The blockchain and cryptocurrency rave is not ending anytime soon. And as more people are being introduced to revolutionary technologies in the digital space, new improvements upon these technologies are also being introduced. In the last couple of years, the DeFi and NFT industries have experienced immense levels of growth and, currently, metaverses and Web3 are the technologies making the digital space light up.

It is not yet clear where these disruptive technologies will lead us, but we are sure that there will be much value up for grabs. At the convergence of Web3 and NFTs lie many platforms looking to leverage technology and infrastructure to make the NFT ecosystem more decentralized, structured and community-driven.

Using social building and governance, the decentralized autonomous organization disruption is a notch higher. The DAO is one major invention that is challenging current systems of governance. Utilizing NFTs, DAOs are changing our perspective of how organizations and systems should be run, and they put further credence to the idea that the optimal form of governance does not have to do with hierarchical structures.

With the principal-agent problem limiting the growth of organizations and preventing agents from feeling like part of a team, you can see why the need for decentralized organizations fostering community-inclusion is paramount.

Is there something you would change about your current organization if given the chance? Leadership? Structure? Payment system? What if your current organization could help you feel like a more valid part of the team by reducing the disparity between the principals and staff? Or, better put:

*What if you get to be a part of your organization’s governance?

*What makes this type of organization both decentralized and autonomous?

Sound interesting? This is what we’ll be discussing!

The answer to the second question is smart contracts on the blockchain. Fundamentally, a DAO runs on the lines of computer code written on smart contracts that anyone can interact with in the same way.

DuMont described the three major steps necessary to launch a DAO. The first step is creating that smart contract. The second step is to determine how to receive funding and enact governance, usually done by creating a token. Lastly, the DAO is deployed on the blockchain.

The most popular use case of a DAO is crowdfunding. The money pooled together is put into a smart contract that, in return, issues tokens to DAO members. Tokenholders, who own equity in the DAO, can then vote on how spend the money and vote to appoint delegates.

In the case of ConstitutionDAO, members raised just over $49 million to buy an original copy of the U.S. Constitution but were outbid at auction. Another example is Blockbuster DAO, which aims to raise enough money to buy the video rental brand from Dish Network and turn it into a streaming film studio.

DAOs intend to reduce the risk of poor leadership through horizontal leadership, or flat hierarchies that level out the playing field of power. The reach is infinite and no matter where a member is located, everyone is bound by the same rules of the smart contract. Trust is placed in code rather than people.

Understanding DAOs

From its name alone, you can probably get an idea of what a decentralized autonomous organization is. A DAO is an organization that is focused on a specific mission, and its members work in coordination according to a shared set of rules encoded on a blockchain. The major purpose of the decentralized autonomous organization is to help eradicate a significant problem in many conventional organizations — the principal-agent problem.

As the popular English phrase goes, two’s company; three’s a crowd. Organizations need a more hands on deck. But with each new person joining the team, there is bound to be some divergence of interest, priorities and goals. This often results in parties making some selfish choices. DAOs avoid this problem by existing as a trustless system, removing the need for centralized leadership.

Related: DAOs are meant to be completely autonomous and decentralized, but are they?

There are a few criteria that a company must meet before it can be considered a decentralized autonomous organization. The governing rules and policies need to be set up as a smart contract on a blockchain — this helps to remove the need for a central authority, and it also prevents any party from making decisions that are different from the organization's initial goal. The treasury of the organization must be accessible only with the consent of the whole group, or at least a predefined percentage.

A brief history of DAOs

The earliest application of DAOs did not go well simply because stakeholders did not put a standard precautionary measure in place. Created in early 2016, the first DAO was called, simply, The DAO. It was an open-source framework focused on venture capitalism. It became an instant success, raking in over $250 million worth of Ether (ETH) — note that ETH was priced at around $20 at this time.

This huge success did not last long, as a bug exploitation attack left The DAO reeling from a loss of roughly 3.6 million ETH in mid-2016. It didn't recover. Since then, several attempts have been made to run a successful DAO, and many more are being created at this very moment. (The Faith Tribe, discussed later in this article, is one of the closest to full decentralization.) The success of a DAO lies in the strength of its smart contract. And, as an investor, you should spend time looking through the smart contract’s open-source code to check for any red flags or abnormalities.

How does a DAO work?

Any DAO is premised on three major things:

The smart contracts involved.

The set of rules known to all members.

A token that can be spent within the system for rewards.

The smart contract holds the rules and nitty-gritty of the DAO, ranging from a roster of its members, the amount invested, who the majority stakeholders are, the workflow, and the reward mechanism. The other two aspects depend on this important facet, as a faulty smart contract puts the project at risk. Any upgrade would also need votes from all its members, so it is important to get it right from the start.

Encoded in the smart contract is a token. The token is useful in allocating rights and incentives to the organization members. The DAO involves everyone in its mission, but members have different levels of benefits based on different input values.

Notable advantages of using a DAO:

The autonomous structure of DAOs makes them open to transparency. The concept of decentralization has fostered the idea of trust and, with DAOs, you don't need to be worried about the people behind the organization and whether or not there's an ulterior motive. The template everyone is judged by is the smart contract, and every transaction is immutably recorded on the blockchain.

There is no long, arduous process required to accept innovations with no central authority. With DAOs, innovations do not need to pass through different hierarchies before they get to those with the authority to make decisions. Anyone can make a suggestion, and the fact that these suggestions come at a fee encourages more well-researched and thought-out ideas, not just random, vague ones.

DAOs solve the principal-agent problem. There is no power play as members see themselves as equally responsible for the organization's progress. Everyone is responsible for the organization's direction, and if there is to be a change in the trajectory, it has to come with the consent of everyone on board.

Disadvantages of using a DAO:

The major disadvantage of the DAO is that it needs everyone to be involved. (Wait! I know you're thinking: "Isn't that supposed to be an advantage?") Yes, there are times when the codes written for the smart contracts are buggy and have loopholes, and getting the whole organization to agree on how to rectify those issues becomes a time-consuming process. Knowing that hackers can operate more effectively given ample time, this can cause huge problems.

The legal terrain for DAOs is still subject to the regulatory frameworks of different nations. Since the DAO itself is not bound by borders, it comes with a high possibility of facing multiple lawsuits from different cities/countries. This is a hurdle that has not yet been surmounted.

Why DAOs are the future!

The stereotypical traditional organization has seen more flaws than imagined, and the COVID-19 pandemic has left us with many workers who are not willing to return to their former jobs because they feel used and without a say. It's unclear if the traditional systems will change or how soon they will, but DAOs have shown a clear path to better working conditions and staff management.

The two unique models for DAOs are the token-based membership and the share-based membership, and both of them have team-centric motives — not a sign of superiority complex.

Because of these reasons and many more, the concept of bringing decentralization into private and public governance has been birthed.

The decentralized autonomous organizations have been used in projects like Dash, Digix, and even BitShares. We have even seen torrents operate similar models and look to integrate blockchain inclusiveness into their future upgrades.

As Vitalik Buterin, co-founder of Ethereum, cited, most companies are likely to buy into the DAO system as it helps to reduce operational costs and improve the bottom line of these companies’ finances.

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store