What Is a DAO (Decentralized Autonomous Organization)?

The advent of decentralized autonomous organizations (DAOs) marks a significant evolution in the field of blockchain and digital governance. These entities, operating on principles of decentralization and autonomy, challenge traditional organizational models. They stand out for their ability to operate without a centralized hierarchy, thus offering a new perspective on management and collective decision-making through smart contracts. However, DAOs are not without challenges, particularly in terms of security and regulation. This article aims to examine the characteristics, advantages, and inherent challenges of these organizations.

Definition and Origins of DAOs

The DAOs or decentralized autonomous organizations represent a revolution in the world of blockchain and community governance. Born from the rise of blockchain technology, DAOs are entities organized around rules encoded in the form of smart contracts, primarily on platforms like Ethereum. Unlike traditional organizations, they do not have a centralized hierarchy and operate transparently and democratically.

How Does a DAO Work?

Decentralized autonomous organizations (DAOs) represent a major innovation in the field of blockchain and decentralized governance. They offer an organizational model where transparency, democracy, and efficiency are at the forefront. Here’s an overview of the main aspects of how these organizations function.

DAOs: A Blockchain-Based Structure

The structure of a DAO relies on blockchain technology, primarily on platforms like Ethereum. This technological base ensures unparalleled transparency and security. In a DAO, the operating rules, members’ rights, and obligations are codified in smart contracts. These contracts are autonomous programs that execute the agreed-upon terms as soon as predefined conditions are met, without external intervention. This automation reduces the risks of human errors and malicious manipulations. Furthermore, the blockchain records all transactions and votes, ensuring traceability of all actions taken within the DAO.

The Decision-Making Process of a Decentralized Autonomous Organization

At the heart of a DAO’s operation is its decision-making process, which is democratic and decentralized. DAO members, who hold crypto tokens, actively participate in governance. Each token held is often equivalent to one vote in collective decisions. Votes may pertain to various aspects such as resource allocation, rule changes, or project direction. This process ensures that each member has a say in the management of the organization, thus promoting a more balanced and representative approach. However, this system can sometimes lead to challenges in achieving consensus, especially when the community is large and opinions are diverse.

The Role of Community Members in a DAO Platform

Members play a crucial role in a DAO. They are not mere passive participants, but active players in the governance and direction of the organization. In addition to voting, they can propose projects, improvements, or changes to the operating rules. This direct involvement creates a sense of belonging and strengthens commitment to the DAO. Members can come from diverse backgrounds, ranging from crypto enthusiasts to ethereum blockchain experts, and even investors interested in the project. This diversity enriches the DAO, bringing a multitude of perspectives and expertise related to computing and blockchain. However, it also poses challenges in terms of coordination and harmonizing interests.

The “Progressive Decentralization” of a DAO: How Does It Unfold?

The progressive decentralization of a DAO involves gradually transferring control of a project from its founders to a broader community, so that it becomes a public good. The creators of the DAO must not only develop a functional and attractive product but also ensure that it is handed over to the community for collective management.

This approach represents a radical shift from the traditional model based on shareholders, the company, and customers. With a DAO, the governance token facilitates the coordination of interactions between investors, project holders, and users, thus creating a new model of organization.

The concept of progressive decentralization was popularized by Jessee Walden on the blog of a16z, one of the largest investment funds in decentralized projects.

In the early phases, founders and core contributors must focus on creating the product, similar to any startup. The main objective is to quickly achieve product-market fit.

Once the product begins to gain popularity and its usage increases, core contributors must move to an approach inspired by open source projects. This includes publishing project documentation and maintaining regular communication to encourage community participation.

What Are the Key Tools of a DAO?

The functioning of a decentralized autonomous organization (DAO) primarily relies on a blockchain protocol. However, this alone is not sufficient to ensure its proper functioning.

The central element of a DAO is the governance token, which symbolizes membership in the organization. This token, issued by the DAO protocol, allows holders to submit proposals for improvements and vote on protocol updates. In short, this token empowers members with decision-making authority.

In theory, all decisions related to the protocol, including those regarding fund allocation, are made directly on-chain by token holders, through algorithms predefined by the founders. These algorithms set the validity conditions for votes, as well as the thresholds for quorum and majority necessary.

However, in practice, the coordination of proposals and votes often occurs off-chain, via communication platforms such as Discord or Telegram. These alternative social networks facilitate discussions among members.

In addition to the blockchain protocol, tokens, and alternative social networks, DAOs typically require a digital vault. This is often a multisig (like Gnosis Safe Multisig) that allows multiple members spread across different countries to collectively manage the DAO’s treasury. This treasury, composed of cryptocurrencies, must be managed sustainably, maintaining a positive balance and diversifying assets to mitigate risks associated with market volatility.

Furthermore, several other essential tools are available for the creation and management of a DAO, such as Snapshot, Discourse, CollabLand, Mirror, and Gnosis Zodiac, which allow for rapid and efficient organization of a DAO.

The Advantages of Decentralized Autonomous Organizations (DAOs)

Decentralized autonomous organizations (DAOs) are a major innovation in the world of blockchain and decentralized governance. Here are three main advantages of these structures.

The Transparency and Security of DAOs

Transparency is one of the fundamental pillars of DAOs. Thanks to blockchain technology, all transactions and decisions made within a DAO are recorded in an indelible and public manner. This means that users must be aware of the implications of smart contracts. Every community member can verify and audit the organization’s actions at any time. This transparency helps build solid trust among members and prevents fraud and manipulation. Moreover, the security of DAOs is enhanced by the use of smart contracts on platforms like Ethereum. These contracts automate operations and ensure that the organization’s rules are applied flawlessly without human intervention. This combination of transparency and security creates a reliable and secure environment for all participants.

