Decentralized Autonomous Organizations, sometimes called DAOs, are fully autonomous organizations that are not managed by a certain institution or a company. The rules contained in these organizations cannot be changed or manipulated by a central government, because each transaction that takes place in the ecosystem, the rewards distributed to the users, or the decision-making processes are completed according to the requirements specified in the smart contracts.
In this article, we will tell you what DAOs are, how these organizations work, the history of these organizations, how DAOs are used today, what the advantages these organizations offer, and so on.
KEY TAKEAWAYS
- DAOs are all built on open-source blockchains, anyone can review the smart contract on which a DAO is built. Moreover, DAOs often share their scores by putting their smart contracts through various audits to prove to investors that they are reliable.
- Launches to be made through or within DAOs take place in three steps: smart contract creation, financing, and distribution.
- DAOs are one of the organizations that host many concerns due to their legality, security, and organizational structure.
- The roots of DAOs are based on four different themes, which can be listed as organizational decentralization, peer production, unbundling and deregulation, crypto-trust, and consensus.
Table of Contents
What is a DAO?
To understand DAOs, we must first understand why they were built. It is possible for DAOs to have any purpose, so it is also possible for DAOs to have many different functions & financial values.
Think of DAOs as human organizations that come together for a specific purpose. You don’t have to look at them as a financial transaction committee. Take, for example, the Ape Foundation, which is a very popular DAO for market cap statistics. ApeCoin is a community that aims to take the culture industry to the metaverse step by step, and they have an ApeCoin to fund various project development processes in this field. Maker DAO wants to create a community that aims to enable a completely decentralized finance world and an ecosystem by integrating more than 400 apps and services into its system. BeetsDAO is a community focused on music-based NFTs. FriendswithBenefitsDAO aims to create a decentralized social club of people getting together. The token attached social club creates a new generation social media platform with Web3 technology. ConstitutionDAO, U.S. It was founded by a group of teenagers trying to buy a rare copy of the Constitution.
Can you understand better now? DAO is just like student clubs in universities. But they may also have the financial power to shake the world. Because they are offered to the public with their tokens.
DAOs, which are platforms without a central leadership and have a completely decentralized structure, are built in blockchain networks. All of the decisions to be made by these organizations are made by community votes on the related blockchain and centered around a predetermined set of rules implemented over smart contracts. The way decisions of this community, which is governed by the rules set by the blockchain, are always made from the bottom up.
DAOs are theoretically owned by participants who own the governance tokens. Because even the built-in treasures owned by these platforms are usually determined by the votes of the token holders. All of the decisions to be made for any purpose in these organizations must be made within a certain period of time, and new decisions are made in line with the votes of all members of the group. Of course, how the majority concept will be determined in the voting process, that is, the vote value of each of the users participating in the voting is determined according to the calculation in the smart contract.
How Does a DAO Work?
DAOs need a few elements to make it work. These elements are applied for the operation of the organization and the rules included in smart contracts, financing in the form of tokens in the amount of which members can be rewarded in return for certain activities, and voting rights for members to make decisions.
Understanding Management Tokens
In the previous topic where we talked about what DAOs are in general, we said that the decisions in these organizations are taken from the bottom up. Almost all of the DAOs today have a collective organization with members, that is, the decisions taken are taken together. If you want to join a DAO, you have to do certain things, but the most common way is to have a management token (or governance token). In that way, you can have a voting right during decision-making processes in a particular DAO.
People who own any stake at any percentage in a DAO subsequently gain voting rights. People with voting rights have a say in any decision like how the organization will distribute stake rewards, what the next move will be, what will APY rates be, whether or not to build a partnership with a company, and so on.
It is not possible to directly approve a management change proposal or decision proposals to be made by a group of participants, for any proposal to be approved it must be approved by the majority of the people in that management system. Unnecessary offers and spam are avoided as offers are not approved by the majority, which creates a certain rate of security. Note that although majority approval is always required in order to make a decision in a DAO, how this majority is determined may vary from organization to organization, and this difference is determined by smart contracts.
