Beginner’s Guide to Decentralized Autonomous Organizations

DAOs empower individuals from around the world to collaborate, make decisions, and create value through decentralized governance—without the need for intermediaries. This transformative approach has been made possible by blockchain technology, which enables secure, transparent, and autonomous systems.

But what exactly is a DAO, how does it work, and how can you become a part of one? In this beginner’s guide, we’ll explore the fundamentals of DAOs, their benefits, and the practical steps to help you join the DAO movement.

Read Also: The Rise of Decentralized Finance (Defi)

Key Takeaway

• DAOs are digital organizations that operate on a blockchain network, allowing for decentralized decision-making, governance, and collective action. 

• They are run by smart contracts, which automate decision-making processes based on predefined rules and voting mechanisms.

• They are decentralized, autonomous, self-governing, transparent, community-driven, & open-source.

• They are found in industries such as finance (DeFi), governance, art and collectibles, education, and healthcare.

Decentralized Autonomous Organizations (DAOs)

Decentralized Autonomous Organization  (DAO) is a Web3 concept where communities are built on the blockchain, and these communities operate without a central authority. 

They are designed so that everyone within the community decides together what happens within the community using computer code and rules stored on a blockchain. 

This way, everything is transparent and secure.

Example: Imagine a company where the CEO or the executive team does not make decisions. 

Instead, every employee within the company (from the highest to the lowest position) has a voice and can decide what happens in the company by casting their votes.

That is basically what a DAO is.

In a DAO, power is distributed among members who hold its tokens. These tokens give them voting power; the more tokens a member holds, the more votes they have. 

DAO founders who create these tokens distribute them to members interested in joining the DAO. Those interested members can then buy these tokens on exchanges or places where they are sold, like cryptocurrencies.

One distinctive feature of DAOs is that they operate without a centralized leadership, and decisions are made by voting. 

Members can even submit project proposals, which the group then votes on. This creates a democratic and open management structure.

DAOs are used by various organizations, such as businesses, nonprofits, and investment schemes. They’re entirely governed by smart contracts, making them a new and innovative way of working together.

History of DAOs

Vitalik Buterin, the founder of Ethereum, first introduced the concept of DAOs in 2014 in a whitepaper titled “DAOs, DACs, DAs, and More.”

Then, in 2016, the first DAO was created by developers on the Ethereum Blockchain.

This Decentralized Autonomous Organization (DAO) was called “The DAO.”

It was an investment company where investors could contribute Ether and vote on funding proposals for startup companies. The DAO was controlled by a smart contract, which was supposed to be its central authority.

Sadly, a coding error that wasn’t fixed on time allowed a hacker to steal $70 million worth of Ether that same year. Due to the blockchain’s immutability, the organizers couldn’t stop the theft. 

To mitigate the loss, a proposal was made to create a “hard fork” to roll back the blockchain and recover the stolen funds. This was controversial, as some argued it went against the principle of immutability.

However, the hard fork was implemented, but in July 2016, opponents of this idea created a new blockchain called Ethereum Classic (ETC), which didn’t roll back the theft. 

Ultimately, the hacker received millions of dollars worth of Classic Ether. 

After this incident, DAOs began to gain popularity with the launch of new DAO platforms like DAOstack, Colony, and Aragon. They were created for various purposes, including decentralized governance, fundraising, and community decision-making.

In 2020, DAOs continued to evolve, creating new frameworks like DAOhaus and the growth of existing ones.

Today, DAOs are being explored and utilized in various industries, including decentralized finance (DeFi), gaming, and social media.

Read Also: How Decentralized Identity (DID) Works in Crypto

Features of a DAO

As an organization based on the blockchain, here are the key features of a DAO that set it apart from a traditional community or organization.

• Decentralized Governance: DAOs operate on a blockchain, making them decentralized and autonomous. Also, no single entity controls the DAO; governance is distributed among members.

• Autonomous: They are self-governing, with rules encoded in smart contracts.

• Transparent: Within a DAO, all transactions and decisions are recorded on the blockchain, which ensures transparency.

