DAO 101

What is a DAO? 

By definition a DAO is a Decentralized Autonomous Organization. However, this definition is vague and leaves much to be desired. A better way to describe a DAO is an organization that lacks a centralized decision making body, and is run by the investors that support it. This can be a large number of investors, or a very small number of investors. The DAO sets up a system of governance, and explicit rules that are written into smart contracts and implemented on the blockchain. Investors purchase governance tokens to participate in community wide votes that determine the direction of the DAO. 

What are smart contracts?

Smart contracts are digital contracts stored on a blockchain that execute specific functions when certain parameters are met. This eliminates the need for a third party intermediary. In essence, this sets the rules of the DAO in “stone.” These rules can be changed at a later time, but only after an investor community vote.

How do DAO’s work?

A DAO is designed to transparently operate an organization through a set of rules that is determined by a consensus voting mechanism that is set up, tracked, and saved on a blockchain. The developers of the DAO outline the rules for the organization explicitly on the blockchain, which allows potential investors with transparent rules or guidelines. Any changes to these guidelines require a vote from the pool of investors to approve those changes. In short, it’s a community lead organization. 

In Layman’s terms, the investors vote on the rules that guide the organization, and based on those rules make decisions about the direction of the organization.

Through the use of consensus voting, the organization is able to execute the wishes of the investors, while simultaneously gathering the collective opinion of the interested parties. Decisions like asset allocation, strategic direction, and core values are determined through community wide consensus voting. All of these decisions are recorded with “transactions” on the blockchain that edit the smart contract. These changes can be viewed and audited at any time. A DAO is basically a fully transparent democratic organization where the collective voice of those most affected determines the direction of the business.

Who is really in charge?

The investors are the core decision making unit within a DAO. Individual DAO’s may structure their organizations differently, i.e., community elected board, or the original developers and community elected members forming a board. There is a small group that is tasked with executing the decision of the DAO with approval from multiple members being required to complete transactions.

The concept for consensus voting is based in the sense that everyone will vote in their best interest. Once you have collected everyone’s vote, you know which way the investors believe is the most beneficial direction for the organization.

How does DAO voting work?

Votes are recorded using blockchain technology that adds items to the original contract to track each vote. Snapshot Labs is the company that most DAO’s use, currently. 

A voting member, determined by the governance token, simply connects their crypto wallet to the contract that is being voted on and completes the vote. They will sign the contract after voting to lock in their vote on the blockchain. This records their vote on this particular proposal on the blockchain forever. The size of one’s vote can be determined in multiple ways, with most choosing to base it on the number of governance tokens an investor has. When the proposal is completed, the votes are tallied and recorded on the blockchain within the smart contract. The community-chosen method of leadership then executes the consensus decision.

What is governance?

The governance stake in each DAO is based on the parameters set forth by the developers and previous DAO votes. These are the rules of the organization. These are housed on the blockchain where they are auditable and immutable. Every decision made by the DAO is housed within this contract. 

How does governance work?

This is based on the rules, but in most cases it is determined by an investor’s stake in a digital asset. The more of the asset the investor holds, the higher percentage of votes they receive during the voting process.

Can anyone invest?

Some DAO’s are private, while others are public. If the investor meets the criteria for owning a governance stake in the company, they are eligible to vote during votes.

What are the future opportunities for DAO’s?

With the expansion of blockchain technology and the use of digital assets, the future for well-run DAO’s is very bright. These organizations utilize direct feedback from investors as to the best direction for the organization. This builds up investor morale, and the feeling of being heard. Since it is housed on the blockchain, the rules of the DAO can be audited 24/7/365. The blockchain also ensures that it is immutable, meaning the contract can’t be edited, removed, or controlled by anyone. This provides a level of transparency that isn’t seen in traditional business sectors. 

In its simplest form, the organization is marketing to, and expanding its customer base by increasing the investor holdings. Unlike traditional publicly traded companies, every investor has a say in the direction of the organization based on their stake in the company. Essentially DAO’s gain their feedback directly from their customers. By combining investor opinions with high levels of investor engagement on a highly transparent level, DAO’s have the opportunity to recreate business as we know it.