Decentralized Autonomous Organization (DAO)
What is a DAO?
DAOs can potentially disrupt multiple business models and break down traditional corporate structures in Western companies. Bitcoin is arguably the first fully functional DAO. It has pre-programmed rules, operates autonomously, and is coordinated via a distributed consensus protocol. The decentralized finance (DeFi) explosion in 2020 has further fueled interest in DAOs. In the last year, we’ve seen an explosion of DAOs across the crypto ecosystem, including dozens of DAOs aimed at stopping climate change, one for pizza lovers, and one recently to raise funds to support organizations in Ukraine. *1
DAO vs. traditional organization
Large companies can quickly become complex entities with opaque structures. DAOs only require a set of rules under which to operate and funding, such as tokens. Tokens can be issued to reward certain activities of its members and to provide voting rights to set operating rules. *1
Once a DAO is operational, all decisions about where and how funds are spent are made by consensus. This requires a secure structure that allows each investor to configure the organization. *1
Compared to traditional companies, DAOs have a democratized organization. DAOs do not have CEOs or executives. All members of a DAO follow the rules embedded in the code of the smart contract. The operations of DAOs are fully transparent and global, whereas the operations of traditional companies are not always global; only the organization knows what is happening. All members of a DAO must vote for any changes to be made. *1
DAOs are not replacing traditional organizations entirely but bringing fresh ideas to the table. By leveraging blockchain and smart contracts, DAOs flatten the conventional corporate hierarchy. They are genuinely community-first organizations. DAOs are a work in progress, but like the rest of the crypto world, enthusiasm and capital are abundant and hard at work behind the scenes.
Formation
Both DAOs and traditional organizations need an initial founder or group of founders. In a traditional organization, this role might be filled by an entrepreneur who sees a gap in the market and sets out to fill it. Similarly, a DAO might be spun up by a small group looking to bring value to a specific community through a new product, service, or protocol. *2 *3
Forming a Traditional Organization
For starters, let’s say you want to form an LLC. You’ll need to create and submit articles of organization, which outline details like your LLC’s name, address, and purpose. These get shipped off to the secretary of state along with a filing fee.
Once these forms are filed and approved, the state issues you a certificate finalizing the formation of the LLC. Your newly formed business will also need insurance, potentially some licenses, and of course, a bank account. *2
Forming a DAO
Forming a DAO is a less formal process. No paperwork is necessary to create a DAO unless they incorporate as LLCs to protect their members further. This is becoming increasingly easy as states like Wyoming move to recognize DAOs as new forms of LLCs. For this course, we will assume forming a DAO does not require this step.
In place of the articles of organization, you’ll typically start by creating a meeting place for conversing and planning, like a Discord group or Telegram channel. While this might be sufficient for the early phases of a DAO, the goal is to bring decisions onto the blockchain using smart contracts. Smart contracts form the backbone of any DAO. Your DAO’s smart contracts should clearly define everything from how new members can join to how the treasury can be accessed and allocated and even how voting should be conducted. Coding your guidelines into smart contracts makes them transparent and verifiable by all your DAOs’ members because everyone can trust the code. *2
As the number of DAOs has increased, so have the tools available for establishing them. Protocols like OpenLaw, Gnosis, and Aragon can help anyone easily create on-chain systems for voting, adding members, managing treasuries, and other necessary functions. These protocols simplify forming DAOs and allow more time to focus on funding. *2
Funding
Full disclaimer: funding any crypto-based project is a sticky subject right now. The SEC may consider processes like initial coin offerings (ICOs) to be security offerings, which would fall under their jurisdiction. For the most up-to-date information, check the SEC website. *2
Funding an LLC
The first contributions to the LLC will probably come from any partner joining the new venture. Initial investments are called capital contributions and should at least cover the initial operating expenses. Each member’s contributions should also be recorded and used to value their percentage of ownership. If a member puts up 30% of the funds, they own 30% of the company. *2