The Efficiency of DAO Governance

DAOs are revolutionizing organizational governance by adopting a decentralized and democratic model. Unlike traditional hierarchical structures, DAOs allow all members to actively participate in decision-making. This democratic approach ensures that decisions reflect the interests of the community as a whole rather than those of a small group of leaders. Moreover, governance efficiency is improved by the speed and automation of voting processes and decision implementation. Members can propose, vote on, and implement projects or changes effectively, without the administrative burdens often encountered in traditional organizations. This efficiency contributes to heightened responsiveness and adaptability to market changes and community needs.

The Community Engagement of DAOs

One of the most significant advantages of DAOs is the emphasis placed on community engagement. Members of a DAO are not mere spectators or passive investors; they are key players in the direction and success of the organization. This active engagement creates a sense of belonging and personal investment in the project. Members are encouraged to contribute with their ideas, skills, and resources, enriching the DAO and fostering innovation. Moreover, the decentralized nature of DAOs allows for greater diversity and inclusion, attracting members from various backgrounds with diverse skills. This diversity enriches perspectives and approaches within the organization, leading to more creative and effective solutions.

The challenges and limits of a decentralized autonomous organization

Although decentralized autonomous organizations (DAOs) offer significant advantages, they are not free from challenges and limits. These obstacles must be understood and addressed to fully realize the potential of DAOs.

The security of smart contracts

Security is a major challenge for DAOs, primarily due to dependence on smart contracts. Although these smart contracts automate operations and ensure the enforcement of rules, they are not infallible. Smart contracts are prone to contain vulnerabilities or bugs, which can be exploited by malicious actors. A notorious example is the attack on The DAO in 2016, where a defect in the smart contract led to the loss of millions of dollars. This risk highlights the importance of rigorous verification and security of smart contracts. Developers must conduct thorough audits and continuous testing to ensure the integrity and robustness of the contracts.

Governance challenges

While the decentralized and democratic model is appealing, it can also lead to challenges in terms of effective decision-making. In a large DAO, reaching consensus can be difficult and time-consuming, especially if members have divergent interests or participation is low. Moreover, there is a risk of centralization if a minority of members holds a majority of the tokens, which can distort the decision-making process. To overcome these challenges, DAOs must develop balanced governance mechanisms that encourage active and fair participation while facilitating effective decision-making.

Legal and recognition issues

DAOs face significant challenges in terms of legality and legal recognition. The decentralized and often anonymous nature of DAOs raises questions about their legal status in many countries, including France. Without legal recognition, DAOs may struggle to interact with the traditional financial system, establish legal partnerships, or be held accountable in case of disputes. Furthermore, regulations regarding cryptocurrencies and blockchain technologies are still being developed in many jurisdictions, creating legal uncertainty for DAOs. To navigate this complex environment, DAOs must be proactive in understanding local and international laws and seek ways to legally integrate into the existing regulatory framework.

Some examples of DAOs to know

The DAO was the first decentralized autonomous organization to emerge. Launched in May 2016 by the company Slock.It, its main objective was to fund projects to promote the development of the Ethereum protocol.

This organization functioned as a decentralized investment fund, where decisions were made collectively by the members. Each participant deposited their funds into a smart contract and received tokens specific to The DAO in return. These tokens allowed voting on the release of pooled funds, determining who would receive the funds and when.

After raising around 150 million dollars in Ether, The DAO fell victim to a hacking incident, resulting in the diversion of one-third of its funds. This incident led to a hard fork of the Ethereum blockchain as well as an investigation by the Securities and Exchange Commission (SEC), the American financial regulator.

Several factors explain this failure, including the lack of experience among investors, the significance of the funds raised for a nascent project, and the absence of adequate tools to manage the funds and make decisions. Moreover, the smart contracts lacked rigorous testing and audits, which weakened the project’s security.

This misadventure initially tarnished the image of DAOs, reducing their popularity. However, the concept experienced a resurgence starting in 2020 and especially in 2021, thanks to the emergence of better practices, more advanced technological tools, and a more educated community.

Today, the number of DAOs has exploded, with over 100 organizations managing around 14 billion dollars in assets. These DAOs can be classified into different categories, such as donations, protocols, investments, services, social networks, collections, and media.

Among the most famous examples are:

• Tezos, a blockchain;
• Aragon Network, an ecosystem dedicated to DAOs;
• Nexus Mutual, a decentralized insurance project;
• MakerDAO and its stablecoin DAI;
• Investment funds like Metacartel Ventures or Flamingo DAO, specializing in NFTs;
• Decentralized exchange platforms like Compound, which stands out for its high level of decentralization and on-chain governance.

Recently, the DAO model has also been adopted by Play-to-Earn gaming guilds like Yield Guild Games, Metaverse Organization DAO, and Ready Player DAO. These guilds use DAOs to structure their community, allow novice players to participate in games through NFT loans, and organize votes regarding the organization’s strategy.

In summary, although DAOs vary greatly, they have become powerful tools for facilitating the collective management of public and private assets.

Conclusion

Decentralized autonomous organizations (DAOs) represent a notable advancement in the field of organizational governance, offering a transparent, democratic, and efficient structure through blockchain technology. However, they face significant challenges, particularly in terms of smart contract security, governance complexities, and legal issues. Despite these obstacles, DAOs hold immense potential to revolutionize how organizations operate and make decisions. Their future will depend on the ability to overcome these challenges and adapt in an ever-evolving environment.

La Rédaction C.

L'équipe éditoriale de Cointribune unit ses voix pour s’exprimer sur des thématiques propres aux cryptomonnaies, à l'investissement, au métaverse et aux NFT, tout en s’efforçant de répondre au mieux à vos interrogations.