DAO: Decentralized. Autonomous. Organization.<\/strong><\/p>\n \u201cThe whole phrase is a misnomer. They\u2019re not decentralized, not autonomous and they are not organizations,\u201d Monsterplay blockchain consultancy founder David Freuden tells Magazine.<\/strong><\/p>\n Freuden co-authored a 51-page<\/span> report<\/span> on DAOs in May 2020 in an attempt to help realize<\/a> their potential.\u00a0<\/span>\u201cWe need DAOs,\u201d he explains. \u201cThe idea of \u2018shareholder first\u2019 is only a 1980s\/1990s concept. Companies became about profits, not products.\u201d<\/span><\/p>\n He foresaw big things for DAOs and much has changed nearly two years later. By the end of 2021, DAOs had more than<\/span> 1.6 million <\/span><\/a>participants, up from just 13,000 at the start of the previous year. In 2021, the US state of Wyoming legislated for legal recognition of DAOs and the\u00a0<\/span>Marshall Islands.<\/span><\/a>\u00a0In 2022, Australia is<\/span>\u00a0considering doing the same<\/span><\/a>.<\/span><\/p>\n In short, a DAO is a governance model popularized in the decentralized finance sector where members buy (or are rewarded with) governance tokens to vote on how the DAO operates and spends its money. <\/span>\u201cDAOs were born from DeFi as an investment vehicle. So, you can\u2019t separate a DAO from tokenomics,\u201d says Freuden.<\/span><\/p>\n DAOs are usually built around a mission which can be a promise or a social cause but usually still involves a desire for profits. \u201cIf you can\u2019t answer the why the DAO won\u2019t be sustainable,\u201d he says. And, \u201cif you don\u2019t have tokenomics, it\u2019s a co-op, not a DAO.\u201d\u00a0<\/span><\/p>\n DAOs come in a range of types that now <\/span>include<\/span> operating system DAOs, protocol DAOs, investment DAOs, grant DAOs, service DAOs, social DAOs, collector DAOs and media DAOs.\u00a0<\/span><\/p>\n The idea that people could be galvanized around a good cause was very attractive to Freuden. The crypto world comprises \u201cspeculators or builders,\u201d so \u201ccrypto needs a DAO for the builders.\u201d<\/span><\/p>\n But, one problem is that mismatched expectations among speculators and builders \u2014 or both \u2014 cause endless but, sometimes creative, friction.<\/span><\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n For DAOs, the idea is usually to launch the DAO with an original product, such as a cryptocurrency, an IT protocol or a VC-like investment fund like FlamingoDAO. <\/span>DAOs allow for tokenized and incentivized distributed open-source contributions without borders. Product or mission is key. Sometimes, this happens in reverse and DAOs emerge once a product is launched, leaving the company to eventually transition to a DAO, like Uniswap eventually did.<\/span><\/p>\n A well-coordinated DAO can get things done. So, it\u2019s a vehicle for a distributed incentivized workforce. Essentially, DAOs are something like productivity coordination organisms.<\/p>\n DAOs incentivize merit-based contributions. Those who \u201cwork for the DAO make permissionless contributions and enjoy fragmented employment benefiting from task descriptions, not job descriptions,\u201d argues Freuden. So, DAOs are, above all else, a new way of organizing cooperation.<\/span><\/p>\n In decentralized autonomous organizations, each word can be interpreted differently. DAOs can emphasize one aspect or at the expense of another. Decentralization is a trade-off for autonomy and vice-versa.<\/span><\/p>\n Matan Field, CEO at <\/span>DAOstack<\/span>, has long argued that a DAO is a <\/span>distributed<\/span> governance system. Power is distributed collectively. Yet, the decentralized aspects of a DAO can be understood by two different factors. This sheds light on the conflicting definitions of a DAO.<\/span><\/p>\n \u00a0<\/p>\n A DAO can be decentralized because it runs on a decentralized infrastructure. For example, it could be created on a public permissionless blockchain so that another party cannot take over.\u00a0<\/strong><\/em><\/p>\n \u00a0<\/p>\n A DAO is distributed because it\u2019s not organized hierarchically around executives or shareholders. There is no concentration of power around its leadership.<\/strong><\/em><\/p>\n \u00a0<\/p>\n Option two is clearly <\/span>distributed<\/span> rather than decentralized.<\/span><\/p>\n Yet, not all of these endeavors are \u201cautomated.\u201d<\/span><\/p>\n Think of a quorum rather than a robot. DAOs can be autonomous in the sense that t<\/span>he most profound characteristics of a smart contract are self-enforcing and self-executory capabilities. <\/span>Thus, every transaction on a blockchain is technically a simplified version of a smart contract.