Explain it to me like I am a non-web3 native: DAOs
web3
A very quick intro to DAOs
DAOs have risen in prominence because of their ambitious promise: replacing and changing how we have done companies and organizations over the past century. This upsurge is more than enthusiastic web3 sentiment: the 28 biggest DAOs — among them Uniswap, Compound, Aave — aggregately have more than 16 billion dollars in total treasury.
This is an introduction to the DAO fundamentals, why DAOs are important now and how they could disrupt the future of organizations.
DAO Fundamentals
Decentralized Autonomous Organizations (DAOs) are blockchain-powered entities assembled by and bringing together a community without any management or leadership. They are instead ‘organized’ through self-enforcing rules, which are open-source coded.
This article is scratching the surface of what DAOs are and why they matter but we should be able to go beyond the general knowledge on DAOs and dive slightly deeper into the technology. These are the pseudo-technical steps — you could think of them as ‘ingredients’ of a DAO:
Smart contracts: The first community members set up rules in a smart contract, code run on the Ethereum blockchain that is not owned by anyone but rather runs on the network. It is programmed in a way that based on the decided inputs, a specific output automatically follows. Once encoded, the rules can not be changed and the outcome is guaranteed. For example, a DAO can adopt ‘quorum voting’ and encode the threshold necessary for a proposal to be accepted and automatically executed. Let’s say we establish that our charity will fund a project once more than 50% of the community (quorum) votes ‘yes’. The DAO will then automatically send those funds.
Token issuance: to be able to vote and become part of a DAO (so to essentially be a co-owner), you need to buy the DAO’s tokens which will give you voting rights.
Deployment of the DAO: Once you own the DAO’s tokens, you have bought in as a stakeholder and will be able to submit proposals and vote on fund allocation.
Value Proposition
At the core, DAOs solve for coordinating groups of people digitally. Naturally, you would want to ask what the value proposition of a DAO is: what is it uniquely, more efficiently doing that traditional structures are not as apt to?
DAOs are set to radically remove boundaries and friction that stem from traditional governance across many industries due to their transparent and fully decentralized nature.
The promised value proposition of a DAO can best be explained through a practical and theoretical breakdown.
Governance theory and core-principles
Centralized systems — be it grassroots organizations, a startup or a large firm — have not embraced a democratic organizational structure nor do they tend to operate from the default of transparency. This is not to say that traditional structures do not embrace a degree of both. However, the underlining assumption remains that ‘too much’ organizational flatness and full transparency can backfire because it would decrease accountability, control, and structure.
DAOs, on the contrary, promise pure democracy and transparency which feeds into the vision of having anyone being able to take ownership and execute on core projects of an organization. Their unique value-add compared to a regular organization or LLC is that they are faster and cheaper because of its automated nature and everyone has access to contribute.
Besides improving on how we have traditionally organized groups of people, they also offer a unique infrastructure to organize people digitally. More and more people cross-boundaries, industries and projects collaborate and DAOs are becoming a facilitating infrastructure, a bottom-up binding force.
DAO praxis: some industry use cases and examples
Venture Capital: DAOs could disrupt venture capital because they are less susceptible to biases traditional VC suffers from. Local bias, similarity bias and pattern matching are common pitfalls that are hard to prevent but DAOs could significantly mitigate them. DAOs are more accessible which allows for more diverse groups of people to coordinate funds and fundraising. It fundamentally reduces restriction on who can participate in venture as any member is both incentivized and equipped to participate in the venture capital deal flow.
To zoom in even further to individual examples, DAOs are claimed to be capable of replacing titans in a multitude of industries. As Kevin Owocki, CEO of Gitcoin put, it: “.. MetaFactory will disrupt Shopify, if we’re successful Friends With Benefits will disrupt Y Combinator, if we’re successful then Gitcoin will disrupt LinkedIn.”
E-commerce: Take MetaFactory, a DAO-run marketplace on which people can create and sell artsy digi-physical products such as apparel. MetaFactory could disrupt fashion on traditional e-commerce platforms because it allows fans to have ownership on a brand by becoming part of the brand’s DAO (deployed by MetaFactory). As MetaFactory content effectively explains, artists get to decide how much brand ownership (IP) they want to keep and how much they want to sell to dedicated patrons, who gain ownership through voting shares (agreed on by the artists through pre-set parameters).
Lending platform: Or MakerDAO, which emulates a core mandate of a traditional central bank, namely creating price stability and a hedge against volatility. I could dedicate an entire article on the (token)economics behind MakerDAO but in short, it is a DAO-backed lending platform that takes crypto assets as collateral which allows more people to borrow while regulating the ecosystem.
Industries in which DAOs operate and change value. Credit: Mirror, Coopahtroopa (source)
Limitations
There are fair criticisms that need to be taken care of to truly capitalize on the aforementioned advantages. A crucial issue with large groups of stakeholders is the lack of efficiency and execution that might arise if there is disagreement.
There is also little legislation that legitimizes DAOs and would facilitate jurisdictional disputes, liabilities, risks, etc. resulting in significant uncertainty.
Multiple companies are building and solving for these issues and the short-term future will tell us how established DAOs will become.
If you feel ready to dive deeper into the DAO-hole, feel free to follow along my learning journey here. I keep track of most DAO content I consume there. And like everything you learn about, I believe it is important to understand the fundamentals, not just general concepts. here are some great resources:
why do people care about decentralization in the first place?
read a couple of DAO whitepapers, like these:
Also, consider participating in a couple of DAOs, and be unafraid to ask critical questions. Consuming content only gets you so far. I deeply believe in forming your own opinions and perspectives. Beginner-friendly DAOs to participate in:
Bankless DAO
Spork DAO
