Key Takeaways:

• A Decentralized Autonomous Organization (DAO) is an entity governed by smart contracts and blockchain technology rather than centralized authority. DAOs operate autonomously, with decisions made by a consensus of its members, typically through token-based voting systems
• DAOs are established based on a set of rules encoded in a smart contract, a self-executing program on a blockchain.
• DAOs have the potential to disrupt traditional organizational models in various industries, enabling new forms of collaboration and ownership.

In traditional organizations, the board of directors holds the reins. They decide on projects, branch expansions, and resource allocation. Employees typically carry out these top-down directives, with limited influence on the decision-making process.

Consider renowned charities. Millions of donors contribute, yet they have little say in how these funds are used. Transparency often comes in the form of reports after the fact, not active participation in decision-making. Publicly traded companies with thousands of shareholders face a similar situation. Investors own shares but may lack insight into internal operations or upcoming projects.

What if we could redefine this top-down structure? Imagine an ecosystem where donors, investors, and supporters have a voice in the projects and organizations they back. This democratization could revolutionize decision-making, fostering inclusivity, transparency, and trust.

What Is a Decentralized Autonomous Organization (DAO)?

Key Characteristics of DAOs

DAOs have the following key characteristics:

• Decentralized: DAOs are decentralized structures built on blockchain technology, where all members contribute and the rules are encoded in self-executing programs called smart contracts.
• Collectively Owned and Operated: All members have a stake in a DAO’s governance, typically through ownership of a DAO token. This token grants voting rights on proposals that shape the DAO’s direction and activities.
• Transparent: DAO rules and financial transactions are recorded on a public blockchain, allowing anyone to view them. This fosters trust and accountability within the organization.

How Decentralized Autonomous Organizations (DAOs) Work?

As mentioned earlier, smart contracts are the foundation of DAOs. Once written and deployed, they cannot be altered, not even by the DAO’s founders. Any technological changes or advancements require member consensus, achieved through voting before any modifications are made. DAO members essentially function like a traditional organization’s board of directors.

Similar to a boardroom where voting power is proportional to share ownership, a member’s voting power in a DAO is directly tied to the number of tokens they hold. A member with 200 tokens has more influence than one with 50 tokens, and someone with 1,000 tokens wields five times the voting power of someone with 200 tokens. To prevent financial clout from translating to undue influence, various voting mechanisms have been developed over time.

What Are Smart Contracts?

A smart contract is a self-executing computer program triggered when predetermined conditions are met by the involved parties. The terms of the agreement are written directly into the code, ensuring automatic execution upon fulfillment. Smart contracts have revolutionized transactions by eliminating intermediaries, fostering trustless and permissionless interactions between buyers and sellers.

The Ethereum blockchain relies on smart contracts, making it a crucial platform for Decentralized Applications (DApps). DApps, enabled by trustless and permissionless technology, are disrupting numerous industries. Decentralized Autonomous Organizations (DAOs) are a prime example, leveraging Ethereum’s smart contract technology on a blockchain network.

Smart contracts operate on the “IF-THEN” logic of programming languages. As long as the coded conditions are satisfied, they can autonomously send, store, and receive funds. They can even interact with other smart contracts as needed, further solidifying their autonomy and removing human intervention from the decision-making process. While human involvement in contracts is crucial, it can introduce bias and errors. Smart contracts eliminate this entirely, empowering the code to function as the governing law for contracts. Since DAOs are powered by smart contracts, the code essentially dictates the organization’s rules. Any alterations to this self-executing system require consensus from all DAO members and parties involved.

The Token System and DAO Voting Mechanism

The primary method for funding DAO projects is through the sale of DAO tokens. These native tokens are exchanged for fiat currencies, Ethereum, or other widely accepted cryptocurrencies to raise capital. Ownership of these tokens signifies co-ownership in the DAO, with the potential for the tokens’ value to increase if the DAO succeeds, rewarding early adopters.