<\/span><\/p>\n For example, keep in mind how smart contracts work on the Ethereum network. They are less like legal contracts and more like lines of self-executing computer code described as \u201cpersistent scripts\u201d by Vitalik Buterin.<\/span><\/p>\n A DAO, however, is autonomous in the sense that its rules are self-enforced\u00a0<\/span>once agreed upon by its members<\/span>. <\/span><\/i>So, a DAO is not fully automated but \u201cautomated upon approval by the governance committee.\u201d<\/span>\u00a0This can differentiate them from traditional organizations whose rules form guidelines that someone must interpret and apply.<\/span><\/p>\n A DAO can adapt quickly to local conditions as a quick way to spin up a governance mechanism. It\u2019s a knowledge coordination tool to make decisions collectively and fast.\u00a0 <\/span><\/p>\n Like UkraineDAO, spun up rapidly by Ukrainian expat Alona Shevchenko, Nadya Tolokonnikova, founder of Russian feminist punk band Pussy Riot, artist Trippy Labs and digital artist collective PleasrDAO, in response to Putin\u2019s invasion of Ukraine. The DAO quickly sought to support Ukrainian charities by selling NFTs of the Ukrainian flag. This is the perfect use case for a DAO: a single mission, moving fast and raising funds for a country accepting crypto where trust in banks is low.\u00a0<\/span><\/p>\n This could be a watershed moment for DAOs.<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n Since receving 1st donation 68 hrs ago, @Ukraine_DAO<\/a> raised $4MM.#KPIs<\/a> \u2014 CryptoSt\u039ev\u039e | UkraineDAO | PleasrDAO (🇺🇦,✨)\u1d50\u1da0\u1d49\u02b3 (@DefiHope) February 28, 2022<\/a><\/p>\n<\/blockquote>\n \u00a0<\/p>\n \u00a0<\/p>\n For Freuden, like many, ConstitutionDAO was another clever use case for DAOs.<\/span> ConstitutionDAO<\/span>\u00a0was an ultimately unsuccessful but \u201cbeautiful experiment in a single-purpose DAO\u201d to buy a copy of the U.S. Constitution for public viewing from a Sotheby\u2019s auction. <\/span>Cons<\/span>titutionDAO raised $47 million dollars from 19,000 people in just one week in November 2021, but was outbid by a <\/span>hedge fund manager<\/span>.\u00a0<\/span><\/p>\n Contributions were returned or lost if transactional gas fees were too high. Yet, as a \u201cbeautiful experiment,\u201d a Special Vehicle DAO like the ConstitutionDAO proved exceptionally fast at organizing and crowdsourcing funds for a specific purpose. <\/span><\/p>\n Soon, we may all be lauding the success of UkraineDAO\u2018s geopolitical ambitions in support of the DAO concept.\u00a0<\/span><\/p>\n For Adam Miller, founder of DAOplatform.io and <\/span>MIDAO Directory Services<\/span>, some of the best use cases for DAOs today are where a DAO structure is part of the <\/span>raison d\u2019\u00eatre<\/span><\/em>.<\/span><\/p>\n That is, a \u201cflat community is key to the venture.\u201d A good example is crowdsourced product development. Miller tells Magazine that DAOs are most likely to succeed when members are excited about a DAO as an alternative to starting a company. He agrees that \u201cdistributed is better for the acronym\u201d because DAOs \u201cstill need some kind of hierarchy.\u201d<\/span><\/p>\n For Miller, DAOs are also a \u201cnew way of organizing people and, importantly, resources.\u201d He started DAOplatform.io, a DAO tooling advisery that is currently transitioning to a DAO due to the \u201cwoeful tech options for running a DAO,\u201d which he says mainly comprises of just \u201cmultisig admin keys and a voting system.\u201d So, today, he is trying to advise on the best tech stacks for DAOs.\u00a0<\/span><\/p>\n There are three key elements, according to Miller. <\/span><\/p>\n \u201cFirstly, tokenization for which there are many methods and tools. Secondly, governance mechanisms, on chain or off chain, and connected to the DAO\u2019s treasury. And, finally, community.\u201d\u00a0<\/span><\/p>\n<\/blockquote>\n DAOs can become more than just a glorified Discord group \u2014 but only if there\u2019s a clear mission. That mission is inevitably part financial speculation part utopian dream. The spectrum can vary greatly.<\/span><\/p>\n The Dash DAO was created because the founder left the cryptocurrency project in<\/span> 2017. It\u2019s the<\/span> story of a prophet who never anointed a successor. So, building a tokenized evangelical missionary community that was distributed around the world \u2014 through a DAO \u2014 made sense.<\/span><\/p>\n Dash\u2019s founder Evan Duffield was a \u201clibertarian\/anarchist\u201d visionary who forked Bitcoin in January 2014 to make it instant and essentially free, or with negligible gas fees. He disappeared for a while, and so DASH organically transitioned to a DAO.