What is a DAO?

Collectively Owned

DAOs are internet-native organizations collectively owned and managed by their members. They have built-in treasuries that are only accessible with the approval of their members. Decisions are made via proposals the group votes on during a specified period.

A DAO works without hierarchical management and can have a large number of purposes. Freelancer networks where contracts pool their funds to pay for software subscriptions, charitable organizations where members approve donations and venture capital firms owned by a group are all possible with these organizations.

Before moving on, it’s important to distinguish a DAO, an internet-native organization, from The DAO, one of the first such organizations ever created. The DAO was a project founded in 2016 that ultimately failed and led to a dramatic split of the Ethereum network.

Members of a DAO have a shared mission but do not have a leader who directs the group. Instead, decisions are made collectively, informed by the community rather than a single figurehead, hence the “decentralized” part.

DAOs can be involved in any kind of mission or endeavor. FlamingoDAO and PleasrDAO are groups of crypto investors who have teamed up to purchase and collect rare and expensive NFTs. Komorebi Collective is a DAO that finances women and LGBT crypto users. And Friends With Benefits is an online social club DAO with nearly 2,000 members that is turning into a blossoming media empire through its music discovery platform, startup incubator, and online crypto news publication.

Advocates for DAOs believe that they are the long-awaited replacement for centralized corporations. But critics have pointed out that there are many unknowns about the new trend and the implications behind being a part of one, warning that its unregulated nature could cause more harm than good.

Why do we need DAOs?

Starting an organization with someone that involves funding and money requires a lot of trust in the people you're working with. But it’s hard to trust someone you’ve only ever interacted with on the internet. With DAOs you don’t need to trust anyone else in the group, just the DAO’s code, which is 100% transparent and verifiable by anyone.

This opens up so many new opportunities for global collaboration and coordination.

DAO examples

To help this make more sense, here's a few examples of how you could use a DAO:

• A charity – you can accept membership and donations from anyone in the world and the group can decide how they want to spend donations.
• A freelancer network – you could create a network of contractors who pool their funds for office spaces and software subscriptions.
• Ventures and grants – you could create a venture fund that pools investment capital and votes on ventures to back. Repaid money could later be redistributed amongst DAO-members.

How do DAOs work?

The backbone of a DAO is its smart contract. The contract defines the rules of the organization and holds the group's treasury. Once the contract is live on Ethereum, no one can change the rules except by a vote. If anyone tries to do something that's not covered by the rules and logic in the code, it will fail. And because the treasury is defined by the smart contract too that means no one can spend the money without the group's approval either. This means that DAOs don't need a central authority. Instead the group makes decisions collectively and payments are authorized automatically when votes pass.

This is possible because smart contracts are tamper-proof once they go live on Ethereum. You can't just edit the code (the DAOs rules) without people noticing because everything is public.

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