Explaining DAOs to a non-technical person in 10 points
I’m seeing a lot of questions about DAOs on Reddit and elsewhere. So I’ve decided to offer my explanation — hopefully, it will help someone to better understand this complex topic.
- DAOs (Decentralised Autonomous Organisations) are mechanisms by which we can align economic incentives (distribute risks/rewards) over the Internet using software. Using DAOs, humans can coordinate themselves to work towards a common goal at the global scale without relying on trust or third parties. This mechanism has been enabled by the invention of the blockchain, pioneered by Bitcoin.
- The ‘alignment of incentives via risk/rewards distribution’ is a fundamental purpose of a DAO. Some participants in the DAO will seek to take more risk today for the expected higher reward in the future, other participants will seek to minimise risk today by sacrificing future rewards. If incentives are compatible, then each participant will contribute to the DAOs purpose, just by working to maximise their own interest.
- This is nothing new. We’ve been doing this for centuries using inventions such as joint-stock companies, insurance schemes or even nation states. Groups of people sharing a common goal pool resources together, agree on risk/reward distribution and enjoy the benefits (or not) of the shared activity in the future. This way humans can cooperate on a large scale and align incentives between individuals who never met each other face to face.
- Nation states, joint-stock companies, corporations, insurance companies are just a few examples of ‘inventions’ that allowed us to achieve large-scale cooperation. Essentially, they are just abstractions that we use to organise ourselves to collaborate. But their function is no different from the function of DAOs but technologies used to implement them are different (paper, print, enforcement by the judicial systems).
- While we’ve mostly replaced paper & print for transferring information, we still use print & paper for aligning and communicating economic incentives (the entire legal system).
- Bitcoin proved we can align incentives using just software, without third parties, to achieve a common goal of creating a digital currency with gold-like properties. We might call Bitcoin a proto-DAO. It proved that a certain design pattern is possible and works in the real world.
- Ethereum takes this concept to the next level. Ethereum provides a platform to coordinate ourselves to achieve economic goals other than just currency creation.
- Ethereum is to DAOs what Blogger was to publishing. It allows everyone to code economic incentives without having to build the underlying delivery infrastructure from scratch.
- The Internet allowed you to exchange information with anyone in the world at no cost. DAOs will allow to your exchange economic value with anyone in the world. That means to invest, raise money, speculate, trade, get insurance, lend, borrow, get paid, form joint-ventures in ways that were impossible before. Generally, make a living in a digital world of the future.
- It’s early, it’s risky, it’s a Wild West. But this is the way, the global networked economy will create value in the future.