It feels like hardly a week goes by that you don’t come across this new acronym which seems to have popped up out of nowhere and now gets used by everyone. If you’ve read 10 different articles to try to understand what it actually is and still couldn’t quite explain it to your kids, then read on and you’ll realize that DAOs have been around for ages.
To give you the answer in one short sentence: Your local running club is a DAO.
When you’ve read previous articles, you may have found an explanation such as: A decentralized autonomous organization (DAO) is a type of organization that is run using computer code and smart contracts. This means that it operates on a decentralized network, such as a blockchain, and that its operations and decision-making processes are automated through the use of smart contracts.
All of this is true, and the fancy new term called a decentralized autonomous organization is most often used to describe an organization in the crypto space, but the reality is that it’s designed to simply be a community without a central owner, leader or controller. Hence decentralized.
Let’s look at the running club example I referred to earlier. If you and 10 friends are avid runners and all training for the same marathon, you might decide to train together and not be so lonely on those early morning runs. You set up a WhatsApp group and call it the City Sprinters. You send out a message and say let’s all meet in the middle of the park tomorrow morning at 6am. Lots of emojis fly around and tomorrow morning you have your first run. During your run, John says he’s thought of a way better name for the running club since it’s so cold this morning. We should call it Cool Runnings. Everyone thinks it’s a great idea and you can have T-shirts made with a logo for your runs. (By the way, you just had your first proposal and community vote). Sarah volunteers to do a couple of designs for the T-shirt and send everyone pictures to vote for their favorite. Peter and Jane start coming up with interesting new running routes and share those with the group ahead of the run each morning. They become the designated route planners and since you created the Whatsapp group and send the most messages, you become the main point of contact for Cool Runnings and generally manage the group.
Without even knowing it you’re now part of a DAO. The running club is the DAO and you’re all club/community members. The club is Decentralized – there are no owners or a CEO; it’s Autonomous – you all govern yourself, and finally it’s an Organization – you formed a group/club (there’s no need to register it to be an organization).
Your first question might be but what about me? I’m the one who started it and is managing it all; am I not the CEO or the boss? Not really. Yes, you manage it but if you forget to organize 3 runs in a row and the rest of the group get upset, they may all decide that Jane is now the one to manage the runs. You can still show up but she’s the main point of contact. You don’t have any employment contract or shareholding to fall back on. The community has spoken. It’s decentralized.
One of the main benefits of a DAO is that it allows for decentralized decision-making because all members of the organization have equal say in how it’s run. In crypto this is achieved through the use of tokens, which represent membership in the DAO and allow members to vote on proposals and decisions (such as the T-shirt design for Cool Runnings). This brings up another interesting concept called governance tokens which is explained in more detail in this article.
As you can see, DAOs have been around for a very long time. What has changed is that real world profit-making companies are now looking to structure themselves as DAOs. The outside world and the government don’t really care about your local running club (and whether you choose to use a trademarked name for it), but they certainly do care when big money is involved.
When a financial institution (like a bank) decides to set themselves up as a DAO with the aim to do business the way their community (customers, stakeholders, founders, etc.) thinks best, then everyone is interested, and this is why you’re hearing the term DAO all of a sudden.
DAOs have the potential to disrupt traditional forms of organization and governance because they can operate without the need for a central authority or hierarchy. This makes them particularly attractive for organizations that want to operate in a more transparent and democratic way.
Some notable and famous DAOs include:
- ConstitutionDAO – who tried to purchase an original copy of the Constitution of the United States;
- UkraineDAO – a group pooling capital to fund the Ukrainian defense effort; and
- MakerDAO, AAVE and Uniswap – all decentralized finance (DeFi) protocols.
Now that you understand what a DAO is, here are a few articles for additional reading:
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