Web3 for TradBiz — Use cases and value propositions (10 of 14)
Decentralized autonomous organizations (DAOs)
New collaborations designed to develop, grow, and manage distributed Web3 ecosystems
Now that we’ve discussed emerging Web3 use cases, including deeper dives on decentralized finance (DeFi) and non-fungible tokens (NFTs), we might ask how are all these ecosystems going to be governed and managed? Fortunately, decentralized autonomous organizations (DAOs) have emerged as a new type of organization better suited to manage bourgeoning communities of stakeholders than more traditional structures like hierarchy-based organizations that have dominated since the Industrial Revolution. This chapter discusses the history of DAOs, how they are used to manage Web3 ecosystems, strengths and weaknesses compared to traditional organizations, types of DAOs, and the tools enabling DAO operations.
DAOs have evolved in parallel with cryptoassets. The concept of distributed governance arguably has been around since the birth of Bitcoin, as the process for evolving the cryptoasset’s protocol requires consensus building and adoption by stakeholders that include software developers, miners, node operators, and users. Ethereum founder Vitalik Buterin outlined his view of the “decentralized autonomous corporation” in a 2013 Bitcoin Magazine article.¹ This was followed by the launch of The DAO in early 2016, a decentralized autonomous organization that intended to function as an investor-directed venture capital fund. The DAO raised more than US$150 million in Ether via a successful crowdfunding campaign; however, was subjected to an attack exploiting code vulnerabilities a month later, resulting in the loss of about one-third of the Ether raised. Given the magnitude of the loss, the Ethereum network was hard forked to recover the lost funds for original owners, with the term DAO becoming synonymous with this hack for several years.² Interest in the DAO concept reemerged around 2019 and 2020, fueled in part by the rising use of governance tokens to manage DeFi protocols and other dApps. Today there are thousands of functioning DAOs with millions of members, managing cryptoassets valued in the billions of U.S. dollars.
DAOs are systems to manage Web3 ecosystems. Decentralized autonomous organizations (DAOs) are made up of the stakeholders responsible for managing an ecosystem through rules and codes enforced by smart contracts, with members incentivized through token mechanisms that align their interests to the collective goals of the community. Think of DAOs as community-led entities that may not have the same degree of centralized authority typical in traditional businesses. In its pure form, a DAO is fully autonomous and transparent, with smart contracts providing the foundational rules and executing agreed-upon decisions. DAOs are governed by individual members who collectively make critical decisions about the project’s future, such as the development roadmap and treasury allocations. Community members may create and vote on proposals, with the successful ones accepted and enforced by the rules implemented in the underlying smart contracts. Since every DAO member is an owner, incentives tend to be aligned with decision making as it is in each member’s best interest to only approve proposals that maximize the value of the ecosystem. This has the potential to create flywheel effects, in which a healthy DAO garners more ecosystem usage, which increases the value of the tokens each DAO member holds, promoting continued good governance, and thus creating long-term sustainability.
DAOs have both strengths and weaknesses. Not surprisingly, DAOs have both strengths and weaknesses compared to traditional forms of organization. DAO operations are more likely to be transparent than traditional organizations, given that major decisions and actions are recorded and accessible on a blockchain. Decision-making can also be more inclusive, including broader sets of stakeholders who can participate directly or indirectly in the governance and management of the ecosystem. Members of DAOs are typically rewarded through actual contributions of value, rather than their education background, years of experience, or potential expertise. Some notable DAO contributors, in fact, have operated pseudonymously, not sharing their legal names, race, gender, age, or other demographics publicly. This has the potential to expand access to economic opportunities and limit discrimination as people can work from anywhere to contribute measurable value. DAOs can also be more flexible and adaptive to achieve their ecosystem’s objectives through their flatter, more emergent structures.³
Yet DAOs also face considerable issues that need to be addressed, many of which are related to the early stage of development and lack of best practices for organizing, managing, and operating these organizations. High amongst the issues is the uncertain regulatory landscape, with unclear, confusing, and even incompatible regulations across jurisdictions, that may hinder widespread adoption, especially among DAOs that operate with global scope. Coordinated attacks by influential stakeholders holding significant shares of governance tokens within DAOs may place individual or team interests above the ecosystem that the DAO governs. It’s also not clear what is the appropriate level of decentralization versus centralization to achieve each ecosystem’s objectives, as some DAOs may place more importance on efficient operations that require certain degrees of hierarchy and centralization, rather than operate in fully a distributed manner.⁴ ⁵
Different types of DAOs address varying objectives. DAOs can be grouped into use case categories based upon the types of projects they manage, including protocol, investment, grants, collector, and social DAOs.