Moreover, members of a DAO can engage in the governance process through their native tokens, voting on proposed projects and decisions. However, the efficacy of these voting mechanisms is a topic of ongoing discussion, with efforts aimed at addressing loopholes and refining the governance structure. The following are some of the existing and experimental voting mechanisms employed by DAOs:

1. Token-Based Quorum Voting Mechanism: Requires a minimum level of participation to validate the voting process.
2. Conviction Voting Mechanism: Allows members to allocate their voting power to proposals they strongly support over time.
3. Rage Quitting Voting Mechanism: Enables members to withdraw their investment if they disagree with the majority decision.
4. Quadratic Voting Mechanism: Allows votes to be cast based on the square root of a member’s tokens, aiming to democratize influence.
5. Liquid Democracy Voting Mechanism: Members can either vote directly on proposals or delegate their voting power to a representative.
6. Holographic Consensus Voting Mechanism: Facilitates decision-making in large groups by requiring a proposal to pass through a preliminary filter of community approval.
7. Multisig Voting Mechanism: Decisions require approval from multiple key holders to enact changes, enhancing security.
8. Permissioned Relative Majority Voting Mechanism: Voting power is adjusted based on predefined permissions, not just token ownership.
9. Weighted Voting & Reputation-based Voting: Votes are weighted either by the number of tokens held or by the member’s reputation within the DAO.
10. Knowledge-extractable Voting (KEV): Aims to leverage the collective knowledge of the community by extracting insights through voting patterns.

The Benefits of DAOs

Organizations are structured so that decision-making occurs from the “top-down,” from the executives to employees, customers, and fans. DAOs changed the game to “bottom-up,” i.e., from the fans, customers, employees, to the executives (even the executives must have been selected with the consent of all members). In addition to this, the DAO has many other benefits including:

1. No Central Authority

Decentralization brings about no central authority, not just for executives, as mentioned above, but also for the contributed funds. DAOs can have their funds as contributed by the members, but operating on a decentralized technology means everything about the entity is not stored on a central server, including smart contracts, voting records, funds, and acquired properties. Not only does this cut away intermediaries and governmental interference, but it also increases security.

2. A Global Community

First, the DAO is decentralized. By using a device and an internet connection, people from all over the world can connect and have one goal and be motivated towards building a positive impact on society. Communities have never been this empowered before. There is power in a gathering of people who can contribute their resources without government interference and run their organization, club, etc., in a democratic manner from the comfort of their homes.

3. Engagement and Participation

As practiced in America today, democracy gives each citizen the power to change and choose a leader, but this shouldn’t be limited to politics. DAOs return control to the people over how their resources are spent, what new projects are launched, who commits to them, etc. In addition to engaging members and bringing participation, each member feels empowered because, as humans, we feel important when we have a voice. A Decentralized Autonomous Organization gives everyone “a say” (a voice).

4. Public Transparency

Since DAOs are built on a decentralized technology, the details of each DAO are public on the blockchain, as are the votes cast by members. One perceived disadvantage of some DAOs’ governance systems is that users with more tokens can have higher voting rights. Still, with public transparency, which makes each member’s voting history visible on the blockchain, members are compelled to act in the organization’s best interest. Thus, protecting one’s reputation serves as a moral incentive to discourage bad actors from acting against the community’s interests. It is important to note that there are different voting mechanisms in use and many more in development to improve the voting experience and protect the best interest of the DAO communities.

The History of the Decentralized Autonomous Organization (DAO)

In 2016, a German company called Slock.it launched “The DAO,” an Ethereum-based project with an ambitious goal: to connect physical world transactions to the blockchain. Think of it as a decentralized Airbnb, using blockchain technology to eliminate intermediaries for renting or sharing physical spaces.

Slock.it envisioned a network of connected devices like cars, homes, and IoT gadgets, creating a seamless link between the physical and digital worlds. This would leverage blockchain’s core strengths – trustless and permissionless transactions – in everyday life.

To fund this innovative concept, Slock.it’s founder, Christoph Jentzsch, and his team created “The DAO.” This novel approach allowed the public to collectively pool resources and participate in decision-making about how those funds were used.

A Record-Breaking Crowdfunding Effort for the DAO

The DAO quickly achieved historic success. Within weeks, it amassed a staggering 11.5 million Ether (ETH), valued at roughly $150 million at the time. This achievement was widely recognized as the “largest crowdfunding campaign in history” by major media outlets like Wikipedia and The Economist. The DAO then transitioned into a blockchain-based venture capital fund, with the ability to invest in member-approved companies or startups.

