DAO is a term that refers to an organization that can promote a business or project without a specific owner or manager.
DAOs are fundamentally different from tradigital organizations such as joint-stock companies, and are attracting attention as an organizational form that will flourish in the era of Web 3.0.
Therefore, this article will explain the DAO, its characteristics, benefits and disadvantages, and other topics in an easy-to-understand manner for beginners with illustrations and other information.
What is DAO
DAO is a term that refers to an organization that can promote a business or project without a specific owner or manager.
Its official name is Decentralized Autonomous Organization, and the acronym DAO stands for Decentralized Autonomous Organization.
DAOs are fundamentally different from conventional organizations such as joint-stock companies, and are attracting attention as a form of organization that will flourish in the era of Web 3.0.
A famous example of a DAO is Bitcoin (BTC).
The Bitcoin blockchain network is maintained and managed by the mining activities of miners around the world, without a specific leader.
DAO vs Traditional Organization
Now that we have an overall picture of the DAO, let’s look specifically at how the DAO compares in structure to a traditional organization.
On its official website, the Ethereum Foundation provides the following chart comparing DAOs to traditional organizational structures.
It is no exaggeration to say that the reasons why DAOs are attracting attention are all contained in this table.
| DAO | A Traditional Organization |
|---|---|
| Usually flat, and fully democratized. | Usually hierarchical. |
| Voting required by members for any changes to be implemented. | Depending on structure, changes can be demanded from a sole party, or voting may be offered. |
| Votes tallied, and outcome implemented automatically without trusted intermediary. | If voting allowed, votes are tallied internally, and outcome of voting must be handled manually. |
| Services offered are handled automatically in a decentralized manner (for example distribution of philanthropic funds). | Requires human handling, or centrally controlled automation, prone to manipulation. |
| All activity is transparent and fully public. | Activity is typically private, and limited to the public. |
In summary, the table argues that DAOs are organizations with a high degree of democracy and information transparency, as organizational decisions are automatically tabulated and implemented through community voting, while traditional organizations are prone to human intervention during the above process.
Features of DAO
We hope that the previous contents have given you an overview of DAOs and how they compare to traditional organizations.
In this section, we will discuss more specific characteristics of DAOs.
DAOs have the following four main characteristics
- Organization without a central administrator
- Decision-making by voting using governance tokens (Cryptocurrency)
- High transparency regarding organizational operations
- Distribution of ownership
Organization without a central administrator
The most representative feature of a DAO is that it is an organization without a central administrator.
There is no specific leader in the management of the DAO organization, and its management policy is determined by the consensus of the community members (voting activities).
We indicated earlier that Bitcoin is a specific example of this type of management system.
However, more advanced use of DAOs began to be considered with the development of smart contract technology in the Ethereum blockchain.
Therefore, the current discussion of DAOs is often in the context of DAOs to be introduced into systems related to the Ethereum blockchain and other layer 1 systems, and the Dapps that will be developed on those blockchains.
Decision-making through voting using Governance Tokens (Cryptocurrency)
The DAO’s operating policy is determined by the voting activities of community members.
Governance tokens are used for this voting process.
Governance tokens are a type of token (Cryptocurrency) that allows the holder of a governor token to make proposals regarding DAO operations and participate in voting activities.
High transparency in organizational operations
Another characteristic of DAOs is a high level of transparency in their organizational operations.
In many DAOs, individual member votes are inscribed on the blockchain, making it difficult to commit fraud, and voting status is reflected in real time.
Interaction among community members often takes place on Discrod, where conversations can be viewed by anyone and, if necessary, can be traced back to previous conversations.
Distribution of Ownership
DAOs strongly reflect the idea of distributing ownership of the organization itself.
The ownership referred to here can be thought of as shares (company ownership) in a stock company.
The ownership of a DAO corresponds to the aforementioned governance token.
In general, DAOs distribute governance tokens to developers, partners, users, and others participating in the DAO in proportion to the degree of their contribution to the DAO.
This system prevents the concentration of ownership in the hands of founders and investors that occurs in the context of conventional joint-stock companies.
Benefits of DAO
Now that you understand the characteristics of DAOs, we will now discuss the benefits of DAOs.
DAOs have two main benefits
- Efficient financing
- Clear and meaningful incentives for work
By understanding why DAOs are attracting so much attention, we hope to increase our information sensitivity to business and investment opportunities related to DAOs.
Efficient Fundraising
DAOs raise funds through smart contracts, making it possible to execute fundraising more efficiently than traditional organizational structures.
Because DAOs are typically built on public blockchains such as Ethereum, they can easily raise funds through the issuance of governance tokens and other means.
Such processes are much simpler and less costly than traditional funding processes.
Incentives for work are clear and meaningful
Community members (also called contributors, in the sense of contributors) participating in a DAO can contribute to the DAO in whatever way and for whatever compensation they find attractive.
In traditional organizational systems, contributions made by individuals belonging to an organization to the organization are subordinate.
In other words, it is in the form of processing work in response to the company’s requirements, and one’s own will was not involved.
On the other hand, for contributions to the DAO, i.e., value creation for the DAO, contributors choose their own labor.
This approach allows us to align the incentives for people to perform labor (value contribution) in the DAO. This is the reward (granting of tokens), the content of the labor, and the management policy or philosophy of the DAO.