<\/span><\/p>\n Today, 200,000 U.S. retail locations including Walmart and Barnes and Noble accept Dash so that purchasers can use crypto in retail settings. This payment system operates on gift card rails like any other gifted voucher.\u00a0<\/span><\/p>\n Dash is the \u201cfirst successful DAO,\u201d according to DASH Corp Co (the legal entity for the DAO) Dash h<\/span>ead of crypto, DAO and blockchain marketing,<\/span> Arden Goldstein. By contrast,\u00a0<\/span>The DAO<\/span>, <\/span><\/i>the first actual DAO<\/span>,<\/span><\/i> was founded in 2016 and disbanded after a hack, an Ethereum hard fork and many controversies. But, what are the metrics for success?<\/span><\/p>\n \u201cIn crypto, the measures for success are different,\u201d says Goldstein. But, a \u201chealthy DAO is where people participate or are incentivized to work toward common goals.\u201d A \u201csuccessful DAO is when people are incentivized to complete a task.\u201d And, crucially, when tasks get completed.<\/span><\/p>\n \u201cVoting, yes or no, 1 or 0, is not the newest concept. The challenge is getting people to continue to participate and keep building a community.\u201d A DAO incentivizes volunteers: Nothing is holding people there to build. The DAO \u201cphilosophy isn\u2019t anything new. You need to have skin in the game to participate.\u201d<\/span><\/p>\n DAO members must stake 1000 Dash to become a MasterNode. Those members are incentivized to do<\/span> marketing (and other tasks) <\/span>for DASH rewards. It\u2019s basically an outsourced team for its onboarding of new users around the world.<\/span><\/p>\n Part of the fun of joining a DAO is encountering the countless crazy or \u201cvery active\u201d people on Discord. No one gets fired (usually). But, in-line with open-source coding communities, you can be offered a full-time job if your work is noticed.<\/span><\/p>\n DAO community members all over the world are incentivized to build the brand. And, Dash is a very useful product for developing countries, where inflation is high and governments are undemocratic. According to wallet downloads, the highest concentrations of Dash DAO members are Russia, Brazil, Venezuela, India, China, France, Italy and the Philippines.\u00a0<\/span><\/p>\n Grassroots activism means that\u00a0<\/span>this<\/span> DAO makes sense. A DAO relies on local knowledge. For example, Dash.org is blocked in Venezuela, so DAO members help people use a VPN. DAO members are investors, energized evangelicals and also local expert product distributors.<\/span><\/p>\n There is a Dash platform for submitting proposals and grant applications which are voted on every month. But, the DAO can decide at any time not to fund you. For example, it once employed a PR firm and the community said not enough press was getting published, so the DAO pulled the funding. This raises a great question: How are real-world contractual obligations met by a DAO?<\/span><\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u201cSometimes, I see the DAO de-fund projects I saw a lot of value in,\u201d Goldstein explains. \u201cAs a full-time employee, I still have to put in a funding proposal.\u201d But, with monthly votes, it is still \u201cmuch faster than other companies I\u2019ve worked on.\u201d\u00a0<\/span><\/p>\n The Dash DAO community sees itself as a headless beast. There is a CEO of the corporate entity overseeing the project DASH Core Group, Ryan Taylor. But, he himself is subject to the decisions of the DAO. He oversees the tech development, investment arm and incubator. Yet, the DAO community \u201cwill lose it if any press ever says Dash CEO Ryan Taylor.\u201d<\/span><\/p>\n The problem is that \u201cwe don\u2019t know who holds the most tokens [\u2026] because you don\u2019t know who your customers are or who your investors are.\u201d However, \u201cthe loudest voices usually don\u2019t have the most MasterNodes and are not the most invested, so they yell and scream the loudest to offset that power imbalance.\u201d<\/span><\/p>\n On the other hand, Goldstein says she worked hard as the only female in the DAO. \u201cI was proud of the DAO when I turned the logo pink for a day and received a great outpouring of support from the men in the DAO.\u201d This has yet to entice a major influx of female DAO members.<\/span><\/p>\n Like the Kibbutz, communism or even the space race, utopian dreams face a great many hurdles.<\/span><\/p>\n How can DAOs deal with bad behavior by major token holders?