Last November, a group of cryptocurrency enthusiasts shocked the world by raising tens of millions of dollars to purchase a rare version of the US Constitution, which was auctioned off by the venerable Sotheby’s auction house.
If ConstitutionDao lost on the wire to billionaire hedge fund manager Ken Griffin of Citadel, it won a symbolic victory, etching into the collective memory the arrival and power of DAOs and a new way of investing.
The peculiarity of ConstitutionDao, which surprised many people and set it apart, is that it is a decentralized autonomous organization, or DAO, that is powered by blockchain technology.
After digital currencies and tokens, blockchain networks, decentralized finance or DeFi, and non-fungible tokens or NFTs, DAOs are the newcomers to the crypto block.
So what exactly are DAOs? How do they work? And will they render corporate governance structures obsolete?
What is a DAO?
Cryptocurrency enthusiasts organize themselves into a decentralized autonomous organization, or DAO, which is an online group with collective bank accounts and mission statements.
A Dao registers its members in the digital ledger system known as the blockchain, and those members do things like vote to govern the group’s decisions.
They don’t meet in person, but through chat apps like Discord and other messaging platforms. Joining one of them often requires a purchase of money. To do so requires the use of cryptocurrencies to purchase blockchain-based assets called tokens. Digital tokens give their owners the right to vote on the operation and organization of the group.
The more tokens you have, the more voting rights you have. Each group gives a specific name to its chips. Constitution Dao called his People.
In short, a DAO is a hectic mix of elements that have recently intertwined traditional finance and the Internet via the r/Wallstreetbets forums on Reddit. For example, a group of strangers, often millennials and Gen-Zers, can now raise millions of dollars overnight, a task that once would have fallen to seasoned financiers.
Investors from all over the world can participate. DAOs are not limited to any border or nationality.
How does a DAO work?
In a traditional corporate structure, there is a hierarchy: a board of directors and executives who have the power to effect change. Everything is centralized.
This is the opposite of DAOs, which are decentralized. No person or entity governs them. The rules of governance and operations are encoded in smart contracts stored on the blockchain, which means that they cannot be changed without the vote of all members of a DAO.
Every member of the DAO has something to say. All decisions are subject to the vote of each member. This is different from a traditional structure, where a small group or a majority decides for the rest.
To participate in a DAO, netizens buy voting rights by paying cryptocurrencies. These voting rights give them the ability to indicate what the DAO should invest in. The risk is that a participant with a large number of voting rights could divert the project from its original objective.
Some DAOs are not limited by tokens. meaning that someone who joins Discord for the community does not need to have invested in the organization.
This is different from a Bored Apes Yacht Club, for example, where users have to pay one of the expensive NFTs to gain member-only access to the community.
Engaging people in the cryptosphere is an important goal. People feel that they are part of something unique, that they belong to a community and that, in some way, they are changing the world.
DAOs are a bet made by people who want to earn money and at the same time gain a sense of belonging and transparency within a community.
Disruption of traditional corporate structures
DAOs are in equal measure a revolutionary force (rewriting some of the oldest business rules by de-prioritizing age, security, and experience) and a disruptive danger.
DAOs give their owners decision-making power proportional to the number of tokens they own. Therefore, DAOs can be compared to mutual funds. Each person who buys a token will thus increase the cash flow of the DAO and participate in the direction taken by the community.
Many startups have entered the battle to accelerate DAO development. For example, Upstream has created a platform to offer DAO-in-a-Box. That’s a world where collective members can deposit money into a shared ethereum wallet, write proposals for the use of the money, vote on decisions, and elect delegates to more widely distribute voting rights and avoid plutocracy.
By creating full locations to configure DAO, governance and compliance will be clearer.
There is also DAO Builder and Utopia Labs, which offer operating systems.
Types of DAO
In addition to hosting auctions of rare historical documents, DAOs have a wide range of potential use cases. DAOs from creators like Mirror allow people to monetize their work on a piecemeal basis, and projects like PieDAO use the structure to make business decisions much like a business. The most well-known DeFi (decentralized finance) credit platforms, such as Uniswap and AAVE, are managed by DAO.
Some in the cryptosphere envision potential long-term uses for DAOs that could serve the public interest, for example in local government, where city residents could vote directly on the use of treasury funds.
For now, DAOs are likely to focus on niche social groups and communities like ConstitutionDAO, rather than materially threatening entrenched social and corporate structures.
But once the infrastructure is in place, DAOs could evolve from groups of crypto-curious users buying niche items and having fun online, to serious collective entities that act like businesses but can be more nimble and inclusive in their take. of decisions.
Some established DAOs that were formed with the goal of making a one-time purchase have since expanded their reach. PleasrDAO, for example, was originally founded to buy Uniswap NFT artwork, but has since ventured into DeFi and launched an incubator.
Hazards and Risks
Experts say DAOs still have a long way to go, due to their novelty and connection to a male-dominated web3 community, though their Discord chats are open to just about anyone.
So while DAOs advocate transparency and ownership, it’s hard to call them democratic because those who can’t afford higher stakes don’t have as much say in group decisions.
And as with other emerging web3 technologies, DAOs enable large transfers of capital with little formal oversight or regulation. Those who are attracted to the vision of community offered by DAOs may fear losing their money or becoming victims of fraud.
Indeed, joining a DAO can be fraught with risk, given the regulatory gray area in which they currently exist. In most US states, DAOs are not subject to a specific legal structure, so protocol developers and participants bear greater responsibility compared to shareholders of regulated companies.
Some DAOs have gone up in smoke. In 2016, one of the first DAOs was hacked. Hackers stole $50 million as reported at the time.
Additionally, DAO members don’t even have the limited protections offered by other common high-risk investments, like hedge funds.