7 Different Types of DAOs

DAOs present a unique opportunity to empower users and foster the development of communities, businesses, charities, and more. Members contribute resources and establish rules that autonomously govern the DAO through coded smart contracts. As DAOs have gained popularity, various types have emerged, each serving distinct purposes and goals.

Below are the seven different types of DAOs:

1. Investment and Venture DAOs

These DAOs pool funds from members to invest in emerging companies selected by the members. They may focus on blockchain startups or dApps, among other areas. For example, MetaCartel Ventures (MCV) DAO invests in early-stage dApps, while BitDAO, with a treasury of $1.1 billion, invests in the gaming industry. DAOVentures offers a “DeFi ETF Index Fund” for investors interested in a variety of established assets.

2. Grant DAOs

Mirroring the traditional grant system, Grant DAOs support innovative projects, especially in the DeFi space, through community-funded pools. Unlike Investment DAOs that acquire shares in projects, Grant DAOs distribute funds based on member votes. Aave, a prominent Grant DAO, enables lending to various DeFi projects.

3. Protocol DAOs

These DAOs manage decentralized protocols, including DEXs, lending applications, and certain dApps. Known also as automated market maker DAOs, they facilitate token exchanges with established liquidity pools. Examples include MakerDAO, Uniswap, and Yearn Finance, which utilize governance tokens for voting on protocol developments.

4. Philanthropy DAOs

Focusing on public good, Philanthropy DAOs enable widespread participation in charitable acts. They support various causes, often leveraging blockchain for transparency and efficiency. UkraineDAO, for instance, raised over $3 million in Ethereum to aid Ukrainian soldiers.

5. Social DAOs

Social DAOs, or Creator DAOs, bring together individuals with common interests for collaboration and idea-sharing. Membership might require holding a specific NFT or tokens. Developer DAO, for example, unites Web3 developers under shared goals, emphasizing community exclusivity.

6. Media DAOs

These DAOs decentralize media ownership, allowing content creators to earn from their contributions. Media DAOs focus on community-driven content goals, differing from traditional media’s centralized control. BanklessDAO aims to educate and integrate a billion users into Web3, shifting away from conventional financial systems.

7. Collector DAOs

Collector DAOs enable collective investment in valuable NFT art and collectibles, making ownership accessible to individuals who might otherwise find it unaffordable. PleasrDAO, known for purchasing the Wu-Tang Clan album and the original Doge meme NFT, and Flamingo DAO, a collector of high-value NFTs, exemplify this type.

As the crypto community continues to grow, so does the diversity of DAOs, including but not limited to SubDAOs, Service DAOs, Entertainment DAOs, and Social Media DAOs. Each type of DAO contributes to the expanding landscape of decentralized organizations, offering unique ways for individuals to collaborate, invest, and support various causes and projects.

Conclusion

Decentralized Autonomous Organizations (DAOs) demonstrate the power of blockchain technology, which isn’t just revolutionizing financial transactions and Web3, but also transforming every aspect of our daily lives. DAO sends a silent message that if this technology can be used in organization management, and the democracy-like voting feature can give every user a voice in the development of projects, ideas, or organizations, then DAO can be introduced in the world democratic system in the future to make voting processes more transparent and records more permanent. When you look at DAO, you will know that the future of blockchain technology holds so much more for the world. This is just the beginning.

Identity.com

As Web3 technologies are based on decentralization, the solution presented by DAO is exciting, as it will make Web3 development more efficient. It is impressive to see Identity.com contributing to this future via identity management systems and as a member of the World Wide Web Consortium (W3C), the standards body for the World Wide Web.

The work of Identity.com as a future-oriented company is helping many businesses by giving their customers a hassle-free identity verification process. Identity.com is an open-source ecosystem providing access to on-chain and secure identity verification. Our solutions improve the user experience and reduce onboarding friction through reusable and interoperable Gateway Passes. Please refer to our docs for more info about how we can help you with identity verification and general KYC processes.