Smart Contracts & DAOs
DAOs operate by smart contracts, which are software or code snippets that are automatically executed as a result of meeting predetermined criteria by the parties. All the clauses in DAOs’ smart contracts are the articles that determine the rules of transactions that can be made on DAOs.
Blockchain-Based Transparency of DAOs
DAOs are all built on open-source blockchains, so anyone can view the code of this community. In addition, since the blockchain on which DAOs are built records all financial transactions made, if the DAO community shares the wallet ID, it is possible for anyone to view the treasury of financial assets of a certain DAO. This method is important in terms of creating a transparent financial view and easily tracking that no transfers are made from any DAO wallet to another that has not been decided by the community.
Risks of Voting-Based Organizational Management
There is a potential issue with the voting system in DAOs, even if the issue is a vulnerability in the code that the organization was created with, that vulnerability cannot be fixed unless most people in the organization vote for this. The paradox here is that hackers may use this coding error to cause incorrect voting, as there will be a problem in the voting system while the voting process is taking place. Therefore, the reliability of DAOs depends on how professionally smart contracts are prepared.
What Characteristics Are DAOs Made of?
DAOs have some features, and since these features progress by adding to each other, we can say that these organizations have an evolutionary structure.
| Features | Explanation |
|---|---|
| Autonomous | DAOs have intelligent programs and an ever-increasing level of artificial intelligence algorithms. Thanks to these algorithms, operations can be self-actualized and sustainability can be achieved at the edges of the organization. |
| Decentralized | In DAOs, unlike traditional organizations, there is no central authority, which allows transactions to be processed faster and a greater amount of scalability can be achieved. In addition, since there will be no intermediary fee, the fees obtained by the organizations can only be used for the organizations. |
| Distributed | DAOs are built in a wide network and each function to be realized is distributed in the relevant ecosystem. The fact that there is no center and the transactions are completed with the approval of the distributed nodes, reduces the administrative expenses to zero and eliminates the bureaucratic waiting times. |
| Participative | Users in a DAO participate in tasks in that organization completely voluntarily and independently. |
| Cooperative | All members of DAOs are in official cooperation with each other, and all of these cooperations are made according to certain rules. For instance, in the DAO backed by a proof-of-stake token, each user who stakes their assets contributes to the safe and fast operation of the ecosystem. Of course, they also get advantages in return: stake rewards. |
| Collaborative | People who own a Decentralized Autonomous Organization’s management token collaborate to develop that organization as they can generate more income as that DAO becomes popular. As a result of this cooperation, they add value to the organization they are involved in and increase their earnings with a common purpose. |
History of Decentralized Autonomous Organizations ( DAOs )
DAOs were organized as repetitions of traditional and centralized organizations when they were first established. They were first launched in 2016 as automated-functioning organizations acting as a venture capital fund.
People who own the management tokens of DAOs can either earn money by participating in passive income-generating services (ie. staking, yield farming, liquidity mining, etc.), or they can earn from these organizations as a result of the price volatility of tokens.
Since DAOs were seen as a revolution when they were first established, there was a great demand for them. So much so that the versions of these organizations on the Ethereum platform had a budget of approximately 150 million dollars as Ether.
The first DAO is released as open-source code by Christoph Jentzsch, who served as Ethereum’s protocol engineer. The first start date of Decentralized Autonomous Organizations, which were created as an investment collaboration, was April 30, 2016. Since there was a great demand for DAO that year, people wanted to invest in the management tokens of related DAO on the Ethereum platform.
