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What are DAOs?

Posted August 5, 2022 3:51 pm
4 min
By Priscila Dick

One of the main selling points behind the world of Web3 is decentralization – meaning that instead of large fragments of the internet being owned and controlled by centralized entities (i.e., Big Tech), ownership is distributed among its builders and users. 

“The design of Web3 is intended to be inherently difficult to co-opt (though importantly, not impossible), as the rules for radically distributed ownership are baked directly into the design and architectures of the underlying Web3 technologies,” writes Dion Hinchcliffe, VP and Principal Analyst at Constellation Research as well as Chief Strategy Officer at 7Summits.

With that in mind, due to the nature of the technology being community-based, many initiatives have been unlocked within the innovations of this industry. Among them – and we’re pretty sure you’ve heard this term if you’re reading this – are DAOs, or decentralized autonomous organizations. 

DAOs, pronounced “dow,” represent a new organizational structure in the blockchain space via smart contracts, considered by many as a crypto co-op, kind of like a group chat with a bank account. 

According to blockchain company, ConsenSys, a DAO is governed entirely by its members, who collectively make critical decisions about the project’s future, such as technical upgrades and treasury allocations.

In parallel, these members are also tasked to ensure the long-term success of the project they support or work on – they could be from all around the world, not knowing who each other is, and from different backgrounds, but must unite to make better decisions regarding their project. 

Blockchains are decentralized peer-to-peer networks that allow individuals to store and share value without the need for intermediaries. Bitcoin’s blockchain is the first successful blockchain the world has heard of, but there are many others today, such as Ethereum and Avalanche.

If things are relatively confusing, then let’s jump into a living, breathing example to help. 

One of those popular organizations out there would be PleasrDAO, representing more than a handful of crypto artists, entrepreneurs, and investors to bid on the work of high-profile digital artists. 

One of their significant acquisitions was of a Non-Fungible Token (NFT) affiliated with NSA whistleblower and activist Edward Snowden for $5.4 million. Another acquisition included purchasing the Wu-Tang Clan album “Once Upon a Time in Shaolin” for $4 million. 

Both of these works became the property of the DAOs members giving them the full right to manage them as they see fit; for instance, they could collectively decide to exhibit them somewhere or break them down into thousands of separate NFTs to sell them off to the public. 

Or simply, keep them hidden away in a digital or physical vault for their eyes and ears only – however, the decision would be made in a classic DAO model, which is “on-chain,” via a system of token-based voting. 

How Do DAOs Work?

The basic principle of any DAO is decentralization, achieved through a high level of automation and shared governance. It’s essential to understand its broader meaning rather than a blockchain application or decentralized applications (DApps), as it encompasses the more organizational side of developing products or services within this industry. 

In layman’s terms, a DAO is a direct democracy: meaning that instead of having someone representing another person’s interests, it allows people to express themselves through direct voting rights in overall decisions. 

However, they aren’t a perfect democracy. 

Whales – people or institutions holding a hefty amount of governance tokens – may enjoy more influence, allowing them to dictate decisions. A risk that anyone who enters into a DAO must assume and consider. 

Yet, many of these decentralized organizations have distinct rules that help curb the influence of these whales in an attempt to maintain their democracy with all members. An example could be drawn from certain DAOs who draw limits of one token per person or institution or by a limited voting right.

It will be interesting to see how DAOs evolve over time. Will they be a focal point of Web3 adoption or will they fizzle out like other democracies? Stay tuned for more educational content in the coming weeks.

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