Autonomous organizations (DAOS)
An overview of Decentralized Autonomous Organizations, also known as DAOs, in the crypto industry.
What Is a DAO?
It is an online community that uses shared digital assets on a blockchain to fund the activities of the organization. It relies on smart contracts—code that executes automatically under predetermined conditions—to manage the actions of the members. Let’s examine each of the three terms that make up the phrase “decentralized autonomous organization”:
Decentralized - It generally has a flat management structure—there are no C-level executives who make decisions on behalf of others in the organization. Any actions must be voted on by the members, not left to a “boss.” This lack of central authority solves the principal-agent problem, in which management deviates from the will of those they represent, that often plagues traditional organizations in the brick-and-mortar world.
Autonomous - There is no third party that has the authority to shut down or interfere with the operations of the organization. All governing rules of the organization are encoded in smart contracts, enabling members to vote on proposed actions without the need for a human mediator. In other words, DAOs operate in a “trustless” manner. Additionally, these rules are open-source in nature and transparent to the members.
Organization - It is composed of members who have a common purpose, as defined by the stated goals of the organization. Many DAOs are permissionless; members join the DAO automatically by purchasing the governance token recognized by the organization. Other organizations require the approval of the member base, which is often gained by making an investment in the form of tokens. Typically, any member of the organization is able to put forth a proposal to be voted on by the others. Decentralized autonomous organizations vary enormously in the sizes of their user bases. Some have only a few members, while the top DAOs have millions.
A Brief History of DAOs
These online organizations have officially been around since April 2016, when The DAO—that was its name—launched on Ethereum. The concept of the decentralized autonomous organization had already been bandied about by theorists, but this is generally considered the first time that an operational DAO had appeared. The mission of this innovative organization was to provide funding for business proposals.
The DAO rapidly earned $150 million in assets from a crowdfunding campaign, but problems soon arose. Some observers who were familiar with The DAO's open-source code (which had not been properly audited prior to launch) noted several serious vulnerabilities and warned of impending disaster.
Their warnings sadly proved to be prophetic. After only a few months of existence, The DAO fell victim to a recursive call hack that siphoned off about one-third of its assets, forcing Ethereum to hard-fork the chain to recover the funds. Nonetheless, the hack was a fatal blow to The DAO. By September—not even six months after its launch—it had been delisted from every major cryptocurrency exchange.
It would hardly seem to be a promising start for the world of decentralized autonomous organizations, but The DAO in fact had an enduring, and quite positive, influence on blockchain developers. The failure of The DAO was clearly due to an avoidable defect in its code, not a flaw inherent in the concept of decentralized autonomous organizations. Developers began to devise ways to improve on the organizational model that The DAO had sketched out.
These efforts have led to an explosion of decentralized autonomous organizations throughout the blockchain world. And this phenomenon shows no signs of slowing down. In July 2021, the State of Wyoming became the first governmental organization in the U.S. to legally recognize a decentralized autonomous organization: the American CryptoFED.
Types of Decentralized Autonomous Organizations
As you might expect, these organizations come in a wide assortment of types, with the primary differences being their operational goals. The more common kinds found on blockchains include the following:
Investment DAOs - These organizations are aimed at providing funding for projects, often relating to decentralized finance (DeFi). The DAO was an example of this type. Also known as venture DAOs.
Media DAOs - These organizations are intended to encourage creation of media content by rewarding creators with digital currency for their efforts.
Collector DAOs - These organizations are dedicated to acquiring and trading digital assets, commonly non-fungible tokens (NFTs).
Social DAOs - These organizations are primarily concerned with fostering an environment for effective social networking among individuals interested in common topics or careers.
Protocol DAOs - These organizations are used by protocols to enable its users to guide future developments in a democratic way. They are the most commonly seen type.
Operating Systems - These are platforms that are used to create decentralized autonomous organizations. They offer a variety of tools intended to remove the difficulties that many developers face when attempting to launch these kinds of projects.What is the best DAO to join? There is no real answer to this—it all depends on the goals you are interested in pursuing.
Launch a DAO on Avalanche Network
Decentralized autonomous organizations are expected to play an increasingly vital role in the Web 3.0 ecosystem. Avalanche, the fastest smart contracts platform active today, is the ideal environment to develop and launch decentralized autonomous organizations. To learn more about the Avalanche protocol, explore the Avalanche website and join the conversation.