The DAO Attack on Ethereum & Soft Fork Solution
On the day that the management tokens of the DAO went on sale, many developers said that they were worried that if any error occurs in the smart contract, the errors could cause malicious people to use the funds in the organization without permission. While the developers were making development suggestions to fix the bug to address these concerns, a hacker took advantage of this vulnerability and stole a significant amount of money. That amount was over 60 million dollars worth of Ether stolen from the wallet of a DAO.
| With the soft fork solution, it was possible to rewind the past on the Ethereum network to the time before the DAO was hacked. All the stolen funds were withdrawn by their original holders. Although this buyback and withdrawal with a smart contract were supported by many investors, some of the investors rejected the move and continued to use the network as an older version known as Ethereum Classic (ETC). |
This large-scale attack by a hacker was a serious blow to the Ethereum platform since approximately %14 of the Ether in circulation at the time was used for the DAO. Not wanting to lose their users, the developers tried to find a way, as people became even more worried about this huge money rush. While this path has sparked some controversy among developers, Ethereum co-founder Vitalik Buterin found a way. This new way was to identify the addresses of attacking people and blacklist their addresses and prevent these attackers from accessing the funds.
The attacker of the DAO on the Ethereum platform, which hosted a serious robbery, responded to this path, claiming that he obtained the funds he obtained according to the smart contract and therefore made a completely legal transaction. Fund managers, who said that people who attack the funds of DAOs will be prosecuted, also expressed that they are ready to initiate legal action. This hacker, who attacked the DAO, even tried to bribe Ether miners to counter this system called soft fork and suggested by Vitalik Buterin, but he was not successful in these threats and actions, the soft fork solution was also accepted.
How Are DAOs Used Today?
Although DAOs have many uses so far, the most common uses are to invest, donate to charities, collect donations for some applications, borrow from some people or institutions and buy NFT. If you want to use DAOs for different purposes, there is no obstacle to you doing so. With DAOs, it is possible to get any amount of money from any part of the world. In addition, how the donations obtained for these organizations will be spent are decided by the members of the organizations
Thanks to these DAOs, it is even possible to be a partner to a singer’s song using only crypto money. For example, in May 2021 Jenny DAO purchased a song by Steve Aoki and 3LAU, which was released as NFT.
How to Build a DAO (Decentralised Autonomous Organization)?
Launches to be made through or within DAOs take place in three steps: smart contract creation, financing, and distribution. Let’s take a closer look at these steps together:
| Steps for Building a DAO | Explanation |
|---|---|
| Smart contract creation | If you want to create a specific organization, you must first have a developer group who needs to prepare a smart contract with the rules that apply in the DAO that you will create. After any DAO is introduced to the people, the rules of the smart contract in that organization can be changed with the management tokens and voting rights that people have. Although the rules contained in the smart contract can be changed later, extensive testing is required before the introduction to ensure that important essential details are not overlooked. |
| Funding | It is a well-known fact that every project needs a certain amount of fund. After the smart contracts of a DAO are created, that organization needs to find out from where it will get financing and share this path with all its members. |
| Distribution | Each organization must have a certain amount of members. In order for a DAO to be promoted to other people, it must be deployed on a blockchain. After this deployment. The management token is opened for purchase by investors according to the determined criteria. After the distribution of the management token, in many DAOs, those who develop the organization and write the smart contracts have no more rights than other participants. All voices are democratically distributed to participants through non-pre-mined tokens. Of course, there are also DAOs on the market that have a certain amount of pre-mined tokens and provide some privileges to the developer team. |
Why Do We Need Decentralized Autonomous Organizations?
The most important reason for using DAOs that work over the Internet and are connected to a blockchain is that they have many advantages over traditional organizations. Let’s look at these advantages in more detail:
- Managed in a decentralized way: One of the main advantages of DAOs is that it’s just the code that needs to be trusted, not people. In traditional organizations, people need to trust the people behind them and especially the investors, organizations can be put in danger if investors and people make a mistake. However, since all transactions in DAOs are managed by smart contracts, and the operations written in these codes occur sequentially, errors are very rare.
- Ruled by smart contracts: We mentioned that DAOs are managed by clauses in predetermined smart contracts. Since all the clauses in these smart contracts and the codes of DAOs are public and completely transparent, it is much easier to review and criticize the platforms. In addition, the code of any DAO can be extensively tested beforehand, thanks to this test, the deficiencies of the organizations can be noticed and these deficiencies can be easily corrected.
