A (DAO) is an organization that runs smart contracts on a public blockchain.
Think of a DAO as an organization that uses smart contracts to facilitate and enforce the decisions made by its members. In essence, a DAO is a piece of software on the blockchain that manages permissions for other contracts and actors.
A DAO is autonomous in the sense that it is managed directly by its members, as individuals or asset holders, over the actions that the organization takes. These actions happen on-chain, which means they are executed and recorded on the blockchain. Some actions include managing funds, holding votes, or changing the governance parameters of the DAO itself.
Smart contracts are lines of code that interact with the blockchain. Think of them as ” if, then” statements that are encoded in the string. They perform an action automatically and without human intervention as long as a certain condition is met.
Smart contracts are like vending machines. You click a button that calls for a candy bar, and the vending machine automatically gives you what you ordered without any human intervention.
You can also think of smart contracts as yellow cartoon minions waiting to be told what to do. They are programmed to perform one action and then when they are done, they wait for the next action. Like these minions, smart contracts are trusted to get the job done exactly how you need it to.
Vitalik Buterin, founder of Ethereum, wrote, “a smart contract is a contract that is enforced.” You don’t need a third party to get involved: it just does it automatically.
Smart contracts are trustless, which means that you don’t need to trust humans to behave in a predictable or reliable way, because they automatically execute specific actions when specific parameters are met.
They are also permissionless because anyone in the world can use them, regardless of who you are, your country of residence, or any other factor that can be used to prevent someone from using them.
Smart contracts make up the backend of a DAO, but the frontend can look like any other website you are familiar with, allowing anyone to participate in a DAO without writing any code.
This is why implementing on a blockchain is a key feature of what makes an organization a DAO. A DAO cannot be decentralized or autonomous until it is on-chain.
To get things done, human beings have always organized themselves into groups, tribes, squads, teams, teams, companies, and other collective action units. DAOs are no different. DAOs range from developer groups, investment clubs, advocacy groups, product teams, charities, digital public goods infrastructure, and more. The possibilities are endless.
The main difference between DAOs and traditional organizations is that instead of enabling coordination by relying on central intermediaries to enforce decisions, DAOs can eliminate this need for trust by making and enforcing decisions in the chain of blocks.
The use of blockchain as infrastructure gives DAOs unique properties compared to traditional organizations, including:
Smart contracts within the DAO framework (smart contracts that run the DAO) facilitate, execute, and enforce actions without the need for human intervention.
For example, smart contracts dictate conditions (such as passing a vote with a minimum quorum and level of support) that must be met in order to withdraw funds. If those conditions are met, the smart contract will automatically send those funds.
The actions that a smart contract can take are determined in advance by the actors implementing the DAO. These can be changed later, following the initial conditions and parameters. For example, a smart contract with token-based voting could not simply decide to change its parameters to implement wallet-based voting. You will need to go through the process of changing parameters, perhaps through a vote, to do this. If you can’t, you’ll need to implement a whole new DAO that has the rules you want.
Here are some key parts of an organization that run on-chain in a DAO framework:
Activity of the human organization: membership is defined (for example, by paying monthly fees).
On-Chain Equivalent: Buy the DAO Governance Token to gain voting rights, similar to “membership”, in the organization.
Human organizing activity: a community makes decisions to achieve a common goal (eg with a committee or board resolution).
On-chain equivalent: wallets issue government tokens in votes, much like voting tokens.
Human organization activity: a shared fund of funds is managed (for example, a checking account at a bank)
On-chain equivalent: funds are withdrawn and deposited directly into the blockchain.
DAOs are one more step in the evolution of human organizations. They use the same components that many organizations past and present have, such as:
In DAOs, actors (people, organizations, or AI) use wallets and tokens to interact. Let’s take a brief look at how each one works:
A real world wallet is where you keep your cash. In the web3 world, a crypto wallet is similar, except this is where you keep your tokens (also called crypto or cryptocurrencies).
You can think of your crypto wallet as your access point to the blockchain. You use your wallet to interact with the blockchain to buy, sell, move, and store tokens, and create and confirm actions in blockchain-enabled organizations like DAOs.
A wallet is needed to interact with the DAO, because you will need to have tokens to participate. You can also use wallets for governance, as they can be placed on an allow list that gives your wallet access to vote. We’re going to go into detail on that below!
DAO minting tokens for use in governance. The DAO could allocate tokens to wallets or put them on a decentralized exchange for wallets to purchase.
You “hold” your tokens in your wallet. Really, your wallet only has the keys to access your crypto on the blockchain. But you might hear that your tokens are “in” your wallet.
DAO mint tokens are unique to them. For example, in Aragón, the platform we use to create our DAO, uses the Araon Network Token ($ANT) to cast votes and carry out governance.
But it is not necessary for a DAO to have a token! In fact, many DAOs choose to never mint tokens and instead use different governance models.
Cryptocurrencies, including DAO governance tokens, are recorded on the blockchain. That means you have to perform a transaction on the blockchain to move or interact with them. It is often said that cryptocurrencies are simply “in” the blockchain. They are also called on-chain assets. This is opposed to off-chain assets, such as your country’s local currency, not being stored in the crypto wallet is your access point to the blockchain.
