A Primer to Decentralized Autonomous Organizations (DAOs)

This post is intended as a high-level introduction to the standard DAO framework and its whitepaper.

Disclaimer: The future remains a work in progress. Our vision exists in a world where laws vary widely. It is important to remember that anyone who uses DAO code will do so at their own risk. We can’t speculate about the legal status of DAOs worldwide. Whatever our personal beliefs may be, people must draw their own conclusions, relying on legal advice where appropriate. Slock.it is not a law firm and we are not in the business of offering legal advice. If you create a DAO it will be your DAO, and you will be responsible for its operation.

A DAO is an organization that’s self-governing and not influenced by outside forces: its software operates on its own, with its by-laws immutably written on the blockchain, not controlled by its creators. DAOs are formed by groups of like-minded individuals with specific projects and goals in mind. Its identity is formed through consensus. Its authority is defined through voluntary endorsement and, ultimately, network effects.

A DAO is purely software: in itself it does not have the capabilities to manufacture a product, write code, develop hardware or sweep the streets. It requires actors in the physical world for this purpose, called Contractors.

A DAO is free to work with as many or as few Contractors in the real world as it sees fit. Contractors submit Proposals for the development of product or services — these take the form of smart contracts backed by plain English descriptions. To guarantee the Contractors will not act against the interest of the DAO, a group of signatories validates Contractors’ Proposals then add them to the list of addresses authorized to receive ether (ETH) from the DAO.

This group of signatories is collectively referred to as a Curator. To maintain decentralization, the Curator can be fired by the DAO at any time and for any reason.

Would-be participants in the DAO can for a period of time acquire DAO tokens by sending ETH to a DAO. These tokens will give them the right to vote on Proposals (proportional to the number of tokens acquired) as well the opportunity to receive rewards generated by the output of the work from the Contractors’ Proposals.

These Proposals are written in plain English and backed by smart contract defining the relationship between the DAO and the Contractor: deliverables, responsibilities, and operating parameters. Debates around Proposals can take place on or off-chain through a service chosen by the DAO’s community (discussion forums, Slack, on-chain threaded discussions, etc).

While the Contractor is bound by the term of the Proposal, the DAO Token Holders can elect to ‘pull the plug’ on the Contractor at anytime and for any reason. This is a major advantage as it considerably minimizes risk.

It is also possible for the DAO to select a replacement Contractor for any given Proposal, meaning projects can continue where they left off rather than being abandoned outright.

Let’s take a practical example: in the context of a Proposal Slock.it UG could submit to a suitable DAO, we will offer the development of the Ethereum Computer, a consumer electronics product making it possible to rent or share connected objects. The incentive to the DAO will take the form of products the DAO Token Holders will then leverage for their own use, or charge non token holders for using them. Slock.it UG would act as contractor to the DAO.

We are making the generic DAO model we developed free and open source, so it can be reused by anyone wishing to put together a transparent organization where governance and decision making systems are immutably programmed in the Blockchain. This code been reviewed by hundreds of pairs of eyes from our community and by one of the most respected auditing companies in the world, Deja Vu.

This standard DAO framework is simple, decentralized and 100% secure.

Voting

A DAO can take two types of actions in relation to its Curator and Contractors:

Signing off on a Proposal

This is done by majority decision after a debating process that takes a minimum of two weeks, and the minimum participation rate for a vote to be valid is calculated proportionally to the value of each Proposal.

Proposals can be as simple or as complex as needed: for example, a DAO can minimize the trust required by signing off Proposals that disburse ETH to its Contractor on a month by month basis as opposed to a lump sum. ETH can be sent to a single address or many, representing various trusted actors each contributing to smaller parts of the project: building a wiki, coordinating a marketing campaign or producing injection molds.

Proposals can also contain operational parameters — for example, they could contain a charge levied by the DAO each time one of the products or services the DAO commissioned from the Contractor is used by non-token holders. This is represented as a variable percentage, defined by the DAO itself.

This allows for the code representing the DAO itself (the smart contract that holds the ETH) to stay immutable and therefore safe, while maintaining flexibility should a DAO desire to switch business models or become dissatisfied with the Contractor(s) performance.

Protecting the DAO

Sometimes however, a DAO could end up being dissatisfied with the performance of the Curator as a whole, in which case it will want to change Curator. Changing the Curator takes the form of a Proposal with a special flag. Votes on changing the Curator take place in two steps. The first, an informal vote on whether a DAO would like to switch Curator or not. The second, a confirmation vote to give a chance to DAO Token Holders to confirm the result of the first vote, or a chance for the minority to ‘split’ their DAO into two and retain control over their ETH.

If a split occurs, both DAOs would continue to operate, each with their own tokens, and each with a different Curator and Contractors. This would be the equivalent of a large company splitting into two. The rewards for projects already backed by the DAO are also split and fairly distributed: Token Holders on both sides of the split will continue to receive any ongoing rewards from Proposals made prior to the split. Of course, Proposals backed after the split will only distributed rewards to their respective DAO.

Note that the above has an added advantage: it prevents someone from acquiring 51% of the tokens then passing a Proposal sending himself 100% of the DAO’s ETH. This idea originates from a blog post by Vitalik Buterin. The very possibility of a split indeed renders this attack moot: the legit minority would stay with its current Curator and 100% of their own ETH, while the majority attacker would be left without Curator, and with only the ETH it put in itself.

Note that this primer was intended solely as a very high level overview —for more information please check the Whitepaper. If you still have questions, please join our Slack.

About the Author

Stephan Tual is the Founder and COO of Slock.it.

Previously CCO for the Ethereum project, Stephan has three startups under his belt and brings 20 years of enterprise IT experience to the Slock.it project. Before discovering the Blockchain, Stephan held CTO positions at leading data analytics companies in London with clients including VISA Europe and BP.

His current focus is on the intersection of blockchain technology and embedded hardware, where autonomous agents can transact as part of an optimal “Economy of Things”.

Twitter: @stephantual
Contact: stephan@slock.it

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