<\/em> In early February, a heated debate in crypto Twitter touched on inclusion, diversity and cancel culture over a number of incidents related to decentralized projects. Again, this spotlight on founding teams raised the question of how a DAO addresses any alleged inappropriate behavior.<\/span><\/p>\n In a corporation, misconduct can result in termination. In a DAO, founders usually hold a large number of tokens and the keys to the blockchain (multisignature) or otherwise.<\/span><\/p>\n The conversation was sparked by derogatory comments made by Brantly Millegan, the director of operations of Ethereum Name Service (ENS), about the LGBTQ community and other controversial topics. The screenshotted comments were made in 2016 and were brought to the attention of the board of the not-for-profit behind ENS in early 2022.<\/span><\/p>\n His contract was terminated with the legal entity linked to ENS. But, what about his large holding of DAO\u2019s governance tokens?<\/span><\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n Members of the DAO put forward a motion to its members, or those that hold tokens to vote on key decisions, to remove Millegan. Yet, he is a \u201cdelegate\u201d that holds 370,000 votes that were \u201cdelegated\u201d to him. He is the largest delegate in the DAO itself and <\/span>remains so today<\/span>.<\/span><\/p>\n So, what would have happened if he refused to accept the DAO\u2019s decision?\u00a0<\/span><\/p>\n The answer is not that simple, according to Freuden.<\/p>\n \u201cDo the members of a DAO have a right to throw someone out that built the project?\u201d<\/p>\n<\/blockquote>\n Yet, if the original mission is no longer viable, they \u201cshould be dissolved.\u201d \u201cWhen a DAO fails, do they give the money back and dissolve themselves? They should. Give back the money with interest like a prenuptial for a marriage that fails.\u201d\u00a0 <\/span><\/p>\n One relevant analogy is that VCs might seek to remove a problematic CEO before an IPO.<\/span><\/p>\n While treasury is one governance mechanism deployed by DAOs, they are usually (at least for an initial period) controlled by the people that built the original project. Or, in the case of Uniswap, <\/span>venture capital firm a16z controls so much of the voting power that\u00a0<\/span>it delegated various parcels to student-run blockchain organizations in order to gain a semblance of distribution.\u00a0<\/span><\/p>\n This leads to the question of whether DAOs can truly work at scale. And, how to evolve these voting paradigms beyond token holdings?<\/span><\/p>\n There are some solutions for the whale token holder problem. Multiple tokens, for example, a utility token on top of a governance token and<\/span> quadratic voting<\/span>\u00a0for whales have become one such mechanism. There are also other protections such as multisignatures keys to a blockchain and time locks on decisions that leave time for any automated decision to eventuate. Each DAO will need to get the structure right depending on the assets at stake.<\/span><\/p>\n In truth, voter participation is often itself a bigger issue.<\/span><\/p>\n Participation is also<\/span> very low<\/span> in many DAOs. This is likely due to not understanding the tech, apathy or members\u2018 busy lives. The \u201cbigger the DAO, the smaller the number of voters that vote,\u201d that\u2019s \u201capathy but also culture,\u201d says Freuden.<\/span><\/p>\n Freuden\u2019s report cites Dunbar\u2019s Law, a British anthropologist, who argued that people can only maintain a total of about 150 relationships, noting that:<\/span><\/p>\n \u201cThe larger the DAO gets, the less influence the individual exercises, as their perception of their voting power becomes diminished or inconsequential once the individual becomes a smaller part of a large group. This can be seen via Dunbar\u2019s Rule and the Ringelmann Effect, which states that members of a group become lazier, disenfranchised and more detached as the size of their group increases.\u201d<\/span><\/p>\n<\/blockquote>\n Freuden says that \u201cwe need to understand how humans relate\u201d to operate a DAO. For this reason, he believes DAOs may work best as an investment fund vehicle, rooted in Cryptoland and function better if small in scale. <\/span>SyndicateDAO, for example, enabled the <\/a><\/span>creation<\/span><\/a>\u00a0of 450 new investment group DAOs in just three weeks.<\/span><\/p>\n For example, FlamingoDAO, a celebrated NFT curation investment DAO, had a maximum of 100 investors due to U.S. Securities and Exchange Commission\u2018s regulations. The so-called \u201cLAO\u201d is a member-directed venture capital fund and a registered LLC in the United States. They have limited membership to only 100 members in compliance with U.S. Securities law with a 120ETH minimum staking contribution.