So, what’s happening with DAOs?
Decentralized Autonomous Organizations are evolving…
DAOs or Decentralized Autonomous Organizations, came into the limelight with the success of the first few DeFi protocols mainly on the Ethereum blockchain, in the last decade (2016 onwards). They are essentially a computer program — code, that can help simulate the structure of an organization or a corporation in digital form. They help put in place controls (in code) to help us (humans) create and cooperate around enterprise-like, corporate structures in a decentralized way — more like a flat hierarchy, member-owned community without a central authority. They are an alternative form of governance and social ordering based on algorithms, as part of algorithmic governance, and more widely — algocracy. Their exact legal status remains largely unclear in most jurisdictions with a few exceptions, to date.
As of today, the 10th of March 2024, 5:00 AM (according to deepdao.io), the total assets held by DAOs — that they may use at their own discretion, excluding DAO managed reward fees and staking accounts; is at $47.1 billion USD with a total of 10.1 million governance token holders, and 3 million active voters and proposal makers, see Image 1 below.
So, how many DAOs are there?
According to deepdao.io, there are currently 19,857 aggregated governances (all DAOs and sub-DAOs governed in common by specific governance tokens), and a total of 2,419 closely followed by DeepDAO with percentage distribution of assets under management (AUM), that can be seen in Image 1 above.
Some well known implementations of DAOs
Some all-time well known implementations of DAOs in DeFi are, MakerDAO (2017, stablecoin peg maintainer and lender), Uniswap (2018, DEX or a decentralized exchange, and AMM i.e. an automated market maker — that replaces the ‘demand and supply’ order book in a classic exchange) and, TheDAO (2016, venture capital DAO, now defunct after a now very well documented and widely cited hack, later the same year) — just to name a few. There are countless other examples, AAVE, Compound, Curve, etc. The DeFi world is your oyster, feel free to explore!
But, DeFi is not their only use case. There are some other impressive implementations such as in the field of justice. For example, FreeRossDAO (2021, now defunct since May 2023)[1] — a criminal justice reform advocacy organization for clemency for Ross Ulbricht (of the darknet website ‘Silk Road’ fame); or AssangeDAO (2022)[2], a DAO to fund legal defense of Julian Assange of WikiLeaks’ affaire. Then there is the example of the ConstitutionDAO (2021, now defunct)[3], that famously tried to buy one of the original copies of Constitution of the United States at an auction at Sotheby’s. Next, we have a use case in real estate with the example of CityDAO — a limited liability company (LLC) registered in Wyoming under the Wyoming DAO LLC law[4], the first DAO ever to own land (40 Acres in Wyoming, USA).
Ok, enough of name-dropping… I guess, you get the gist by now.
These are just a few initial implementations, as it is still early days. But, we (humans) have come to realize the potential of DAOs in helping us organize ourselves in highly efficient and equitable ways — eliminating unnecessary bureaucracy, conflict and interpersonal friction in decision making to a great extent. And, this is just the beginning.
If you are new to the idea of DAOs, here is an excellent article on HBR to get a rapid overview: What a DAO Can — and Can’t — Do.
So, what are these DAOs really, and why are we talking about them?
Well, DAOs are essentially a computer program — computer code, that can help simulate the structure of an organization or a corporation in digital form. They help put in place controls (in code) to help us create and cooperate around enterprise-like corporate structures (such as mentioned above). Essentially, they allow a group of people to come together, agree upon, and set up rules that are then embedded in code — thus setting up an organization. This group of people then has the right to vote (via smart contracts), on the future decisions pertaining to the functioning of this organization, with the guarantee that the outcome of their vote will be automatically executed (by the code) as previously planned, thus eliminating possibility of foul play and corruption to a large extent.
What we have seen till date through initial versions and iterations of DAOs, whether that is for DeFi or a social cause, is but the beginning. Their true potential is yet to come as they are expected to play a crucial role in the future of digital governance. In the industrial metaverse, for example, they could help with the digital governance of digital twins, i.e., hyperreal replicas of real-world assets meant to simulate products and processes in the industrial metaverse (before investing in any real world implementation of the same). Something that will contribute to positive environmental impact by reducing the carbon footprint, for example.
What does it take to create one?
Surprisingly, it doesn’t take much at all! You don’t even need to know how to code to put one up and running in a matter of minutes. For a simple structure or a classic DAO, there exist no-code DAO generation platforms that allow you to create your DAO by just filling a form and answering a few questions about what features you would like to include in your DAO, to customize it for your use case (see Image below).
In fact, these no-code DAO generation platforms such as, Aragon, Moloch, DAOstack, Realms, etc., have played a crucial role in the rise in the number of DAOs in recent years, since 2018 on the Ethereum network (see Image Fig. 8 below)!
Here is a mini course on how to launch a DAO by Aragon, check it out for yourself!
Then, there is always the option of writing custom code, or to customize an open-source one. Here is a link to the GitHub repository of DAOstack, just in case.
Contention over a unified overarching definition
To define a DAO is no easy task. There have been a couple of attempts by a number of scholars, study groups, and some by dissident writers as well. One of the more saucy definitions being, “DAO is kind of like a group chat with a bank account,” → not entirely wrong either. Read the entire article here for more.