- Participants control the decisions: After a DAO is introduced to the people, by purchasing the management token, the people in that organization have the right to vote in the organization’s votes. Decisions to be made on behalf of a DAO must be approved by a majority. Every action in this organization must be acceptable to the majority and be completely transparent. We can say that these organizations are quite democratic since the majority decision is given priority and all decisions are open to members. In addition, it is not possible for any human being to have greater influence than any other person in voting in these organizations. This means that these communities do not have any leaders.
- No hierarchy: In DAOs, there is no hierarchy due to the organizational structure. It means that any member in this community does not have an initial right to ”influence the decisions more”. In this way, people can easily express their innovative ideas. If there are internal disagreements in a DAO, we can say that these disagreements are resolved through the voting system. The articles in smart contracts prepared before the establishment of DAOs usually include how these disputes will be resolved.
Are DAOs Trusted by the Public?
We can easily say that organizations that do not have a center, where everyone has the right to speak, will not be perfect. Considering that DAOs are among these organizations, we can add that DAOs are not perfect either.
DAOs are one of the organizations that host many concerns due to their legality, security, and organizational structure as a brand new technology. In an article by the Massachusetts Institute of Technology in 2016, it is mentioned that it is a mistake to rely on communities for important financial decisions that need to be made.
We mentioned that DAOs were seriously attacked after they were first established on the Ethereum platform, and this attack occurred due to a vulnerability in smart contracts. We also mentioned that the errors in smart contracts cannot be fixed without any voting. This could mean that a malicious group of hackers could make a non-large DAO dangerous.
4 Main Requirements for a DAO to Work
DAOs, an idealistic result that emerged as a result of the popularization of cryptocurrencies and the development of blockchain technology, emerged as a result of the combination of many themes. The roots of these companies and organizations are based on four different themes, which can be listed as organizational decentralization, peer production, unbundling and deregulation, crypto-trust, and consensus.
| Organizational decentralization | The fact that these organizations do not have any headquarters does not mean that there is a management vacuum in these organizations. The more votes the person with the more tokens can vote, the more monopolized groups may form within the DAO. Therefore, maintaining organizational decentralization is very important. |
| Peer Production | A DAO needs a certain amount of audience to run. Management tokens are sold to attract people to a DAO. These management tokens owned by people will increase in value as their organizations become popular. Naturally, people can profit by investing in a DAO, which is a good way to build an audience. |
| Unbundling and Deregulation | Unbundling is a method used for companies with more than one and different business lines. With this method, assets, product groups, divisions, or by-products owned by an organization or company are divided during the purchase or sale transaction. Using the unbundling method, DAOs can separate the services they offer such as tokens that have different functions, game ecosystems, voting ecosystems, decentralized tech developments, or passive income methods. DAOs also use deregulation, a method of removing restrictions and regulations within an organization. This method makes it easier for people to enter the market, making KYC policies or other bureaucratic requirements unnecessary. This facilitation makes it possible for DAOs to grow and raise funds. |
| Crypto-trust and consensus | People joining a DAO need to trust cryptocurrencies and digital assets because these organizations operate on the same basis they do. In other words, all transactions made in these organizations take place through cryptocurrencies and digital assets. |
Differences Between Traditional Organizations and DAOs
Let’s explore the main differences between traditional organizations and DAOs
- Traditional organizations work with contracts, while DAOs work with open-source protocols – Traditional organizations all have specific employment contracts that describe the relationship of all employees, the company, and customers. DAOs have a self-executing open-source protocol, people using this protocol can perform tasks by interacting with other people in the organization.
- While in traditional organizations, everyone acts in accordance with their own purpose, there is a common purpose in DAOs – Although there is a possibility that the members of the organization may act badly and endanger the organization because the people in these communities increase their earnings as the organization they are in becomes popular, it is more likely that the community work for related DAOs’ good.