<\/span><\/p>\n Still, how were investment decisions made by FlamingoDAO? Did all 70-odd members have a say regularly? Art and NFTs are highly speculative.<\/span><\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n Thus, there is a belief that investment DAOs work well in the small petri-dish environment. This is due to pooled capital (a max of 7% contributions per member) and crowd-sourced knowledge in a crypto-native club.<\/span><\/p>\n While scalability may be an issue, every DAO will operate differently depending on the aim, the stage of tech development and the personalities within. <\/span>Tech people are accustomed to meet ups and hackathons for collaborating around a cause or exploratory idea. But, someone or something still organizes the hack.<\/span><\/p>\n However, there are lots of clever people working on creative solutions to every problem.<\/span><\/p>\n DAOplatform.io\u2019s Miller cites <\/span>DXdao,<\/span> as an example of a successful DAO. <\/span>DXdao<\/span> is \u201ca collective that builds and governs decentralized products and services\u201d and runs the DAO completely on-chain. You \u201cearn governance rights by contributing to the community and must keep contributing to keep voting.\u201d<\/span><\/p>\n DXdao, a fork of<\/span> DAOstack<\/span>, also deploys a system of economic curation of proposals known as<\/span>\u00a0holographic consensus<\/span>, a voting algorithm invented by DAOstack founder Matan Field. The system allows a random or semi-random subset to make decisions for the group as a whole.\u00a0<\/span><\/p>\n DXdao\u2019s Luke Keenan explains to Magazine that \u201ca small predictions market economy emerges around the likely outcome of a proposal as tokens are staked on it, which increases the potential influence of the issue by acting as a gatekeeper for voters. Additionally, proposals that have been given a financial incentive (boosted) have fewer prerequisites to be considered successful, resulting in increased system efficiency.\u201d DXdao \u201cmakes decisions by removing voting power as an economic incentive.\u201d<\/span><\/p>\n Field, noting that \u201cscalable DAOs are indeed my focus,\u201d explains that the main point is that holographic consensus \u201c<\/span>does not require a quorum<\/span> to render a vote valid.\u201d<\/span><\/p>\n \u201cRather, it provides a different parallel process to do so. This other parallel process is a \u2018prediction game\u2019 played (for profit) by the \u2018predictors\u2019 who can be anyone and not particularly voters \u2014 they can even be A.I. bots \u2014 who make predictions about whether a certain vote will be eventually approved or not by the voters. If, for a long enough period of time, enough stake is being placed over the prediction that the vote will be approved, then the voting process is considered valid, even when the voting quorum is low.\u201d<\/em><\/p>\n<\/blockquote>\n \u201cIn other words, a quorum is not a resilient strategy for DAO governance at scale,\u201d says Field.<\/span><\/p>\n \u201cSo, you don\u2019t need large votes on every issue. If only 5% votes, that\u2019s fine. But, if the proposal moves a significant amount of value or makes a significant change, you require a longer, say a 30 day, voting period and a higher quorum,<\/span>Yeah, but what is a DAO?<\/h4>\n
![\"How](\"https:\/\/cointelegraph.com\/magazine\/wp-content\/uploads\/2022\/02\/magazine-How-do-you-DAO-Dummies-guide.jpg\")
Productivity coordination organisms<\/h4>\n
DAO? Distributed not decentralized<\/h4>\n
Autonomous: Think quorum, not robot<\/h4>\n
![\"Dao](\"https:\/\/cointelegraph.com\/magazine\/wp-content\/uploads\/2022\/02\/dao-4.png\")
Why a DAO? They move fast<\/h4>\n
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$63K USD per hour.
$1,000 USD per minute.
2,115 ppl in party bid#Alpha<\/a>
Frens, this is ur alpha! 🤫😉
And ur investment 📈 has instant return in Karma. #🙏🫂
NOT INVESTMENT ADVICE.
Common sense advice. pic.twitter.com\/OtkKEsmVvG<\/a><\/p>\n\n
How a typical DAO works\u2026<\/h4>\n
![\"DAO](\"https:\/\/cointelegraph.com\/magazine\/wp-content\/uploads\/2022\/02\/dao-1.png\")
Does the DASH DAO work?<\/h4>\n
Governance problems remain<\/h4>\n
<\/b><\/p>\n![\"Build](\"https:\/\/cointelegraph.com\/magazine\/wp-content\/uploads\/2022\/02\/dao-3.png\")
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Can DAO governance work at scale?<\/h4>\n
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Mass voting via holographic consensus<\/h4>\n
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