• Democratic: Each member can vote on proposals, ensuring democratic decision-making.

• Token-based: Members hold the DAO’s tokens, which grant voting power and potentially a share of profits.

• Smart contract-based: DAOs are governed by smart contracts, designed to automate the rules and decisions within the organization.

• Immutable: Its rules and transactions are stored on a blockchain, making them immutable.

• Open-source: Most DAOs’ code is often open-source, allowing community members to review it and work on any vulnerabilities spotted.

• Community-driven: This is one of its outstanding features. As a Web3 concept, DAOs are driven by their community, with members contributing to decision-making and growth.

How they work

Building a DAO begins with a desire to change an industry, launch a groundbreaking business, or champion a vital cause. 

This is where DAOs genuinely excel. However, here is how they work.

In a traditional organization, the founder handles everything, but in a DAO (Decentralized Autonomous Organization), smart contracts handle everything. 

Founders or programmers of a DAO write code to automate all rules and structures, including financial transactions, that will be performed within the DAO.

They also create DAO tokens, which will serve as the organization’s governance and utility tokens. 

Note: Most DAOs allow votes to be based on the investment amount made by a member.

Once the DAO is formed, its founders promote their project to potential investors and participants to attract supporters.

Now, depending on the DAO’s design, individuals can contribute in two ways:

• By investing in cryptocurrencies directly.
• By contributing resources or services, 

In return, participants/contributors can earn rewards, fostering a sense of community and incentivizing engagement.

Once a DAO is running, more members can be allowed into the community by following its early members’ steps.

Purpose of a DAO

By fostering a culture of collective ownership and collaboration, DAOs aim to create a fair, transparent, and accountable system in which every member actively shapes the organization’s direction and future.

This is the primary purpose of DAOs. However, there are more reasons they exist.

• Enable decentralized decision-making:

These decentralized organizations allow members to control the narrative by empowering them to vote on proposals and make decisions collectively without a central authority. This ensures everyone has a voice and can contribute to the organization’s direction.

• Automate processes: 

It uses smart contracts to execute rules and actions, ensuring transparency, efficiency, and consistency in decision-making and operations and reducing the risk of human error or bias.

• Facilitate community engagement: They provide a platform for like-minded individuals to collaborate, contribute, and participate in a shared mission, thereby fostering a sense of community and shared ownership.

• Raise funds: 

Members within a DAO collectively make investments or donations, often in the form of cryptocurrencies, providing a decentralized and transparent way to fund projects and initiatives.

• Support for a cause or project: 

Members of this organization pursue a common goal, such as developing a new technology, promoting a social cause, or creating a community resource, bringing people together around a shared purpose.

• Distribute resources: 

Funds, assets, or rewards are allocated to members or projects based on predetermined rules or voting outcomes, ensuring fair and transparent distribution of resources.

• Ensure transparency and accountability: 

Blockchain technology records transactions, decisions, and actions. This makes the organization’s operations transparent, tamper-proof, and publicly accessible, ensuring accountability and trust among members.

Types Of DAOs

With thousands of DAOs in existence and all having different purposes, here are the different types of DAOs below:

1. Charity DAOs

These decentralized organizations focus on social impact, fundraising, and philanthropy, allowing for transparent and community-driven decision-making in charitable efforts.

Examples of Charity DAOs:

• GiveDirectly: It was created to raise and give direct cash transfers to impoverished people.
• Gitcoin: This organization funds open-source software development across various industries.

2. Investment DAOs 

These organizations invest in projects, startups, or assets, often with a financial return goal. They provide a decentralized alternative to traditional investment funds.

Examples of Investment DAOs:

• The LAO: This organization was created to invest in startups and early-stage companies.
• MetaCartel Ventures: It was created to invest in decentralized applications.

3. Protocol DAOs

They govern and develop decentralized protocols and technologies, ensuring the growth and maintenance of a blockchain infrastructure.