- Traditional organizations have a single manager, while DAOs are ruled by communities – While traditional organizations have one legal entity, that is, one person or institution that manages the entire organization, DAOs are ruled by their participants, ie. community. Also, none of the people participating in a DAO are required to sign any formal and legal contract.
- Traditional organizations consist of layers of hierarchy whereas DAOs do not – This situation causes two things: those who want to receive services from traditional companies may have to be in various parts of a country or the world. Or, a service that is not considered legal in one country may deprive a user of services that are easily accessible in another part of the world. Consider the inability of thousands of women to benefit from banking services individually in the Arabian Peninsula. Or consider African continent residents who can’t even have a bank account simply because the official branches don’t value the region enough. Secondly, because hierarchy and bureaucracy mean that requested jobs have to be approved in more layers, things will happen much more slowly, and wait times will increase. The fact that DAOs do not have a hierarchical structure makes them accessible to anyone, anywhere in the world. Moreover, with fast and transparent transactions.
- The founders of the DAO do not enjoy the benefits more than anyone else, benefits are distributed, just like voting rights – DAOs also have a founder like every organization, but in these organizations, the founders (generally) do not have initial privileges will result in an unbalanced power relationship. We can say that DAOs are completely independent of their creators and are managed by many people.
- While activities in traditional organizations are kept private, activities in DAOs are completely transparent and publicly trackable – DAOs (their wallet transactions, voting processes, APY rates, reward distribution policies) are completely transparent because they are built on blockchain technology, which is an open-source network that keeps all the data it has in each ledger on the chain. DAOs often share their organizational wallet IDs publicly to build trust with investors. In this way, every investor who wants to make sure that there is no corruption in the organization can follow them regularly.
4 Examples of Popular DAOs
According to current discourses and experts, Dash is the first truly DAO. The main reason is that the people involved in this project can vote on the use of funds, be management system, and participate in the decision-making process about how will Dash work.
In many cases, organizations or people starting DAOs gradually relinquish control of the project, allowing self-running DAOs to be self-managed. In these organizations, people who have management tokens can vote in favor, negative, or abstain on any proposals to include people who can contribute to the organizations, buy new tokens to obtain physical money, and adjust the parameters more properly.
Let’s see popular DAOs:
| DAOhaus | DAOhaus is a no-code platform for building, launching, and running DAOs. This platform is completely under the control of the members. If you want to establish a DAO, using that tool can be helpful. |
| MakerDAO | Makerdao is the protocol that introduced DAI. This platform, which introduces itself as an “unbiased global finance system”, appeals to those who want to be protected from the volatility of the crypto money world in trading, export, import and daily payment processes with the stable coin DAI. DASH has an important role in the ecosystem in order to be presented as a staking reward with its stable coin feature. Owners of the platform’s native token, the MKR token, can have a say in how the protocol is managed.. |
| RaidGuild | The fully service-based RaidGuild is a DAO based on the MetaCartel network and deeply embedded in the Web3. By joining this organization, you can present your developer, marketing, or design skills to members of this community and follow the approval process of your application. |
| Aave | Meet a DAO that allows users to develop dApps while offering interest-generating methods and creating an ecosystem where asset holders can lend at advantageous APY rates. Aave is a pretty big DAO in terms of market cap. There are many reasons for this. Primarily established for financial purposes, this DAO supports the entire Ethereum, Avalanche, AMM, Fantom, Polygon, Arbitrum, Aave Arc, and Harmony networks. In addition, those who want to generate passive crypto income for the platform can benefit from Curve, Convex, Pooltogether, StakeDAO, and Balancer. |
| BanklessDAO | With BanklessDAO, which looks like an ordinary social media network that you can see on the internet, you can easily educate and entertain the masses by sharing any type of content you want. The platform is a good option for buying and selling NFTs. |
| IBC DAO | Considering the emerging technology Metaverse and NFY as passive income sources in the world, IBCDAO aims to offer investment options to its participants. The ROI rate of this platform, which consists of 51 members in total, was announced as 37.18%. The held treasury is known as 31.42 ETH. |