You use your wallet to interact with the blockchain to buy, sell, move, and store tokens, and create and confirm actions in blockchain-enabled organizations like DAOs.
Typically, a crypto wallet is a piece of software that appears as a browser extension on your computer. He has the keys to his wallet address. That means you have to use your crypto wallet to “talk” to the blockchain to tell it to move your funds. It does this by signing a transaction, which is included in the next block in the blockchain.
A DAO treasury, sometimes called a vault, is similar to a wallet, except that a person cannot simply sign the transaction and move funds. It is managed by a smart contract. To move them, you need to meet the conditions set in the smart contract, and then certain parameters need to be met, such as the number of votes (counted as tokens) and a certain percentage of tokens that need to be issued for “yes”. We’ll cover the details of decision-making below!
A permission management system is a set of smart contracts that determines who and what can perform certain actions.
The “who” refers to who is capable of executing the action. This can be any wallet or smart contract. The “what” refers to the action that is triggered. This can be a token transfer, transaction execution, or anything you can write to a smart contract. In web3, all of this is done automatically and without trust via smart contracts.
An on-chain permission management system, or DAO Framework, is a set of smart contracts that contain parameters that determine who can perform certain actions.
DAOs use chain permission management systems to determine who can perform actions and under what circumstances. For example, a person cannot withdraw the entire DAO treasury into their own wallet, because there are conditions and parameters, such as holding a vote that meets a certain quorum and level of support for proposals, necessary to gain access to the treasury.
DAO governance is who can make decisions and how those decisions are made. We use wallets and tokens to run the DAO governance.
We are still in the early days of experimenting with DAO governance, but today it mostly comes in the form of voting, either wallet-based or token-based.
For example:
In 1 authorized wallet = 1 government vote, the voting power is the same for all wallets on the allowed list. So if one wallet has 2% of the tokens and another wallet has 5%, they still have equal voting power as long as they are both on the allow list.
In the 1 token = 1 vote government, an individual’s voting power is directly proportional to the number of tokens he owns. </ strong> So if a token holder has 2% of the tokens, he has 2% of the total voting power available.
Fungible tokens (ERC-20) and non-fungible tokens (ERC-721) are two types of tokens that your DAO might mint.
Minting a Governance token is just like creating voting tokens or issuing membership cards, except on the blockchain.
DAO governance is still evolving. Right now, DAOs often use voting to make decisions. We have token voting available.
But today there are tons of governance mechanisms. DAOs do not need to vote to remain considered DAOs!
Actors organize to achieve a shared purpose and goals. The goal could be anything: raise money for a community garden, start a new protocol, or launch a sports fan club.
Since you can join most permissionless DAOs by purchasing their governance token, many competing priorities and strategies can emerge. This can create more innovative spaces where DAO members propose and decide the most compelling direction the project should take. This creates more dynamic and creative organizations, because there is a diversity of points of view and approaches among the members of the organization.
Although members of a DAO may try to further different strategies and goals, smart contracts can be used to align incentives. DAO technology allows you to program incentives directly into your organization’s governance. This can encourage certain behaviors, aligning incentives to achieve certain goals.
Smart contracts introduce the possibility of unique incentive structures. For example, if you need more vote share, you can program incentives into the contract that are awarded to token holders when they cast their votes.
The programmability of smart contracts makes shared purpose not only intrinsic, but also extrinsic.
DAO technology can be applied to almost any type of organization you can imagine. There is no “correct” way to use this technology. It’s more like a box of legos that you can use to build any type of organization you want!
Legos are the building blocks—the blockchain, smart contracts, wallets, tokens, parameters, open source DAO frameworks, and more—that can be put together in many ways, most of which we haven’t yet! We’ve discovered!
We are still in the early days of DAOs and we cannot predict all the ways in which they will change the world around us. But we know that DAOs have had a lot of impact!
Management of protocols and products: DAOs are suitable for managing public goods transparently. From MakerDAO to Lido to ENS, there are tons of DAOs managing the critical infrastructure of the web3 ecosystem with transparent governance .
Investing in on-chain assets with others: Investing DAOs are alive and well on the blockchain, and for good reason! Before DAOs, investment groups had a high barrier to entry. Now anyone can start an investment club and start making money with her friends today in a less intimidating, democratized and accessible way.
Money-raising for charitable causes: DAOs are a great way to raise money for charitable causes. Organizations like Ukraine DAO and Unchain Fund have shown how important this use case is today!
Starting Social Clubs: There are also many successful social DAOs. Friends with Benefits, Boys Club and BanklessDAO all have social components and have found their niche here on web3.
Sports DAOs and Fan Clubs: DAOs can also be used as ways to raise money and start sports DAOs and fan clubs. Get inspiration from KrauseHouse, Links DAO and WAGMI United!
Creating games and exploring the metaverse: DAOs are also great for creating user-owned games. Aavegotchi and Decentraland are just two examples of DAO-run games that are exploring the metaverse in exciting ways!
New nations and jurisdictions: Projects like Nation3 and CityDAO are exploring what it means to live in a chained world as well as geographic. Exploring a network state is possible with DAO technology!