Examples of Protocol DAOs:

• MakerDAO is one of the most popular DAOs in the crypto space. It was created in 2014 on the Ethereum blockchain and governs the Maker Protocol and DAI stablecoin.

• Compound is a popular decentralized lending protocol built on the Ethereum blockchain in 2017. Its purpose is to create a decentralized lending market where users can lend and borrow cryptocurrencies trustless and transparently.

4. Service DAOs 

They offer clients services, like consulting, development, or marketing, utilizing blockchain technology for secure and transparent service provision.

Examples of service DAOs:

• DAOstack: They provide blockchain development services for Web3 startups.

• Aave: The Aave DAO is a decentralized lending protocol built on the Ethereum blockchain. It was founded in 2017 under the name ETHLend but rebranded to Aave in 2019.

It was created to decentralize the lending market, allowing users to lend and borrow cryptocurrencies trustless and transparently.

5. Social DAOs

Its focus is on community-building, networking, and social activities, thereby creating decentralized social networks and communities for participants.

Examples of Social DAOs:

• Friends with Benefits (FWB) and The Village are two popular DAOs in this category. They were created for social networking and community-building.

6. Collector DAOs

They are decentralized autonomous organizations that collect, manage, and trade digital assets, such as art, collectibles, and rare items. 

They also provide a decentralized platform for artists, creators, and collectors to showcase, buy, and sell unique digital assets. 

DAOs under this category utilize blockchain technology to ensure ownership, scarcity, and provenance.

Examples of Collector DAOs:

• Rarible: It was founded in 2020. It is popularly known as a marketplace for creating, buying, and selling digital art and collectibles.

• The Sandbox is another popular decentralized marketplace in the DAO category. Founded in 2018, it has gained a massive reputation as a lucrative place for creating, buying, and selling digital assets and experiences in a virtual world.

Other famous examples are SuperRare, Async Art, Decentraland, etc.

7. Media DAOs

They create, produce, and distribute media content, like articles, videos, or podcasts. They were founded to change the way media is created and consumed globally.

Mirror and Bankless are examples of Media DAOs. These DAOs are known for creating and publishing decentralized media content through platforms like Livepeer, Coindesk, Audius, Podbeen, Mastodon, etc.

8. Gaming DAOs

These DAOs develop, publish, and manage virtual games. They utilize blockchain technology for secure and transparent gaming experiences. 

Examples include Decentraland, The Sandbox, Roblox, etc.

Read Also: The Rise of Cryptocurrency in Gaming

9. Prediction Market DAOs

They create platforms where participants can freely predict the future events or outcomes of the crypto market. 

• Augur: It was founded in 2015 and allows users to create and participate in prediction markets on various topics, including sports, politics, and finance.

Other examples include Gnosis and Omen.

10. Hybrid DAOs

They combine multiple purposes or functions, like investment and charity, offering versatile and adaptable organizational structures.

Examples include DAOhaus & MetaCartel.

11. Decentralized Autonomous Corporations (DACs)

They focus on business operations, such as manufacturing or logistics, and utilize blockchain technology for efficient and transparent supply chain management.

Examples are Digix (created for managing and trading gold assets) and Blockstack (which manages and develops decentralized applications).

12. Decentralized Autonomous Organizations for Science (DAOs4Science): 

They were created to support scientific research and innovation. 

Examples include SciDAO & Molecule.

How To Join A DAO

Joining a DAO can be pretty easy; however, some DAOs require intending participants to meet specific criteria, which depend on the DAO’s unique structure and requirements. 

However, here are the general steps you can take to join a DAO today. 

1. Start with research

This is the most crucial step. Begin by researching DAOs that align with your interests and goals. Consider factors like the DAO’s purpose, governance structure, and community.

2. Meet its requirements 

Next, check if the DAO has specific requirements, such as holding a certain amount of cryptocurrency or completing a task.

Most DAOs require participants to hold a specific cryptocurrency, like Ethereum or a DAO-specific token.

This means you must create a digital wallet that supports the required cryptocurrency, like MetaMask or Ledger. 