| FriendswithBenefits | Aiming to gather members from as many different backgrounds as possible and wanting to transform Web3 technology into a new/digitalized cultural environment, FWB is actually a space to share ideas. Saying that its members are creators, rebels, artists, thinkers, and doers, the platform believes that the Web3 world can be implemented with these activities. By joining the community-building channels of the platform, you can participate in conversations that will educate you in areas such as NFT learning, blockchain, and crypto trading. You can subscribe to newsletters by participating in creative classes. |
| CurveDAO | When you enter the website of Curve, an Ethereum-based DAO, you will feel like you are in the early 2000s, but don’t worry. You are at the heart of Web3. Supporting many wallets such as Metamask, Trezor, Leger, Frame, Curve offers DeFi services on the Ethereum network. With its advantageous base APY and rewards APY rates, Curve is actually an Automated Market Maker (AMM) and is known for providing high liquidity, especially to exchange platforms. |
| GnosisDAO | Aiming to increase liquidity in the Ethereum network, Gnosis makes it possible for you to securely produce, trade, and hold digital assets while gaining advantageous interest income. Participants can produce their new projects in three different product groups and request funds on Gnosis. These three product lines are Conditional Tokens Framework, Gnosis Protocol, and Gnosis Safe. Gnosis DAO also allows you to make predictions about events that create movement in the public, from political elections to football matches, and to earn income for your correct predictions. |
| DuckDAO | Working as a crypto incubator, DuckDAO aims to help crypto-based projects that are still in the seed stage or in the early stages to find the funding they are looking for. What a well-meaning DAO! There are three basic levels determined by the platform for this: Incubation, Strategic Contribution, and General Contribution. In first, DuckDAO works with you from the very beginning of the project, from marketing to advisory. In the second, the projects get support from DuckDAO for their social media strategies. In third, it is possible to fulfill OTC sales and community requests thanks to DuckDAO. |
How do DAOs work?
Decisions made within Decentralized Autonomous Organizations, an entity with no centralized leadership and no managerial position, are made by the community. There are no manager or employee roles within this community. Everyone can be qualified as a stakeholder, and gain the right to vote proportional to the number of tokens they have. With these voting rights, the majority decision is formed and the majority decision is put into effect by voting in the affirmative, negative, or abstaining on the subjects they want. It is unlikely that there will be any initial hierarchy in this system. People in these communities need to be aware of all the clauses in the smart contract before registering with the community, but these smart contracts are not about how people will behave, but how things are going inside the organization.
What is an example of a DAO?
Bitcoin can be considered one of the most popular DAOs. Because this cryptocurrency creates an ecosystem where the participants decide together with the consensus mechanism called proof-of-work. In addition, it is possible to say that Ethereum is the network that hosts the most DAOs today. Popular DAOs include Steemit, Decentraland, Augur, MakerDAO, Dash.
What can a DAO do?
Think of DAOs as organizations that can be set up for any purpose: for any purpose, really. For example, DAO can be established to slow the extinction of pandas, play games together in an online ecosystem, or raise funds for a political party. The recent development of the decentralized finance world has led to an increase in decentralized platforms that offer services such as staking, yield farming, liquidity mining, and trading. In other words, DAOs are heavily preferred especially for decentralized banking transactions. But besides these, Metaverse-based and customizable game ecosystems with NFTs are also a great example of DAOs. Decentraland is one of them.
Is Uniswap a DAO?
Yes, Uniswap is also a kind of DAO and has a native token that it uses to run its ecosystem: UNI.
Is Binance a DAO?
No, it cannot be considered a DAO as it is a Binance decentralized exchange. DEXs work as DAOs. These include Uniswap, Pancakeswap, Beefy, Sushiswap, TraderJoe.
How is a DAO different from a regular LLC?
LLCs are organizations managed by a specific group of shareholders. DAOs, on the other hand, practically do not manage a group of people, it is smart contracts that are governed. The manager group changes as the holders of the governance token change. This creates a much more democratic structure as the token trading process in a marketplace depends on the balance of supply and demand.