Protocol DAOs use tokens for ownership and on-chain governance to maintain and evolve the underlying platforms. These are commonly seen among DeFi ecosystems. For example, Uniswap’s UNI token holders can vote or delegate their vote to guide Uniswap’s directions, fees, and treasury use. Similarly, Maker uses a DAO framework for token holders to vote on policies, fees, and protocol operations.⁶
Investment DAOs operate as investor-controlled investment funds, where DAO members collectively decide on how to allocate their pooled capital. MetaCartel Ventures, for example, allows members, including non-accredited investors, to vote in which dApps to invest, while The LAO functions as a member-directed venture capital entity registered in the U.S. as a limited liability company (LLC).⁷
Grants DAOs are often created as the mission-driven philanthropic arm of a bigger project, focused on missions like supporting new Web3-based ecosystems through grants. Gitcoin, for instance, is an independent platform funding developers focused on open-source applications. Moloch DAO focuses on funding Ethereum’s infrastructure development.⁸
Collector DAOs pool funds from multiple users to acquire collectible items, such as NFTs, physical art, music, and real estate — from both Web3 and traditional markets.⁹ PleasrDAO is a collective of DeFi leaders, early NFT collectors, and digital artists that acquires and curates unique art and collectibles. The DAO’s collection includes purchasing Wu-Tang Clan’s one-of-a-kind unreleased album Once Upon a Time in Shaolin for US$4 million in October 2021,¹⁰ as well as Edward Snowden’s signed Stay Free NFT for US$5.4 million in April 2021.¹¹ Constitution DAO was organized in November 2021 to purchase an original copy of the United States Constitution. The group raised approximately US$ 47 million in Ether within a one-week crowdfunding effort but lost to a higher bid in the Sotheby’s auction. Nonetheless, the ability to conceptualize, organize, raise money, and bid at this scale, according to Bloomberg news, “showed the power of the DAO … has the potential to change the way people buy things, build companies, share resources and run nonprofits.”¹²
Social DAOs are clubs in which people acquire a DAO’s token, which could be an NFT, social token or other cryptoassets, to become members. Examples include Friends with Benefits, a social club composed of Web3 artists, developers, and enthusiasts, which we mentioned earlier when discussing social tokens. Another example is the popular Bored Ape Yacht Club (BAYC), in which membership is determined by ownership of the PFP (photo for profile) from the BAYC NFT collection.¹³
Users participate in DAOs with tokens. Crypto holders generally become members of DAOs by acquiring tokens in the DAO that provides them with a share of ownership and governance rights. The specifics of how this works differ by DAO, but we can use a hypothetical investment DAO as an example. In this case, you decide to join the DAO by exchanging some of your crypto, like Ether or USDC, for tokens that represent proportional ownership of the DAO. This so-called tribute adds to the shared treasury, which the DAO uses to make investments. As a DAO owner, you have right to vote on proposals offered by fellow members on how to utilize the treasury to make investments, distribute earnings to members, reward other contributors, and otherwise fund the DAO’s operations. For example, the DAO may compensate contributors for services that improve the DAO’s value, which for an investment DAO could include investment research, portfolio management, accounting, legal advice, tax compliance, and marketing. Smart contracts determine what the organization can and cannot do, as well as define member rights and responsibilities; however, DAO members may have the ability to change these engagement rules through the voting process. As a DAO member, you also may have the ability to quit the DAO whenever you wish, redeeming your proportional share of the DAO’s treasury back into underlying cryptoassets. Some DAOs allow what is called rage quit, in which there is a predetermined time after each proposal passes where members who don’t agree can simply exit the DAO.
The numbers and size of DAOs are exploding. There are currently nearly 5,000 DAOs identified by analytics website DeepDAO, with an aggregate membership of about four million governance token holders managing more than US$ 10 billion in total treasury. Top DAOs, with treasuries valued from hundreds of millions to billions in U.S. dollars, include decentralized exchange Uniswap, crypto cross-ownership network BitDAO, crypto tool provider Gnosis, next-gen blockchain Polkadot, and Ethereum staking protocol Lido.¹⁴
An increasing number of tools and services enable DAOs. As DAOs become more commonplace, the range of services from both Web3 projects and TradBiz that enable DAOs is growing. These include broad organizational frameworks, as well as focused solutions supporting community management, analytics, operations, tokens, and treasury management. Organizational frameworks provide on- and off-chain governance with decision-making tools that help DAO’s achieve their objectives. Operations management services enable day-to-day management of DAO operations, including full-stack technology platforms as well as risk and legal management systems. Community management tools help stimulate participation and collaboration, including measuring and validating the reputations members earn over time by contributing to DAOs. Analytics tools help DAOs monitor progress as well as gain insights on governance, spending, initiatives, and discussions. Token services enable DAO tokenization, including token design, issuance, distribution, and market making. And treasury management solutions aid in DAO financial management, including asset allocation, payments, and financial reporting.
