can earn a yield on their crypto. Moreover, DAO crypto businesses power Dapps. For instance, MakerDAO created the Ethereum-based Maker protocol that generates the Dai stablecoin used in the DeFi market.

Like DeFi, DAOs have improved the NFT market, especially in 2021 when NFT sales hit a record US$27 billion. NFTs allow people to own and transact digital assets on the blockchain. DAOs such as CollectorDAO provide community governance that helps creators to fund and execute NFT projects.

For example, in 2021, CollectorDAO allowed thirty members to crowdsource funds to purchase the pixelated CrypoPunk#2980 for 605 ETH (or US$761, 889). By sharing costs amongst community members, DAOs make it easy to own NFTs. 

The gig economy

At the height of the COVID-19 pandemic, organisations turned to gig workers to cut operational costs without sacrificing productivity. DAOs bring effectiveness and flexibility to the gig economy, automating tasks and improving productivity through AI-powered smart contracts.

DAOs also expand the compensation structure of creators and gig workers. Despite the growth of centralised finance (CeFI) systems, cross-border payment is a challenge gig workers experience. But DAOs provide the options to earn in tokens and cryptocurrency. 

In addition, DAOs expand gig workers’ earning options through digital communities. For instance, members of Global Coin Research, a tokenised community of learners, earn tokens when they contribute articles. Token owners can trade tokens for fiat currencies or other tokens on PancakeSwap or Uniswap to mark DAO ownership. Otherwise, token owners can use Yearn to stake their tokens to generate more rewards. 

How DAOs continue to change the online world

Over the last decade, the blockchain industry has constantly produced disruptive technologies and systems that improve collaboration. DAOs provide another opportunity for the blockchain industry to spread its innovation wings. Here are some ways DAOs are changing the online world.

Improving the reward system of the gaming community

The gaming industry is famous for adopting high-tech innovations, such as virtual reality (VR), cryptocurrency, and NFTs. Therefore, the gaming industry is ‘naturally’ prepared to adopt DAOs.

One notable contribution of DAOs to the gaming sector is how it uses the bottom-up and play-to-earn (P2E) concepts to empower gaming creators through improved gaming participation and rewards. Serkan Toto, CEO at Kantan Games, aptly captured the benefits of gaming DAOs in an article, where he noted that “successful gaming DAOs provide access to capital as well as a strong sense of community and reduced barriers to entry to the world of crypto games”.

P2E rewards players like an economy: they receive tokens when they provide value in the form of labour (time and energy) and capital (such as purchasing NFTs). Unlike other gaming reward options, the P2E model allows players to swap rewards for crypto tokens and fiat currencies.

In addition, DAOs provide a community for players to play and compete in challenges to win rewards. A case in point is GameDAO which unifies gamers, creators, and investors to pursue a common cause or win lucrative tournaments. 

Healthcare research and funding 

Like many sectors with centralised control, the healthcare sector suffers from a lack of trust that affects research funding. ‘Big pharma’ controls patients’ data and their usage. This is why experienced healthcare consultant Kim Bellard bemoaned the current management structure in the healthcare industry. 

“I don’t question the motives of the various executives involved… but the approach doesn’t take away the kind of hierarchy we’ve seen in healthcare for decades,” Bellard wrote in the Healthcare Blog shortly after “member-led” Graphite Health signed three other firms (SSM Health,  Presbyterian Healthcare Services, and Intermountain Healthcare) as organising members to solve “healthcare interoperability.”

Bellard’s solution? DAOs. A decentralised biotech system will help the healthcare industry to break the monopoly of firms on research data. It’ll also give more control to users. BioDAO, for instance, leverages the Web3 community and tokens to fund early-stage research projects. Similarly, CureDAO—a community-owned biotech platform—allows users to donate healthcare data in its bid to democratise clinical research in the food industry. 

The metaverse

When Neal Stephenson first described the metaverse in Snow Crash,  it was filled with fictional and futuristic tech components. That tune has changed in the last few years in which technology growth has turned the  fictional aspects of the metaverse into a reality. Scott Keeney, Chief Metaverse Officer at TSX Entertainment, told The Chainsaw in an exclusive interview that the metaverse is now widely perceived as the ‘next generation internet’ that incorporates high-tech components (5G, virtual reality technology, blockchain, and the Internet of Things).

While, like DAOs, the metaverse is built on decentralisation principles and cryptocurrency adoption, DAOs bring governance to the metaverse. Decentraland, the 3D world where you can play games and conduct crypto business, is a worthy example. Decentraland uses DecentralandDAO to organise smart contracts for digital assets (land, estates, wearable, and content servers). DecentralandDAO also allows community members to regulate Decentraland activities through voting. 

Benefits of DAOs 

The hierarchical management structure where only selected members call the shots is the default strategy in many institutions. Although the approach has its place, it creates unequal participation. But DAOs work in reverse, creating organisations that function without centralised leadership. They also improve collaboration among like-minded people. Other benefits of DAOs include:

Transparency

Under DAOs, certified members (or token holders) are privy to every piece of information on the smart contract, the binding agreement of the community. This is why DAOs strongly suit fundraising projects because members can verify the purpose of the projects and the funds on the public blockchain.

Community-driven 

Power to the people. With the  DAOs system, the power belongs to the members. It’s a leaderless community where members contribute equally to the decision-making process. The group makes the decisions. Although participants enjoy varying rights (for example, not all votes are weighted equally — the more tokens you have the greater your vote) members generally have equal access to essential info about DAO operations.

Low barriers to entry (and exit)

Because DAOs are built on blockchain, they’re easy to launch and globally accessible to people. Regular stumbling blocks like location and intermediary institutions don’t restrict participation — membership entry is strictly by crypto tokens. Similarly, exit is straightforward because statutory laws don’t bind members; they’re free to leave when they deem fit.

Are DAOs worth the hype?

DAO businesses are fertile grounds for innovation because of their community-first approach and adoption of Web3 technologies. In 2021 alone, DAO participants increased 130 times from 13,000 to 1.6 million, according to DeepDAO data. Despite the impressive growth,  DAOs have weaknesses that frustrate mainstream adoption.

Regulatory uncertainties raise doubts about the sustainability of DAO crypto businesses. Doubters argue that DAOs don’t fit into any existing corporate models. As a result, they’re neither subject to regulatory compliance checks, like the Know Your Customer (KYC) policies, nor can they enjoy corporate privileges such as clear tax arrangements and legal personhood.

Some DAOs have since registered as limited liability companies (LLCs) to circumvent legal uncertainties. But LLC status introduces centralisation elements, the opposite of DAO’s decentralisation principles.

Furthermore, DAOs, like other blockchain-powered platforms, are vulnerable to security attacks. For instance, hackers siphoned over $120 million from BadgerDAO by exploiting security risks. There are also reservations about voting structure, power concentration, and pseudonymity. The alleged doxxing of the OlympusDAO founder Jason Liang earlier this year strengthens the case against pseudonymity in the DAO community.

These challenges suggest that DAOs must improve their operating model for widespread adoption. However, the current market growth of DAOs and the continued spread of Web3 suggest that they could live up to the hype where its success is a case of ‘when’ rather than ‘if’.