What is a Decentralized Autonomous Organization?

TL;DR

Are Decentralized Autonomous Organizations (DAOs) the Future of Governance? DAOs completely do away with traditional top down business structures by enabling individuals from completely different countries and jurisdictions to manage, in a trustless manner, organizations and Treasuries. The rules of a DAO are engraved in Smart Contracts. DAO token holders can submit governance proposals and vote on proposals submitted by others in order to change existing rules or add to the core set of rules that define a particular DAO.

Introduction

It is an indisputable fact that Blockchain technology is a disruptive agent when it comes to business processes. However, the manner in which Blockchain is disrupting traditional, top-down business structures has certainly not been given enough attention. In light of the efficiencies that blockchain technology is bringing to the table, traditional business structures are being forced to change – to evolve.

When traditional business structures adopt the decentralization ethos that is characteristic of Blockchain technology, they become something else entirely: Decentralized Autonomous Organizations (or in short, DAOs).

What is a DAO?

A DAO can be defined as a transnational and internet native entity with no central leadership. Decisions are made from the bottom-up, and the organization is governed around a specific set of rules engraved in Smart Contracts. A DAO is an expression of the impact of Blockchain Technology on traditional business structures.

DAO as an idea was first proposed by BitShares, Steemit and EOS founder Dan Larimer in 2015. The idea was further discussed and elaborated by Vitalik Buterin in 2016. BitShares, an e-commerce platform linking merchants and customers without a central authority, was arguably the first successful DAO.

A DAO has a built-in treasury (pooled resources) that can only be accessed with the express approval of its members. Governance and spending decisions are made via proposals, which the members vote on during specific periods. The voting weight of each DAO member is proportional to the amount of governance tokens owned. Here again, we witness the power of incentives: DAO members are rewarded with additional governance tokens for participating in governance.

A DAO’s launch follows a three-step movement:

1. Smart Contract Creation: a DAO is bound by rules engraved in Smart Contracts. It is important to extensively review the Smart Contract prior to deployment, as the rules can only be changed by proposals emanating from the DAO’s governance system.
2. Funding: A DAO must find a way to raise funds – this is usually done by selling a governance token, which will grant holders the right to make proposals and vote.
3. Deployment: Once a DAO’s Smart Contract has been deployed and funding has been secured, the DAO becomes the property of token holders – the management of the DAO is effectively decentralized.

A DAO can be used in various ways. A Charity, which accepts donations from anyone in the world, can be set up as a DAO, allowing the members of the charity to vote on the manner in which the donations will be spent.

A Venture Fund can be set up as a DAO – the members would review applications and vote to disburse funds to the projects that gather the most votes.

DAO can function under two distinct types of memberships:

1. Token-based membership (such as MakerDAO): this type of membership is usually fully permissionless. The tokens associated with these DAOs can usually be traded on Decentralized Exchanges. Token holders are granted the right to submit proposals and they can also vote on proposals submitted by others.
2. Share-based membership (such as MolochDAO): Share-based DAOs happen to be a little more permissioned. Members can submit proposals to join the DAO, usually offering a tribute of some kind 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.