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DAOs [2] • History & Lore

DAOs are a new way of organizing people. Traditionally, a company structure has been the most effective free-market approach to accruing talent in pursuit of a goal. That labor is usually persuaded and controlled through wages. DAOs seek similar ends — the creation of value — but rely on a decentralized framework in which workers, users, and other stakeholders have true ownership of the entity.

👉 Part 1: 5 Actionable Insights

👇 Part 2: History & Lore

👉 Part 3: What is a DAO?

👉 Part 4: Types of DAOs

👉 Part 5: Philosophy & Culture

We did not always work for companies.

As late as 1820, just 20% of the American population worked for an organization that paid wages. The rest farmed, fished, ran their own businesses, or split their time between these activities.

Over the following 130 years, that changed rapidly. Industrialization offered the chance for greater wealth while demanding increased labor. That drove the consolidation of workers beneath large organizations with centralized command systems. These shifts meant that by 1950, as much as 90% of the populace depended on companies for wages.

The company, then, is a modern phenomenon, at least in the way we usually think of it. What seems so embedded and intractable today — the default for most new ventures ​​ — is really just humanity’s latest attempt to solve the problem of coordination.

A better alternative may have emerged. Though far from perfect, decentralized autonomous organizations (DAOs) seek to remedy some of the company’s flaws while enabling human collaboration at scale. This internet and crypto-native structure looks to decentralize governance and ownership, giving contributors the chance to determine a project’s direction and profit from its success.

While still in its fledgling stages, the explosion of interest in this organizational framework indicates that DAOs are an idea to be taken seriously. Over the last few months, in particular, new DAOs have risen to prominence, attracting meaningful capital and high-caliber, devoted talent. Historically, those that have paid attention to such dislocations in the crypto realm have looked prescient years later — even when the hype seemed overblown. Both builders and investors would be wise to give the space due consideration.

Beyond the potential for financial gains, DAOs may herald a societal shift with lasting implications. We are, after all, influenced by the organizations in which we operate. In his work, “A Society of Organizations”, sociologist Charles Perrow argued that organizations explain much of the way our world works. He introduced this theory, as follows:

Unless you are an organizational theorist… your specialty will be treated as a dependent variable; organizations will be the independent variable that shapes political and economic behavior, the stratification system, religion, social psychological processes and history in general.

How will DAOs, as a new independent variable, influence each of these dependencies? What will this structure do to religion, history, and politics?

In a telling line, Perrow says, “My proposition is that organizations are the key to understanding our society because organizations have absorbed much of society.”

If that maxim holds true, what parts of life will DAOs absorb? If companies invaded the relationships and connections made in the physical realm, DAOs may, over time, assimilate our digital beings. They may, in short, absorb the internet, becoming the constituent pieces of our new, web3 society.

Want to invent your own financial derivative? With Ethereum, you can. Want to make your own currency? Set it up as an Ethereum contract. Want to set up a full-scale Daemon or Skynet? You may need to have a few thousand interlocking contracts, and be sure to feed them generously, to do that, but nothing is stopping you.

Those words appeared in Vitalik Buterin’s 2013 Ethereum Whitepaper — the source for one of the first ever descriptions of a DAO. Not only does Buterin’s explanation above illustrate his blockchain’s modularity and power, it hints at its intellectual influences.

Indeed, years before there was Ethereum, let alone DAOs, there was the “Daemon.” In 2006, science fiction writer Daniel Suarez published a book by that name that can be seen as a kind of ur-text for DAOs.

In Daemon, Suarez paints a picture of a mass scale computer program that orchestrates an underground cooperative society. While the Daemon is involved with a number of insalubrious acts (think self-driving-motorcycle assassins!) that we wouldn’t want any web3 organization to take inspiration from, its fundamental operations are very similar to those a DAO under takes today: paying out bounties, sharing information across a community, and managing a narrative currency.

Despite its functional analogousness, Daemon did not coin the name “DAO.” Buterin had written about “decentralized autonomous organizations” prior to the publication of Ethereum’s whitepaper, but he included a tidy definition in the seminal work:

DAOs are a virtual entity that has a certain set of members or shareholders which, perhaps with a 67% majority, have the right to spend the entity’s funds and modify its code.

Like the Daemon, Ethereum DAOs rely on self-modifying code. Unlike Suarez’s creation, however, Buterin envisioned DAOs as fundamentally transparent with clear governance processes and paths for establishing consensus.

This notion is further illustrated by the whitepaper’s delineation between two types of DAOs: “Decentralized Autonomous Corporations” (DAC1) and “Decentralized Autonomous Communities” (DAC2). (These acronyms are our attempt to easily distinguish between them and are not canon.)

Buterin envisions the former as profit-seeking entities with tradable shares and a dividend offering, while the latter serve more as a democratic entity in which community members vote on certain issues, such as adding or removing members. Effectively, DAC1s operate with a model in which “1 share = 1 vote,” whereas DAC2s govern such that “1 member = 1 vote.” Needless to say, readers of Daemon will remember the book’s near-omniscient program did not have such a clear structure.

Now, while Buterin’s quote at the beginning of this section can be viewed as an invitation, it was also — at least, in part — a provocation.

Want to set up a full-scale Daemon or Skynet? … Nothing is stopping you…

It took nearly three years for someone to take on that challenge. In April 2016, The DAO was born.

The project began with the best of intentions, hoping to become the de-facto venture fund for the Ethereum community, managed in decentralized fashion. Community members collaboratively invested in The DAO, and voted on potential investments.

That proved an enticing proposition to many. The DAO quickly accumulated 12.7 million ETH, the equivalent of $150 million at the time, from more than 11,000 LPs. A warchest of that size would have been meaningful, even among traditional venture firms. For context, the same year that The DAO was founded, storied fund Union Square Ventures announced the closing of a $166 million new fund, not much beyond the Ethereum-native vehicle.

For those that know what came next, it’s hard not to spend a moment imagining just how miraculously successful this entity might have been. Had The DAO done nothing more than hang on to its ETH, delivering zero alpha, it would have assets under management equivalent to $52 billion today. Had The DAO picked even a few winners — and it would have certainly had the broadest sourcing structure in the world — the sums could be significantly higher. The result would be a Tiger Global-scale player in the world of decentralized finance.

Of course, it didn’t play out that way.

In June of that same year, The DAO was hacked. Fully 3.6 million ETH was extracted from the entity and moved to a holding account. To give owners of that ETH the chance to recover their funds, Ethereum underwent a hard fork. No money was lost, but the hack led to a schism within the Ethereum community and illustrated the perils of a DAO structure that had yet to be fully baked out.

What followed was a DAO winter that preceded and endured through the broader crypto cooldown. Still, even during this slower period, dedicated builders were building in the space. Aragon, co-founded by contributor Jorge Izquierdo, began working on tooling for DAOs in 2016. MakerDAO, which had been founded in 2015, continued to grow in prominence, attracting new talent to work in the space.

These early-movers have proven vital over the past 12 months. Part of the reason renewed enthusiasm about DAOs has translated into a tangible renaissance is because newcomers are able to rely on the infrastructure and architecture created by organizations like Aragon and Maker.

Before we talk about the state of play, we’ll think a bit harder about the definition of a “DAO.”

Next part: What is a DAO? 👉

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