Even with those capital contributions, you may find yourself in need of some extra cash to really get things going. You could take out a business loan from a bank or crowdfund your business through a site like Kickstarter. Both options would allow you to retain full ownership of your LLC. Alternatively, you could turn to a venture capitalist or angel investor, but they will take a slice of ownership for themselves in exchange for their investment. *2
Some options can be when an outside investor puts money into your new business; they will surely expect a return on that investment. This can sometimes lead companies to make unsavory decisions to generate revenue and pay back investors. We see this all the time – gig job platforms cutting wages to increase their profit margin, social media sites exploiting user data, the growing presence of microtransactions in video games – the list goes on. You might point out that this is just business as usual, and you’d be right. *2
Funding your DAO
Funding your DAO starts with creating your own token, which can be done through dapps like Aragon. You then make your DAO token available for purchase by the public, like launching a Kickstarter project for donations. By purchasing tickets, new members receive a financial stake in the DAO and voting rights, and the DAO receives funds in its treasury. In place of a traditional bank account, your DAO will probably lock its treasury into a multi-sig wallet like Gnosis Safe. A multisig is a wallet that requires approval from multiple people before any transaction occurs. Requiring numerous keys to access your DAO’s funds increases security and takes power out of the hands of a single individual. *2
By purchasing a DAO’s token, individuals become owners. DAO’s members share in its upside; they have added incentive to contribute and ensure the organization’s health.
One of the most compelling arguments for DAO funding over traditional VC funding is its ability to be exclusively merit- based. In the Web3 world, where many founders and developers are anonymous, raising capital is based almost entirely on the project’s potential; race, gender, wealth – all that goes out the window. All that matters is the product. In an age where about 1% of venture capital goes to black founders and 2% goes to women-led startups, this is a true game changer. *2
In the case of protocol DAOs like Uniswap and SuperRare, many members also use the protocol itself. Who better to shepherd an application than the very individuals who use it? Unlike the world of traditional corporations, the idea of owners and investors exploiting their users and employees becomes ridiculous; often, they’re one and the same. *2
Flat Organizations
DAOs are still experimenting with how to structure themselves, but they are very flat relative to traditional organizations. CEOs aren’t calling the shots and there’s a noticeable lack of middle managers. In their place is a system where all members can propose and vote on changes to the DAO. This is made possible through smart contracts. *2
Smart contracts remove layers of precarious little Jenga pieces and replace them with solid, dependable blocks. In other words, processes that may be prone to human error and corruption, like quality assurance and capital management, are instead handled by ever-reliable code. But remember that A LOT is riding on this code, and altering it will likely require a collective vote. The smart contracts run the DAO. It’s critical to make sure they are free of errors and bugs. *2
DAO members must constantly communicate and be honest with each other; there are fewer checks and balances than in a traditional corporation. This might lead to DAO members operating in small teams, with a core group of organizers at the center. This way, they can forgo the traditional hierarchical pyramid and maintain an organizational level. *2
We can see this in communities like the Bored Ape Yacht Club. While not necessarily a DAO, BAYC is a large, decentralized community made up of the owners of Bored Ape NFTs. These NFTs act like a DAO’s tokens. While members are free to use the IP rights baked into their Ape NFTs however they choose, they are not the sole drivers of their value. Instead, much of the project’s value comes from the small group of developers who started the project. This group of founders continues to create new spinoff projects and build alongside the rest of their community, increasing the value of the underlying NFTs in the process. While the Bored Apes certainly benefit from their considerable reach and decentralized nature, they also benefit greatly from having a core team at the helm. *2
This bottom-up approach makes for organizations where collaboration across traditional verticals is possible and encouraged. DAOs benefit from their open dialogue, usually on Discord and Telegram, and enjoy a level of transparency that few traditional organizations offer. *2
What are the Different Types of DAOs?
