What are DAOs?

Decentralized Autonomous Organizations (DAOs) are member-owned, democratized communities in which like-minded people congregate and collaborate virtually, committing funds towards a common cause, with no centralized leadership.

At the heart of every DAO is an indispensable smart contract. Smart contracts eliminate the need for vetted intermediaries. Members collectively establish rules that are encoded and embedded into the DAO’s smart contract, and outcomes are automatically executed without the need for intermediaries. These contracts also function as a decentralized repository for the management and distribution of funds. Rules governing spending are programmed into the DAO, and community approval is needed to authorize the use of treasury funds. Anyone holding DAO governance tokens is eligible to vote on proposals before any changes to the smart contract are implemented.

Once live on a programmable blockchain, a DAO’s activities and smart contract are publicly accessible. Malicious attempts to hack DAO protocol are thus hindered by blockchain transparency and a network’s native consensus mechanism, the verification protocols that maintain network security. Established networks like Ethereum and Solana provide reputable foundations for DAOs due to the meaningful distribution of these consensus mechanisms.^[1]

DAO Formation

A DAO’s ability to successfully endure is dependent upon the health of its treasury and governance token, ability to respond to the community while fulfilling the DAO’s core mission, in addition to the integrity of the underlying blockchain protocol.^[2] DAOs are commonly formed for charitable purposes or to pool and leverage funds for purchasing NFTs or other assets. ‘ConstitutionDAO’ is an example of an investment DAO created to crowdfund the purchase of a copy of the U.S. Constitution. Though outbid at auction by billionaire Ken Griffin, the collective raised an impressive $47 million in Ether in under 7 days. The effort made headlines in financial trade publications across the globe and exposed traditional finance to the untapped potential of DAOs. DAOs.^[3]

Native tokens are often issued to fund DAOs. Ownership of these governance tokens ensures members have a stake in shaping DAO formation and a voice in guiding its future. Money earned within a DAO can be collectively programmed to reinvest in new opportunities, to pay dividends to members, or to be allocated in any number of creative ways.

DAO Membership Models

Two common membership structures are Token- and Share-based membership. Token-based membership is commonly used to govern broad decentralized protocols alongside the DAO’s native token. Depending on the governance token, token-based membership can be fully permissionless if traded on a decentralized exchange. Members can earn tokens by providing useful liquidity or when contributing to consensus via staked governance tokens. MakerDAO is an example of a token-based membership model. Anyone holding its governance token MKR has voting rights with the power to shape the future of the Maker protocol.

The share-based DAO model is not fully permissionless––this structure is often used by private communities united via common goals. Private DAOs may extend membership to select individuals via exclusive invitation. Other share-based DAOs may allow prospective members to petition or pay for access to a community. Shares determine ownership and voting power. MolochDAO is an example of this membership arrangement. To join, prospective members were required to submit a proposal demonstrating they had valuable expertise and assets useful for advancing the DAO’s mission.^[1]

<strong>THE EVOLUTION OF COMMERCE: THE METAVERSE AND WEB3</strong>

DAOs anticipate a future in which democratized organizations supersede traditional corporate models within Web3.^[4] DAOs present individuals with unprecedented opportunities to connect to like-minded communities across the globe. As this organizational model continues to gain traction, co-ownership and collective governance structures will challenge traditional companies and brands.^[2]