Introduction to DAOs: The Future of Decentralised Organisations
Blockchain technology has revolutionised the way we transact, and with the advent of decentralised autonomous organisations (DAOs), it’s now changing the way we organize ourselves. DAOs are a new type of organisation that allows individuals from around the world to collaborate on projects, make decisions together, and manage funds in a fully decentralised way.
In this article, we’ll take a closer look at what DAOs are, how they work, and why they’re important.
What are DAOs?
DAOs, or decentralised autonomous organisations, are blockchain-based organisations that operate without a central authority or management.
Instead, they rely on code that defines the rules of the organisation and holds the group’s treasury. These rules are transparent, auditable, and enforced by a decentralised network of nodes that verify and execute transactions. In a DAO, decisions are made through proposals and voting, ensuring that everyone in the organisation has a voice.
The concept of DAOs is based on the idea of smart contracts, which are self-executing contracts that are programmed to automatically execute when certain conditions are met. Smart contracts are the backbone of DAOs, and they define the rules and logic of the organisation. Once the contract is live on a blockchain, no one can change the rules except by a vote.
Why do we need DAOs?
Traditional organisations are typically hierarchical, with a CEO or board of directors making decisions on behalf of the organisation. This model relies on trust in the leaders and their ability to make good decisions.
However, DAOs can move beyond the corporate model and eliminate the need for a central authority, allowing individuals to collaborate in a fully decentralised way.
DAOs also offer a level of transparency and accountability that is not possible with traditional organisations. All activity in a DAO is transparent and fully public, ensuring that all members of the organisation have access to the same information. This makes it easier to detect and prevent fraud, corruption, and other types of unethical behavior.
Furthermore, DAOs are not limited by geography, allowing individuals from around the world to collaborate on projects and make decisions together. This opens up so many new opportunities for global collaboration and coordination.
DAO Examples
DAOs can be used in a variety of ways, from charities to investment funds to collectives for purchasing and managing assets. Here are a few examples:
- Charities: A DAO can accept donations from anyone in the world and vote on which causes to fund.
- Collective ownership: A DAO can purchase physical or digital assets and members can vote on how to use them.
- Ventures and grants: A DAO can create a venture fund that pools investment capital and votes on ventures to back. Repaid money could later be redistributed amongst DAO-members.
- Social Impact Investing: DAOs can be used to fund social impact projects like affordable housing, renewable energy, or community gardens. Token holders could vote on which projects to fund, and profits from successful ventures could be reinvested into new initiatives or distributed amongst members.
- Decentralised Autonomous Collectives: DAOs can be used to create decentralised autonomous collectives for artists, musicians, or other creators. Members could vote on how to allocate resources, such as studio space, equipment, or marketing campaigns, and profits from their creations could be distributed among members.
- Decentralised Marketplaces: DAOs can be used to create decentralised marketplaces for peer-to-peer transactions. For example, a DAO could be created to manage a marketplace for buying and selling goods or services, with members voting on which products or services should be listed and how transactions should be processed.
- Governance: DAOs can be used to govern decentralised protocols or networks. For instance, the MakerDAO protocol is managed by a DAO, which controls the issuance and management of the Dai stablecoin.
- Gaming Communities: DAOs can also be used to govern gaming communities, where players can collectively make decisions about the game’s development, rules, and in-game items. For example, the Yield Guild Games (YGG) DAO enables players to invest in NFTs (non-fungible tokens) and other in-game assets to earn a share of the community’s profits.
- Decentralised Social Networks: DAOs can also be used to create decentralised social networks, where users can collectively govern the platform and its features. For example, the Friends With Benefits (FWB) DAO is a social network that enables members to own and trade social tokens representing ownership in the community and the ability to access exclusive content and experiences.
- Real Estate Investment: DAOs can also be used to invest in real estate properties and manage them collectively. For example, RealT is a platform that enables users to buy fractional ownership in real estate properties, and then vote on decisions related to the properties, such as leasing, renovations, and selling.
- Decentralised Autonomous Research Organisations (DAROs): DAOs can also be used for scientific research and innovation. DAROs are DAOs that enable researchers to collaborate and share resources to pursue scientific breakthroughs. For example, the GnosisDAO is a decentralised research organisation focused on exploring new approaches to prediction markets and decentralised finance (DeFi).
And these are only just a few examples of the many ways in which DAOs can be used to facilitate decentralised, collaborative decision-making and resource sharing.
As blockchain technology continues to evolve, we can expect to see even more innovative applications of DAOs in the future as there is really no limit to the variety of ways that DAOs can be used to manage operations.
DAO Governance
Governance is a critical component of DAOs, as it determines how decisions are made and how the organisation is run. There are several methods of governance, each with its own strengths and weaknesses.
Token-based membership is a permissionless model in which anyone who holds a certain token can vote on proposals. This model is best suited for decentralised protocols and tokens themselves.
