There is so much hype surrounding blockchain, cryptocurrencies, and NFTs that it can sometimes be hard to see the true utility of the technology. It is difficult to understand the intrinsic value of a cryptocurrency or an NFT, when their prices are primarily based on their value as a speculative instrument.
Understanding the usefulness of DAOs, or Decentralized Autonomous Organizations, is a little easier, although the concept is still very young and has only been tested in a small number of types of organizations so far.
What is a DAO?
A DAO is a way to organize people and their interests on the internet using blockchain. Blockchain is a public ledger system that only exists on the internet. It uses a complex cryptography system to ensure that everything written in it (“blocks”) is verifiable. This ledger, which is usually maintained by a group of internet elves called “miners,” can be used to store an organization’s legal statuses in documents called smart contracts.
What are some examples of DAO?
You can form a DAO to raise funds for a charity or to create an investment company where all members contribute funds in exchange for equity in a business or project. Each participating member could pay a certain amount of cryptocurrency, and the amount would determine how many tokens the participant could receive from the DAO. Payout and payout can work on a schedule written into the smart contract.
The popular Bitcoin cryptocurrency can be thought of as a DAO, where people enter into agreements to buy and sell the cryptocurrency under a set of terms, and everything is tracked on the Bitcoin blockchain.
Most DAOs that exist today run on the second largest blockchain, the Ethereum network. Ethereum describes a DAO as “an internet-native enterprise collectively owned and managed by its members. They have built-in treasuries that no one has the power to access without group approval. Decisions are governed by proposals and votes…..” In other words, participants run the DAO, not a central administrator, and must approve any movement of currency into or out of the DAO’s vaults.
For example, in November, a group of crypto enthusiasts created a DAO called ConstitutionDAO to raise funds to purchase one of the first 13 printings of the US Constitution. The group did not win one of the Constitutions, which were auctioned off by Sotheby’s, but managed to quickly raise $47 million for the cause.
Another DAO called LinksDAO raises funds to purchase and develop his own crowd-funded golf course. The group sold club memberships in the form of non-fungible tokens (NFTs), raised over $10.5 million, and is now sold out. Owners of NFTs get a stake in the club and the right to participate in decisions on how to develop the golf club.
What is the benefit of a DAO?
DAOs are set up in a way that does not require participants to “trust” each other. Indeed, they can be complete strangers. Indeed, the participants fulfill or not the obligations prescribed in the smart contract. The terms of the contract, as well as all the actions of the participants, are written in the code of the blockchain, where the information is public and permanent.
Distrust of centralized human control is rooted in the thinking behind DAOs. “No CEO can authorize spending based on their own whims,” the Ethereum FAQ reads, “and no chance of a dodgy CFO manipulating the books.”
There is a school of thought that says human beings do not behave badly in a vacuum because they are evil, but because they act within an organization that gives them power that can be abused. They might act against the best interests of the organization because of greed, prejudice, desire for fame, or a hundred other flaws. This sometimes happens behind closed doors (as when an executive pays $1,000 for a haircut and signs his own expense report), or out in the open (as when a CEO decides to harbor misinformation about the company’s social network).
In theory, decision-making power in a DAO is distributed to include all participants and automated to minimize the need for day-to-day administration.
What can DAOs do that legal contracts can’t?
In some ways, a DAO smart contract is like a legal agreement written in code by software developers. Skeptics often ask what DAOs can do that good old-fashioned legal clauses can’t. It’s a good question. Blockchain enthusiasts claim that smart contracts add an element of automation to legal agreements. For example, a smart contract governing a fundraising effort might contain, and then distribute, a crypto token to a participant who has just donated a certain amount of money to the DAO’s cause.
Smart contracts can also be shorter, smaller and more quickly produced than standard legal contracts, argue DAO proponents. Moreover, by using cryptocurrency registered on the blockchain, it is possible to raise funds much faster than with fiat currency processed by traditional banks.
What are the disadvantages of DAOs?
Despite their name, the DAOs that exist today are not fully decentralized or purely democratic. They still rely somewhat on the participants’ trust in the group of human beings who originally set up the DAO, its objectives and its terms and conditions. This group of humans must also be trusted to decide on a governance model that suits them. In some models, each participant who contributes crypto, regardless of the amount, receives a single token, which signifies one vote to be cast in future DAO decisions. But in some DAOs, it might be unfair for a participant who contributed a large amount of crypto to have the same say on important matters as someone who contributed a small amount.
It’s still early days for DAOs. These organizations, and the technology behind them, are promising enough to be watched closely as they mature, perfect, and find new use cases.