What is a DAO?

“Decentralized Autonomous Organization“

This is what DAO stands for.

To sum up what a DAO is in one sentence, I’d describe it as “A self-governing community utilizing smart-contract and blockchain automation to remove any centralized control.“

To grasp a full understanding of the workings behind these decentralized organizations, let’s dissect the foundations of a DAO.

The key elements of a DAO

• The term DAO was coined by the co-creator of Ethereum, Vitalik Buterin, in 2013.

• Despite the previous fact, the first DAO (named The DAO) wasn’t launched until April 2016.

• A DAO is owned by the community itself.

• Although there are founders / investors in many DAOs, the community decides via consensus what decisions to make regarding rules and the future progression of the DAO.

• Governance is sorted through token issuance where members exchange funds for tokens that carry voting rights and potential rewards. A token is an essential component of a DAO since it acts as the incentive for validators to update the network.

• DAO’s leverage the use of smart contracts to automate a variety of mechanisms. An example of this: compliance with the core rules is mandated through the self-enforcing code in the smart contracts, which cannot verify any action that doesn’t follow the DAO rules. Furthermore, smart contracts are responsible for executing agreed upon or majority vote decisions made by the DAO members. All members have access to make proposals, vote, and audit the code. This is how a completely autonomous and transparent system is possible.

• The purpose of a DAO is to create a community built around decentralization, usually in the finance sector. They also serve to improve traditional business & operation frameworks through incentives to work for the collective good of each other.

Governance

In contrast to a common business hierarchy – where decisions are made from the top of the pyramid (CEO, Owner, Shareholders) and passed down until they reach the employees at the bottom of the pyramid who then carry the orders out – a DAO operates differently.

A DAO removes the hierarchy of power and replaces it with a linear incentive-based framework. This means the DAO is run by each individual member who contributes to important decisions regarding the future of the DAO. Each member has a role.

The members collectively vote upon the core rules of the DAO, future decisions, technical upgrades & installments, treasury allocation, partnerships, and token distributions. For any of these changes or additions to be accepted on the network, the proposals MUST achieve some predefined level of consensus.

The benefits of an incentive-based framework:

• It’s in the best interest of each individual to vote on and approve proposals that benefit the users and serve the protocol itself, as the members will be directly rewarded from the longevity and success of the project.

• All members align on priorities and goals per the majority consensus vote of the DAO, which rids DAO environments of the principal-agent dilemma, which is when the owner of an asset is in conflict with the priorities of the person who has control of the asset.

• Any robust & healthy DAO over a long enough timeframe will increase in usage & members, thus increasing the token value.

• Ultimately, everyone who is a member of the DAO has invested in its success, and therefore the majority of voters are aligned in deciding what is best for the DAO as a community. With the same collective goal in mind, this means the DAO greatly increases its effectiveness per action.

How a DAO is formed

STEP 1 – Smart Contract Rules: The first community members & developers establish rules. These rules are written in code on the blockchain and executed as the framework for the DAO by smart contracts. This is made verifiable and auditable by the DAO members at any given moment. The rules cannot change without a consensus reached through a complete community vote.

STEP 2 Funding: The members & developers must then establish the mechanics of DAO governance and how to distribute funds to the DAO treasury and rewards to the members. Often, tokens will be issued to directly raise funds for the DAO treasury and in return community members receive proportional voting rights as well as unique roles based off their individual holding amount. In essence, the members are verified by their stakes, so to become a member, one must be a stakeholder.

STEP 3 Deployment: Once these two previous decisions have been made final, the DAO is launched on the blockchain, and all developers & original members are demoted from their influential positions over the DAO. All decisions ahead must meet a complete DAO consensus to be put into action.

Structural Information

(Mainframe)

Governance Token Holders – The directive from where DAO members with influence vote upon decisions.

Smart Contracts – Final DAO actions are carried out / enforced effectively through smart contracts.

Open Source – The fully transparent mechanism that displays all ongoing activities to ensure DAO users are up to date. If any discrepancies are discovered, they may be disputed or rejected if a consensus of users have an issue with the actions.

(Related structure)

Product Multi-Signature – A sub-organization of wallets used to sign off to approve specific transactions. These are usually for development purposes or used for tasks on the blockchain.

Developers Cooperation – This cooperation is an organization chosen by the DAO members who are issued funds for fulfilling DAO requests. This could be new coding and other advanced technology that only these specialists are able to build or incorporate into the DAO.

Treasury Multi-Signature – This is similar to the Product Multi-Sig (it is a sub-organization of wallets used to sign transactions) except it is used for selective approval of real-world assets managed by a Trust. Both the Product Multi-Sig and Treasury Multi-Sig circles can be voted on by all the DAO members.

Real World Trust – This is a legally bound entity tasked with the control of real-world assets. For this to work, a trustor, trustee, and beneficiary must be established. The Trust uses the funds issued from the Treasury to invest them in the best interests or for the benefit of the DAO token holders.