Share-based membership is a more permissioned model in which prospective members can submit a proposal to join the DAO, usually offering a tribute of some value in the form of tokens or work. Shares represent direct voting power and ownership. Members can exit at any time with their proportionate share of the treasury. This model is best suited for more human-centric organisations like charities, worker collectives, and investment clubs.
Reputation-based membership is a model in which reputation represents proof of participation and grants voting power in the DAO. Reputation cannot be bought, transferred or delegated; DAO members must earn reputation through participation. On-chain voting is permissionless, and prospective members can freely submit proposals.
Personhood-based membership is another model where individuals are verified to be true individuals to allow true democratic DAOs to exist. Many of the previous membership examples can have vunerabilities, either due to bots or duplicate accounts to sway the governance, or by using token models that may be seen as unlicensed securities in some jurasdictions such as the United States and their Securities and Exchange Commission (SEC). Few blockchains offer good solutions for truly secure and easy Proof-of-Personhood so this model is extremely rare amongst DAOs—although it is akin to the Holy Grail amongst DAO operators.
DAOs are also useful for pooling resources and collaborating on ventures. For example, a DAO could be created to pool investment capital and vote on ventures to back. The repaid money could later be redistributed amongst DAO-members. This enables like-minded individuals across the globe to work together on projects without needing to trust a single person to manage the funds.
Delegation is like the DAO version of representative democracy. DAO members delegate votes to users who nominate themselves and commit to stewarding the protocol and staying informed. A famous example of this is ENS (Ethereum Name Service) members who can delegate their votes to engaged community members to represent them.
In many DAOs, transactions will be automatically executed if a quorum of members votes affirmative. A famous example of this is Nouns DAO. In Nouns DAO, a transaction is automatically executed if a quorum of votes is met and a majority votes affirmative, as long as it is not vetoed by the founders.
While DAOs may have thousands of voting members, funds can live in a wallet shared by 5–20 active community members who are trusted and usually doxxed (public identities known to the community). After a vote, the multisig signers execute the will of the community.
In essence, DAOs allow for a more decentralised approach to decision-making and management. They provide a way for groups to work together without needing to trust a central authority figure to manage the funds or operations. There will be many innovative models of voting and membership (fractal democracy, qualified sortition, holocracy) coming to DAOs, creating new forms of governance models that may end up proving to be more resilient than the existing forms of governance that we are typically used to.
How Do DAOs Work?
Smart contracts are at the heart of how DAOs operate. A smart contract is a computer program that executes code automatically when certain conditions are met. In the case of a DAO, the smart contract defines the rules and regulations of the organisation, and holds the group’s treasury.
Once the smart contract is deployed on the blockchain, the rules of the DAO become immutable, meaning that they cannot be changed without the approval of the members through a vote.
This means that no individual or group of individuals can unilaterally make decisions for the DAO. Instead, decisions are made democratically, with each member having an equal say in the process.
One of the most important aspects of a DAO is its treasury. The treasury is controlled by the smart contract and can only be accessed by the members of the DAO. This ensures that funds are protected and cannot be stolen or misused. Any proposed expenditure from the treasury must be approved by a vote of the members.
The governance process of a DAO is entirely decentralised and transparent. The smart contract ensures that every member has an equal say in the decision-making process, and all transactions are recorded on the blockchain for anyone to see. This creates a high level of trust among members and ensures that the organisation operates with complete transparency.
The use of blockchain technology in DAOs provides an additional layer of security and accountability. Every action taken within the DAO is recorded on the blockchain, providing an immutable record of all transactions. This makes it virtually impossible to commit fraud or manipulate the system, as any attempt to do so would be immediately detectable.
Overall, the combination of smart contracts and blockchain technology make DAOs a powerful tool for collective decision-making and resource management. They offer a transparent and secure way for groups to collaborate and achieve their shared goals without the need for a central authority or intermediary.
DAO Laws
DAOs are changing the landscape of corporate law by enabling direct voting of participants’ interests instead of placing trust in a board of directors. DAOs are powered by the basic human right of freedom of association and exist outside the system of states or governments.
This allows them to transcend territorial government, providing a universe of possibilities for human self-governance, decision-making, and participatory wealth creation. However, there are still challenges in incorporating DAOs into the existing legal framework, such as limited liability, a lack of precedent for unforeseen problems, and the potential for exploitation by those programming the smart contracts.
To address the need for limited liability, some states and countries are adopting DAO-specific legislation. Vermont introduced the Vermont Blockchain-Based LLC (BBLLC), which applies standard LLC law to any company using blockchain-based technology, while Wyoming and Tennessee created the Wyoming DAO LLC and DO LLC, respectively, which apply standard LLC law with additional requirements such as specifying the extent to which management will be conducted algorithmically.