DAOs are innovating how business is conducted. While we don’t expect DAOs to replace established organizational structures and business entities, we do think that DAOs will have a substantial role in our Web3 future. In this chapter, we’ve introduced DAOs, discussing how they govern and manage distributed Web3 ecosystems. You now know that DAOs enable a broad variety of use case objectives, such as protocols, investments, grants, collectors, and social. Users participate by obtaining DAO tokens, which provides both shared ownership and governance rights. There are now thousands of DAOs managing billions of U.S. dollars in shared treasuries with millions of members. And an increasing number of tools enable DAOs in areas like organizational structure, community management, analytics, operations, tokens, and treasury management.
Now that we’ve explored Web3 use cases, including decentralized finance (DeFi), non-fungible tokens (NFTs), and decentralized autonomous organizations (DAOs), let’s shift emphasis to thinking about the implications and opportunities arising from our transition to Web3, starting with Web3 impact on TradBiz market and business models.
Monchester Macapagal and Kris Caigas of AcceleratingBiz contributed significantly to the research, writing, and production of this series.
Explore other Web3 for TradBiz insights and resources at acceleratingbiz.com.
Click on the links below to progress through the Web3 for TradBiz series:
[1] Web3 for TradBiz introduction
Web3 and crypto foundations
[2] Why embrace Web3 now
[3] Inevitable Web3 future
[4] Crypto and Web3 basics
[5] Advanced Web3 topics
[6] Using crypto wallets
Use cases and value propositions
[7] Web3 use case categories
[8] Decentralized finance (DeFi)
[9] Non-fungible tokens (NFTs) and the Metaverse
[10] Decentralized autonomous organizations (DAOs)
Web3 implications and opportunities
[11] Web3 impact on TradBiz market and business models
[12] Emerging Web3 investment opportunities
[13] Evidence of mainstream Web3 adoption
End notes:
¹ Vitalik Buterin, “Bootstrapping a Decentralized Autonomous Corporation: Part I,” Bitcoin Magazine, September 19, 2013, https://bitcoinmagazine.com/technical/bootstrapping-a-decentralized-autonomous-corporation-part-i-1379644274.
² “The DAO (organization),” Wikipedia.org, accessed on August 2, 2022, https://en.wikipedia.org/wiki/The_DAO_(organization).
³ Paul C, “What is DAO: advantages and disadvantages of decentralized autonomous organizations,” CoinMonks Medium page, accessed April 25, 2022, https://medium.com/coinmonks/what-is-dao-advantages-and-disadvantages-of-decentralized-autonomous-organizations-e099b8e1b5dd.
⁴ “Decentralized Autonomous Organizations Explained,” Binance Academy, last updated November 18, 2021, https://academy.binance.com/en/articles/decentralized-autonomous-organizations-daos-explained.
⁵ Brynly Llyr, “Re-envisioning corporations: How DAOs and blockchain can improve the way we organize,” World Economic Forum, accessed April 25, 2022, https://www.weforum.org/agenda/2022/02/re-envisioning-corporations-how-daos-and-blockchain-can-improve-the-way-we-organize/.
⁶ “The Complete Guide to DAOs,” DeFiRate.com, accessed April 25, 2022, https://defirate.com/dao.
⁷ DefiRate.com, “The Complete Guide to DAOs.”
⁸ DefiRate.com, “The Complete Guide to DAOs.”
⁹ DefiRate.com, “The Complete Guide to DAOs.”
¹⁰ Keira Wright, “PleasrDAO adds $4M ‘OG NFT’ Wu-Tang Clan album to its collection,” Cointelegraph, accessed July 20, 2021, https://cointelegraph.com/news/pleasrdao-adds-4m-og-nft-wu-tang-clan-album-to-its-collection.
¹¹ Ekin Genc, “Why This DAO Bought Snowden’s NFT for $5.4 Million,” Decrypt, accessed July 20, 2022, https://decrypt.co/66933/why-this-dao-bought-snowden-nft.
¹² Olga Kharif, “Crypto Crowdfunding Goes Mainstream With ConstitutionDAO Bid,” Bloomberg, accessed July 11, 2022, https://www.bloomberg.com/news/articles/2021-11-20/crypto-crowdfunding-goes-mainstream-with-constitutiondao-bid.
¹³ DefiRate.com, “The Complete Guide to DAOs.”
¹⁴ “Organizations,” DeepDAO.io, accessed July 15, 2022, https://deepdao.io/organizations.
