Learn / Beginner · DeFi and Apps

What is a DAO?

Beginner · DeFi and Apps · about 5 min read

A DAO, or decentralised autonomous organisation, is a group that owns a shared pot of money and decides what to do with it by voting, with smart contracts enforcing the result.

How it works

Ethereum’s guide describes a DAO as a collectively owned organisation working towards a shared mission.
Its money sits in a treasury that nobody can use without the group’s approval. The rules are written into a smart contract, so when a vote passes, the payment can go out automatically.
Members make decisions by putting forward proposals and voting on them. In many DAOs, holding the group’s governance token gives you a vote.
Examples include a charity that votes on which causes to fund, a group that buys something together, and a fund that pools money and votes on investments.
DAOs are young, and few places have laws for them. Wyoming, Vermont and the US Virgin Islands have DAO laws in some form.

Keep in mind

When votes follow token holdings, big holders have the loudest voice. One study of 33 DAOs found that voting power was very unequal in most of them, and that in about a third of them, on average, two participants together could control a majority.
Code can fail. The first famous DAO, launched in 2016 on Ethereum, was drained of millions of dollars’ worth of ether because of a flaw in its code.
Joining a DAO is not the same as owning a share of a company. Check what your token actually gives you.
General information, not financial advice.

Three ways a DAO can be organised

Ethereum's guide describes different membership models:

Token-based. Holding the group's governance token gives voting rights, as in MakerDAO.
Share-based. People join through a proposal and can leave with their share of the group's treasury.
Reputation-based. Voting power comes from taking part and cannot be bought or sold, as in DXdao.

How a vote becomes action

Members put forward proposals and vote. In some DAOs, such as Nouns DAO, a passed proposal can be carried out automatically by the smart contract. Others use a multisig, where a small set of publicly known members carry out the community's decision, which means trusting that handful of people. Some let members hand their votes to representatives, a feature called delegation that ENS uses.

What DAOs do in real life

A charity that takes donations and votes on which causes to fund.
A group that buys physical or digital assets together and votes on how to use them.
A venture-style fund that pools money, backs projects by vote and shares repaid money.
CityDAO, which used Wyoming's DAO law to buy land near Yellowstone.

How a DAO differs from a company

Ethereum's guide notes that DAOs are usually flat and democratic while companies are usually hierarchical. DAO votes are counted and carried out automatically, while a company handles votes internally. DAO activity is public, while a company's is typically private. And a DAO relies on code to manage funds, while a company relies on people and central controls.

Questions before you join

What does the token give me: a vote, a share of money, or only an association?
Who holds most of the tokens, and could a few people outvote everyone?
Does a multisig or a team hold real control behind the scenes?
Has the code been reviewed, and what happens if it fails?
What law, if any, covers the group where I live?

Common mistakes

Assuming a vote means everyone has equal power.
Treating a governance token as a share of a company.
Not reading what a proposal does before voting for it.
Joining because a social account said a DAO would "pay out".

Try it yourself

Choose a well-known DAO and find its public forum or voting page. No wallet or money is needed.
Read one proposal. Note what it asks for, how many voted and how long voting lasted.
Look up its token's top holders on a block explorer and note the share held by the top ten.

Key terms

DAO, treasury, proposal, governance token, vote.

Sources and credits

Models, voting and comparison with companies: ethereum.org, Decentralized autonomous organizations. General information, not financial advice.

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