Some good definitions, however, can be found on Ethereum: https://ethereum.org/en/dao/ ; and Aragon: https://legacy-docs.aragon.org/aragon/about-dao/what-is-a-dao
A non-exhaustive collection of definitions from academia can also be found compiled in the study paper, ‘The ins and outs of decentralized autonomous organizations (DAOs) unraveling the definitions, characteristics, and emerging developments of DAOs’, by Rikken et al., (2023)[5]. They also propose one of their own, “A DAO is a system in which storage and transaction of value and notary (voting) functions can be designed, organized, recorded, and archived, and where data and actions are recorded and autonomously executed in a decentralized way”.
And about their legal status?
Now, here is the interesting part. Although there is no clear universal agreement on their legal status, there are some proactive initiatives taken by some states to embrace technological advancement, while others have adopted the ‘turning a blind eye’ approach to wait and watch where all this leads to, instead of stifling it with harsh or excessively punitive legislations.
As mentioned above, Wyoming in USA is one of the rare states to have a legal structure around DAOs — a bill that, “establishes baseline requirements for member managed or algorithmically managed DAO’s and provides definitions and regulations for DAO formation, articles of organization, operating agreements, smart contracts, management, standards of conduct, membership interests, voting rights, the withdrawal of members and dissolution”.
Bill consultable here: https://wyoleg.gov/Legislation/2021/SF0038
There are other jurisdictions (in addition to Wyoming, US), that have been popular for DAO incorporations in recent years, see list from 2023 in Image below. According to a series of articles published by a UK based online consultancy firm[6], these destinations include Switzerland, Singapore, the Cayman Islands, Marshall Islands, Liechtenstein, Panama, the British Virgin Islands, Gibraltar, and the Bahamas.
These jurisdictions allow ‘wrapping’ DAOs in existing legal structures such as an ‘association’ or a ‘foundation’. Check out the Image below with a list of popular jurisdictions offering options for incorporating a DAO in 2023:
Depending upon whether the DAO governance is more or less centralized or decentralized, and if it is a for-profit or a non-profit initiative, the aforementioned firm also suggests specific destinations for DAO incorporation (from the list of popular jurisdictions for DAO incorporation). See Image below:
On the topic of decentralization in DAOs
The topic of decentralization in DAOs is a fascinating one, and yet one that is very poorly studied. So, how many individual actors or participants does it take to make a DAO truly decentralized, or at least to consider it so?
According to an intriguing write-up, ‘You don’t need a DAO’, by Grace Rachmany on Hackernoon (from 2020): “If you have a team of 20 or fewer people, and you need to make decisions together, get in a room together and make decisions”.
This figure of 20 participants that the writer cites is very interesting. A study carried out later by Rikken et al. (2023)[5], has since shown that the decentralization threshold for a DAO is indeed a minimum of 20 token holders (or active participants). And this sum of 20 participants is also considered the ‘tipping point’ for the survival of a DAO.
Their study, however, simply assumed that each unique account number (voter or token holder) was a single individual — a unique representative, and did not take into account (or verify) the possibility that these multiple accounts could belong to a single wallet, that is, it could belong to a single person or one entity.
So, where are DAOs headed?
Recent technology developments in DAOs show that they are evolving and we can see the development of off-chain voting (see the orange bar in the bar graph, Image Fig. 9, below). This trend is leading to the emergence of DAO ‘subtypes’ — DAOs that either do not execute decisions autonomously (need human intervention), or are only partially autonomous; leading to new classifications such as decentralized organizations (DOs) or Decentralized Partially Autonomous Organizations (DPAOs).[5]
This is a space to be watched closely, as we wait for some more ingenious use cases to surface in the near future that will widen the horizon for DAOs, and open new doors and avenues for their use.
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References:
[1] https://www.freerossdao.org/ ; https://coinmarketcap.com/currencies/freerossdao/
[2] https://assangedao.substack.com/ ; https://www.coindesk.com/tech/2022/02/08/assangedao-raises-38m-to-aid-wikileaks-founders-court-battle/ ; https://coinmarketcap.com/currencies/assangedao/
[3] https://www.theverge.com/22820563/constitution-meme-47-million-crypto-crowdfunding-blockchain-ethereum-constitution ; https://www.coindesk.com/business/2021/11/23/constitutiondao-to-shut-down-nearly-50-of-funds-already-returned/
[4] https://wyoleg.gov/Legislation/2021/SF0038 ; https://legalnodes.com/article/wyoming-dao-llc
[5] Rikken, O., Janssen, M., Kwee, Z. (2023). The ins and outs of decentralized autonomous organizations (DAOs) unraveling the definitions, characteristics, and emerging developments of DAOs. Blockchain: Research and Applications. https://doi.org/10.1016/j.bcra.2023.100143. https://www.sciencedirect.com/science/article/pii/S2096720923000180
[6] The Best Entities and Countries for DAO Registration in 2023. https://legalnodes.com/article/choose-a-crypto-friendly-country-for-dao
Note to reader: please feel free to share your insights and experience on this fast evolving topic in the comments below.