Other countries, such as Malta and the Republic of the Marshall Islands (MiDAO), have also enacted DAO-specific legislation, recognizing DAOs as legal entities. The Marshall Islands’ recent legislation is very DAO specific and allows DAOs to achieve limited liability without onerous KYC requirements and including member confidentiality.
Additionally, as mentioned previously, many DAOs use tokens in ways that are akin to shares—offering rights to revenue as well as governance features. This means many of these tokens are likely to be classed as unregulated securities putting any DAO that issues such tokens at risk with regulating bodies, especially the United States’ SEC which has been taking a hard stance on such organisations.
The way to counter this concern is to allow Proof-of-Personhood to provide democratic voting rights to real people, not based on token holdings. Any tokens that are issued by the DAO can then be based on utility, work, and reputation, mitigating the risk that any DAO token is seen as an unregulated security used to achieve passive income and governance rights.
The DAOScape is a set of DAO-building tools that uses the Proton and Internet Computer blockchains to offer DAOs Proof-of-Personhood-based features, as well as ways for DAOs to easily launch tokens that are based on genuine labour and utility to further lessen any legal risk.
Proton, Internet Computer and DAOs
Proton is an ideal blockchain platform for DAOs for several reasons:
Proton’s consensus is distributed and established enough for organisations to trust the network while being fast (transactions and finality) to provide a good user experience.
Additionally, Proton includes one of the best user experiences for a blockchain wallet—WebAuth—which allows users to securely and easily execute smart contract actions with minimal friction and a pleasant user experience—important to bring ordinary people to experience the power of DAOs without hassle.
With Proton, smart contract code can be upgraded—unlike many other blockchain platforms. Additionally, Proton’s advanced built-in multisig features means that a DAO can only be upgraded by a vote from the DAO.
Smart contracts can send/receive funds. Without this, you’d need a trusted intermediary to manage group fund, and Proton’s multisig functions make managing a fund far more secure, without requiring additional tools to make multisig work.
The Proton community has proven to be more collaborative than competitive, allowing for best practices and support systems to emerge quickly.
In addition to Proton, Dfinity’s Internet Computer is also allows an important piece of decentralisation — allowing both the backend (smart contract) layer of the DAO to be decentralised, as well as the frontend code. This allows a more unstoppable DAO to exist that is not beholden to centralised infrastructure.
Additionally the Internet Computer has abilities to connect directly, and trustlessly, to traditional Web2 APIs allowing DAOs to connect to the outside world without relying on centralised infrastructure.
And most importantly, both Proton and the Internet Computer are gas-fee free, ensuring that using a DAO a pleasant, friction free experience.
In combination, the two blockchains work well to make up a technology stack that can create powerful DAOs that are censorship resistant, borderless, fast, low-friction, and connected to the rest of the world.
Overall, Proton and Internet Computer are two blockchain platforms that offer unique features and benefits that make them appealing for hosting DAOs, which has allowed tools like the DAOScape and the Freeos Economic DAO to offer so many unique features to DAO builders that are difficult to achieve elsewhere.
While there are many other blockchain networks available, the specific strengths of Proton and Internet Computer make them well-suited for organisations looking to create decentralised and autonomous structures.
Conclusion
In conclusion, DAOs have the potential to revolutionise the way we collaborate, coordinate, and make decisions in a decentralised world. They offer a level of trustlessness and transparency that is unparalleled in traditional organisations. DAOs can be used for a wide range of purposes, from funding philanthropic causes to collective ownership of digital and physical assets.
Thanks to blockchain technology, smart contracts, and decentralised governance mechanisms, DAOs can function autonomously without the need for a central authority.
DAOs are also highly adaptable and can be tailored to different needs and organisational structures. Furthermore, DAOs have the potential to be more inclusive and equitable by allowing anyone with an internet connection to participate in decision-making and share in the organisations success.
As with any new technology, DAOs have their challenges and limitations. For example, governance and decision-making in DAOs can be slow and inefficient due to the need for consensus and voting. There is also the issue of legal and regulatory frameworks that have yet to catch up with the rapid pace of technological innovation. Nonetheless, DAOs have already shown immense potential, and as the technology and legal frameworks continue to evolve, we can expect to see more innovative and impactful DAOs emerge in the coming years.
Overall, DAOs are an exciting development in the world of decentralised technology and have the potential to create more inclusive and equitable organisations. As the DAOScape continues to evolve, it is important to stay informed about the latest developments and explore the various opportunities that DAOs offer.
Whether you are interested in funding philanthropic causes, collective ownership, or decentralised decision-making, there is likely a DAO model out there that fits your needs and goals.
Our team is happy to help work with any DAO-in-formation wishing to setup, operate a DAO. Feel free to connect with us at www.thedaoscape.xyz or in our Telegram or Discord channels.
