Web3, Decentralization

What are DAOs?

With blockchain technology, we are now entering a landscape of endless possibilities when it comes to creating new assets and earning rewards while retaining a sense of complete asset ownership, eventually making reliance on banks obsolete. Since the launch of cryptocurrency in 2009, and especially Ethereum in 2015, the blockchain has evolved to allow nearly anyone to build on top of its open-source code, giving rise to multiple applications. One blockchain-powered solution that has been gaining popularity lately is the DAO.

What is a DAO, exactly?

A DAO, also known as a Decentralized Autonomous Organization, is an internet organization managed according to rules encoded as transparent computer programs on the blockchain. DAOs are governed by its organization members and not by a central authority. Think of a DAO as an internet governance system with a shared bank account. As straightforward as that sounds, the DAO structure allows for the creation of a multitude of different organizations and communities.

Traditional Companies vs DAOs

Most DAOs run on smart contracts, which are collections of code that are powered on the blockchain. These smart contracts act as the ‘rules’ of these organizations, which are publicly available for review and can’t be edited in secrecy. The rules and features of DAOs can be changed through a democratic vote, however, according to the procedures predetermined by the DAO. This is the main difference between traditional companies and DAOs. Traditional governance is mostly reliant on a board of directors, shareholders, investors, etc. – a closed circle that is inaccessible and opaque to most members of the organization. DAO operations, on the other hand, are completely decentralized, using tools like governance tokens to allow participation in changes to the system.

An well-established example of a decentralized finance DAO is MakerDAO, an organization that is behind the stablecoin DAI. The MakerDAO team does not control how much DAI is created; that’s up to the stakeholders of their MKR token. Along with DAI minting, they can use their governance powers to vote on other decisions concerning different fees, implementing UI changes, technical specifications, and even how the voting process goes for such proposals.

Why were DAOs created?

Cryptocurrency itself was created to eliminate the need for centralized, controlling third parties like banks and regulators when making digital financial transactions. DAOs extend this principle to issues of governance and decision making in organizations. Governance tokens give voting power to the holders and allow community interaction become paramount in the company’s future. Token holders not only gain control of their own assets, but over the project’s direction, roadmaps, and creative decisions. Governance tokens aren’t premined, and the decision making process is only limited to those who are quite literally invested in a platform. Think of it as shareholders who gain the benefits of a businesses’ success. The company can only succeed if token holders are financially incentivized to move the entire project forward.

How are DAOs being used today?

DAOs have exploded in the past year, and the infinite possibilities of decentralized organizations are being demonstrated everywhere, from videogames to climate change initiatives. DAOs bring like-minded individuals together and give them the tools to reach certain goals through the use of blockchain technology.

Here are just a few examples of the DAOs out there:

  • Krause House DAO has the sole intention of owning an NBA team. Created by Jerry Krause, the Krause House self-identifies as “a community of hoop fanatics that are just crazy enough to buy an NBA team.”
  • Klima DAO aims to address climate change. Their goal is to acquire as many carbon offsets as possible to drive up their value and make offset-generating activities more profitable.
  • Decentraland DAO is a user-owned, Ethereum-based virtual world where you can play, explore, and interact with games and activities.
  • SuperRare DAO is a curated NFT marketplace meant for curating one-of-one pieces and community-made storefronts.
  • UniSwap DAO is a smart contract DeFi platform that allows users to swap ETH and tokens without the need of an exchange, connecting the wallet directly.
  • HerStory DAO collects and funds projects by Black women and non-binary artists.

What’s next for DAOs?

Despite their popularity, DAOs have yet to hit mainstream adoption. There are still many unknown factors that DAOs have to face, such as potential regulatory and legal challenges. DAOs can feel to some like holding equity to an early stage start-up; the future is unclear and the risk remains high.

With this being said, many industry experts believe DAOs will soon disrupt the traditional structures of business. Mark Cuban posted a tweet in May of 2021, stating, “The future of corporations could be very different as DAOs take on legacy businesses…Entrepreneurs that enable DAOs can make money. If the community excels at governance, everyone shares in the upside.”

The recent wave of institutional investment in DAOs demonstrates growth in the space, and shows the potential for more widespread adoption, leading to potential competition with traditional businesses and organizations. Nevertheless, it still is very important to do your own research in such a new landscape. It might feel like the wild west era as of right now, but as the years go by, who knows how DAOs can evolve? If you have any interest to contribute your expertise and time to a DAO, both to earn rewards and influence the company’s development, definitely DYOR and provide your skills to projects that you believe can make a difference.

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About Jason Kim