There are many types of DOAs, but we’re going to focus on the following eight:
- Protocol DAOs
- Philanthropy DAOs
- Venture DAOs
- Media DAOs
- Social DAOs
- Grant DAOs
- Collector DAOs
- SubDAOs
Protocol DAOs
Protocol DAOs are one of the most common DAO types you can find today. As the name implies, these DAOs focus on governance of decentralized protocol such as a borrow/lending application, decentralized exchange, or another type of dapp. For example, Automated Market Maker or AMM DAOs utilize smart contract protocols for offering DeFi services such as borrowing/lending applications or decentralized exchanges. Protocol DAOs can also serve as a vital asset for the governance of other types of decentralized applications. *3 *4 *5
Protocol DAO Examples
Three of the most notable protocol DAO examples are MakerDAO, Uniswap, and Yearn Finance. *5
MakerDAO
One of the original DeFi applications on the Ethereum blockchain network, MakerDAO uses smart contracts to enable users to lend and borrow cryptocurrencies with customized lending rates and repayable amounts. *5
MakerDAO uses MKR governance tokens so holders can vote on changes to the Maker protocol, including the amount of collateral for collateralized debt positions (CDPs), annual borrowing, and shutting down if Ethereum crashes. *4
MKR holders also act as the buyers of last resort for DAI loans (an algorithmic stablecoin created by MakerDAO). If the value of ETH in Maker Vaults doesn’t cover the amount of DAI in circulation, MKR is created and sold in a debt auction to raise the needed funds. *4 *5
Uniswap
Uniswap launched its governance token, UNI, giving the community voting rights in Uniswap’s development and operations. Holders of UNI tokens control the Uniswap governance, UNI community treasury funds, the protocol fee switch, and more. *4 *5
If token holders want to alter Uniswap or introduce new features, a proposal is submitted with a minimum of 25,000 UNI yes-votes to be eligible for further deliberation. *4
Yearn Finance
Like the above governance token powered DAOs, Yearn DAO delegates funding to DAO Vaults. YFI holders can provide funds to DAOs approved to accept funding in the DAO vault ecosystem. YFI founder Andre Cronje built Coordinape to allocate funds and reward contributors autonomously to fill a gap in the traditional HR and payroll system. *4
Grant DAOs
Grant DAOs are designed to facilitate nonprofit donations, strategically deploy capital assets throughout the web3 ecosystem, and are either a charitable extension of a larger project or an entirely separate entity in the DeFi space. *4 *6
Grant DAO Examples
Aave Grants DAO is a community-led program to fund ideas and projects that power the development of the Aave Protocol, focusing on supporting a more comprehensive network of community developers.
Aave Grants allocate a specified amount of funding per quarter. Eligible grant submissions include but aren’t limited to; Aave development, integrations, developer tools, and more. *4 *5
One example of a Grant DAO that is a separate entity is MetaCartel. It creates financial funding for projects and provides operational support for early stage dapps. *4
On a mission to accelerate the creation of Web 3, MetaCartel awards grants between $1,000 to $10,000 for dApps built on Ethereum, new consumer-facing use-case experiments, the creation of new DAOs, community-oriented initiatives, and more. *4 *5
Philanthropy DAOs
Philanthropy DAOs aim to help progress social responsibility by organizing around a shared purpose to create an impact in the world of Web3. *4
Philanthropy DAO Examples
The first nonprofit philanthropic DAO, Big Green DAO, is tied to Big Green. Big Green is a national 501(c3) food justice charity that teaches people how to grow food to improve nutrition security, mental health, and climate impact. Big Green DAO latched onto the decade-old charity to restructure grant-making and put the nonprofit in a favorable financial position. *5
The speed at which DAOs organize and execute is a testament to the power of Web3. UkraineDAO raised over $3 million in ETH to support the Ukrainian Army in less than a week. *4
Coordinated by members of PleasrDAO, Trippy Labs, and Russian art collective Pussy Riot, UkraineDAO uses the ENS domain, ukrainedao.eth, to send donations to Ukrainian soldiers, and support the Ukrainian organization, Come Back Alive. *4
The popularity of the crypto combined with the simplicity of international remittances allow philanthropy DAOs to create a meaningful impact at record-breaking speed. *4
Social DAOs
Social DAOs, or creator DAOs, are focused on the self-organizing community aspect of DAOs by bringing together like- minded individuals such as builders, artists, and creatives. *5
While Social DAOs are community focused, typically, they have a barrier to entry, such as owning a specific number of tokens, owning an NFT, or being personally invited. *5
Creator DAO Examples
Developer DAO is a collective of web3 developers focused on building the future of web3. To join Developer DAO, members must hold a genesis NFT or be one of the lucky developers invited into the private Discord server. *5
Friends With Benefits is a web3 creator DAO focused on building community and fostering creativity. Access to Friends With Benefits is 75 $FWB tokens, and once admitted, members have full access to connect with builders, artists, creatives and attend exclusive events.