Another benefit of DAO-like labor is the ability to activate organizational management from the bottom up (suggestions from the community) rather than from the top down (orders from the top).
Problems (disadvantages) of DAO
While there are the aforementioned advantages, DAOs also have the following disadvantages
- There is no legal framework in place.
- Decision-making and implementation of measures take time
There is no legal framework in place.
Unlike joint stock companies and other traditional organizational systems, DAOs are governed by a democratic and systemic operating process.
As a result, these blockchain-based systems operate outside the jurisdiction of existing laws, and legislation on DAOs has not caught up in many countries and regions.
The lack of legislation on DAOs may be a barrier to launching a project around DAOs.
However, resolution on this topic is in progress in certain areas.
In April 2021, legislation was approved in the U.S. state of Wyoming to allow DAOs to be officially incorporated as limited liability companies.
In addition, in February 2022, the Marshall Islands in Micronesia passed a legal amendment recognizing DAOs as corporations. Like the State of Wyoming, the Marshall Islands is the first nation in the world to approve a DAO.
Decision-making and implementation of measures take time.
One of the benefits of DAOs is that there is no centralized authority and they operate democratically.
This feature, in turn, leads to the concern that decision-making as an organization will be slow.
Because a DAO needs a vote by governance to determine its operating policy, it will inevitably take time to determine its direction.
Therefore, in the event of a fatal incident, such as when a service operated and managed by the DAO is hacked or a flaw is discovered in a smart contract, decision-making may be delayed.
In such situations, a vote by the governing token is still required in principle for organizational decision-making.
If the will of the community through voting is ignored, the organization will not function as a DAO.
The inability to take quick, top-down action to resolve the above-mentioned unforeseen situation is a disadvantage in DAO operation.
5 Examples of DAO
Typical DAOs include the Bitcoin (BTC) and MakerDAO, but here are five other examples of projects.
- Compound Grants
- BitDAO
- PleasrDAO
- Nouns DAO
- CityDAO
Compound Grants
Compound is a leading Cryptocurrency lending platform built on the Ethereum blockchain in 2018. And “Compound Grants” is the name of Compound’s associated DAO.
Compound allows users to lend and borrow Cryptocurrencies directly to each other without the intermediary of an administrator through the use of smart contracts. Users who act as lenders of cryptocurrencies can deposit their cryptocurrency holdings into a liquidity pool and earn interest after a certain period of time.
Compound Grants is composed of holders of “COMP,” Compound’s governance token, who are working together to develop Compound by sharing ideas for increasing liquidity in the system and organizing related events. The Compound is a group of “COMP” holders who are working together to develop Compound.
BitDAO
BitDAO is a DAO project led by Bybit, a Singapore-based Cryptocurrency exchange. It was established in June 2021 to support the development of new DeFi (decentralized finance) projects.
It issues “Bit” governance tokens, and issues related to the organization’s operation, such as the selection of investment partners and the implementation of corrective measures, are decided by a vote of the Bit token holders.
In April 2022, BitDAO attracted significant attention when it decided to invest $6.5 million in PleasrDAO, an NFT art collection
PleasrDAO
PleasrDAO is a DAO established in March 2021 for the purpose of jointly purchasing NFTs. The purpose is for DAO members to jointly purchase NFTs that are too expensive for individuals to purchase, and to sell the acquired NFTs when they increase in value and share the profits.
PleasrDAO has made headlines in the past by purchasing NFTs created by Uniswap, a DEX (decentralized exchange), for $525,000 and by bidding $5.4 million for NFTs belonging to Edward Snowden, a former member of the NSA (National Security Agency).
Nouns DAO
Nouns is a series of NFT artworks featuring 32 x 32 pixel dots created by Auto-Tune.
One of the unique aspects of Nouns is the method of issuance and sale. Using smart contracts, one Nouns is automatically generated every 24 hours and is automatically auctioned and sold without the intervention of the operator.
The Nouns DAO is the organization that manages the Nouns ecosystem, and decisions regarding the DAO’s operations and finances are formed through voting by its members. Each Nouns is entitled to one vote, so the opinions of members who own a large number of Nouns are more likely to be respected.
CityDAO
CityDAO is a project that aims to build a digital city on the blockchain. Land certificates are sold as NFTs, and users who purchase NFTs can become “citizens” of the land.
One unique aspect of CityDAO is that land on the blockchain is linked to land in the real world. While users who become citizens do not gain ownership of the land, they do gain the right to vote on various events that occur on the land. Specifically, they can participate in decisions such as what kind of buildings to build on the land or what kind of stores to attract to the land.
In September 2021, CityDAO co-purchased 40 acres of land in Wyoming with the profits from the NFT sale. Governance of this land is being done by CItyDAO members.
Summary
In this article, we have explained DAOs, including their characteristics, benefits and disadvantages, and case studies.
We hope you have understood that DAOs are envisioned as a solution to improve and democratize traditional organizational management practices.
In the future, we can anticipate that the services used may change according to differences in user literacy and awareness.
The prominence of DAOs is still in its early stages and is a developing field. Incorporating knowledge about DAOs now may lead to more attractive decision-making in the future.
We hope that the contents of this article will help those who wish to learn more about DAOs.