Then, buy or earn the DAO’s token, which often grants voting rights and access to the DAO.

3. Join its community

You will be required to participate in the DAO’s discussion channels, like Discord or Telegram, to engage with members and stay updated. 

By doing so, you will get to familiarize yourself with the DAO’s governance structure, voting mechanisms, and decision-making processes.

As you do this, you can exercise your voting rights to contribute to the DAO’s decision-making and shape its direction.

4. Contribute to the DAO

Depending on the DAO, you can contribute skills, resources, or expertise to help achieve its goals. 

Finally, continuously participate in discussions, voting, and contributions to maintain your membership and influence within the DAO.

Benefits Of A DAO

DAOs are a revolutionary innovation in the Web3 space with numerous benefits. 

Here are some below: 

1. Democratic foundation

DAOs are built on a democratic foundation, allowing anyone from anywhere in the world and its governance token to participate. 

Participants can come together to work on any project, making a real impact. 

No single person can make decisions alone, as everyone has the opportunity to vote on proposals.

2. Transparent decision-making

Votes are logged on the blockchain, making decision-making transparent. 

This transparency motivates members to vote more altruistically, benefiting the community and building their reputational capital.

3. Collaborative structure

Within these organizations, members are encouraged to contribute to the DAO’s growth through a collaborative structure, where they can submit proposals and feedback on projects and protocol updates. 

This open and inclusive approach ensures everyone has a stake in the DAO’s success and can help shape its direction.

4. Ownership & accountability

The transparent and democratic nature of DAOs reinforces ownership and accountability across the organization. 

Members accountable to the community are more likely to take ownership of their actions and decisions.

5. Global Participation

These decentralized organizations allow for global participation, enabling individuals from diverse backgrounds to collaborate and contribute to projects.

6. Innovative & adaptable

Participants in these organizations are innovative and adaptable, allowing them to respond quickly to changing circumstances and make real-time decisions.

7. Reduced costs

DAOs can reduce costs associated with traditional organizations, such as administrative and management expenses.

8. Increased security 

They are built on blockchain technology, making them more secure and resilient to tampering and corruption.

Limitations of a DAO

Although DAOs come with many benefits, as a new form of community built on the blockchain, they have some limitations due to their early stage. 

Here are some limitations below:

• Scalability: As they grow in size and complexity, their decision-making processes can become slow and cumbersome, making it difficult to respond quickly to changing circumstances.

• Complexity: Setting up and managing a DAO requires significant expertise in blockchain technology, smart contracts, and decentralized governance, which can be a barrier to entry for many individuals and organizations.

• Regulatory uncertainty: They still exist in a gray area, with unclear regulations and potential legal risks, making it difficult for them to operate and raise funds.

• Security risks: Some DAOs are vulnerable to smart contract bugs, hacking, and other security threats, which can result in financial losses and reputational damage.

• Voting apathy: Low voter turnout can lead to decisions made by a small group, undermining the democratic process and potentially leading to decisions that benefit a select few rather than the broader community.

• Dispute resolution: They can only resolve disputes and disagreements among members without a straightforward resolution process.

• Reputation and trust: Some DAOs need help establishing reputation and confidence, which makes it difficult to attract new members, partners, and investors.

• Taxation and accounting: They need more clarity on tax and accounting obligations, creating administrative burdens and potential legal risks.

Note: These limitations highlight DAOs’ challenges in achieving their goals and operating effectively. However, many DAOs are actively working to address these challenges and improve their operations.

Read Also: Centralization vs Decentralization in Crypto

Conclusion

DAOs are a fascinating concept in the Web3 space. They leverage cryptocurrency to pioneer a novel organizational framework. 

Though still early, DAOs can transform traditional business management structures. However, achieving this vision will likely take time.

Many crypto experts predict that DAOs will soon experience greater adoption, improved scalability, enhanced security, and more precise regulatory guidelines.

They are expected to integrate seamlessly with DeFi and AI, expand into new sectors, and evolve with more user-friendly interfaces and hybrid models.

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