While DeFi was arguably built on the principles of accessibility, many social DAOs derive value from exclusivity, collaboration, and interpersonal network effects. *5
Collector DAOs
The primary purpose of Collector DAOs is for members to pool funds together so that the collective community can invest treasury funds in blue chip NFT art and other collectibles, where each member owns a share corresponding to their investment. *4
Collector DAO Examples
Notable collector DAOs such as FlamingoDAO rose with the explosion of NFTs, which collected incredibly expensive NFTs from digital artists like Pak, Hackatao, XCopy, and CryptoPunk #2890 NFT, which
was purchased in 2021 for $760k. *4
Another group of collectors formed ConstitutionDAO to attempt to buy the United States Constitution. Remarkably, ConstitutionDAO raised $47 million worth of ETH in one week to try to buy a first edition copy of the U.S. Constitution at a Sotheby’s auction. *4
Though not every collector DAO will pay off, it is a new medium for investors to get financial exposure to expensive NFTs without risking large amounts of personal capital. *4
Investment and Venture DAOs
Venture DAOs pool capital to invest in early-stage web3 startups, protocols, off-chain-investments, and access to portfolios not available in traditional finance. *4
Venture DAO Examples
Krause House DAO is a Venture DAO trying to buy a professional NBA team of investors and basketball fanatics. Krause House DAO members would participate in decisions affecting a National Basketball Association team’s operating procedures, including general management, ticketing, merchandising, and partnerships. *4 *5
Other notable venture DAOs include MetaCartel Ventures (MCV). MCV is a for-profit DAO established by the MetaCartel community to invest in early-stage Decentralized Applications (DApps). BessemerDAO was launched by the San Francisco-based VC firm Bessemer Venture Partners to discuss crypto industry trends and share resources. *5
Media DAOs
In contrast to a top-down approach where content is produced with a central agenda and influenced by advertisers, Media DAOs reinvent traditional media platforms by creating content driven by the community.
Think social media, but instead of corporate organizations governing the profits, individuals in the media network actively earn a piece of the decentralized organization’s profit. *5
Media DAO Examples
BanklessDAO is a decentralized community to coordinate and propagates bankless media, culture, and education. Its goal is to drive the adoption of a genuinely bankless money system.
Decrypt is another media DAO example that empowers users to vote on what types of content they want to see. *5 Media DAOs are especially powerful for up-and-coming communities looking to reward their users as the crypto community and Web 3.0 culture grow. *5
SubDAOs
A SubDAO is a new kind of DAO that is a subset of DAO members. The objective is to organize to manage specific functions such as operations, partnerships, marketing, treasury, and grants. *5
Balancer Protocol saw an opportunity with its growing DAO membership. It proposed to create subDAOs to manage DAO-related decision-making and facilitate execution without requiring every proposal to be passed by the entire DAO. *5
In a unanimous vote, Balancer DAO successfully integrated subDAOs into their structure and can now move more efficiently as a Decentralized Autonomous Organization. *5
The community’s creativity is truly the limit of what can be built within the DAO framework.
