A look at Decentralized Autonomous Organization (DAO)
With the rise of DeFI and NFTs and the mass adoption of blockchain technology in general, a new organization form - DAO - has become increasingly popular. DAO stands for Decentralized Autonomous Organization and refers to a type of governance commonly used for DApps, NFT projects, DEX platforms, crypto-investment funds, and so forth. On the other hand, the term DAO may also refer specifically to an organization called “The DAO,” which was the first DAO ever created on the Ethereum blockchain and was then hacked for millions of dollars worth of ETH causing a controversial hard fork, back in 2016.
For now, let's take a closer look at what DAOs are and how they actually contribute to the crypto space.
Table of contents:
What is DAO?
Brief outline of “The DAO” affaire
Where are DAOs used?
Some DAO exemples
Decentraland DAO
The formation of DAO at the time of the Ukrainian crisis: UkraineDAO
Closing thoughts
What is DAO?
To answer this question, let's unpack the acronym. As the name suggests, Decentralized Autonomous Organization is some kind of organization, a form of governance, that operates in a decentralized manner while some of its working mechanisms and functionalities remain automated. Well, now let's put it all together.
DAO runs on code and is managed entirely by its community through a combination of smart contracts. Smart contracts allow participants to take an equal part in the decision-making processes within the organization meaning there is no any kind of hierarchical management. They also make most of the processes run without human interference or any trusted intermediary. Often DAOs have their governance rules written into smart contracts. In contrast, DAOs cannot actually create products or develop code or hardware. However, participants may submit a proposal to hire contractors to perform any of these services.
Decisions are governed by proposals and voting to ensure everyone in the organization has a voice. Decisions are made by the community of stakeholders i.e. to become a member of a DAO, you must first acquire the governance tokens of that DAO. In order for proposals to be accepted, a percentage of the community must reach a consensus. Each DAO determines the percentage required for a decision to be adopted.
As DAO operates on the blockchain, thereby it takes on some of its characteristics. For instance, all operations remain visible to all members and the community. Indeed, all activity is transparent and fully public. Similar to the underlying concept of cryptocurrencies, the idea of DAO is to surpass the traditional centralized management of an enterprise and create a totally transparent organization.
Brief outline of “The DAO” affaire
As we already mentioned, “The DAO” was the first DAO ever created. It was launched by Slock.it back in 2016 in order to raise funds for various Web 3.0 projects and startups. Over the course of a month, The DAO raised more than $150 million in funds through a crowd sale of tokens. In return, investors received The DAO tokens allowing them voting rights on potential projects. It was extremely well received by the community, after all, it was the first truly decentralized, autonomous, and community-run fund, despite having several documented security vulnerabilities in its code.
Later, the hackers attacked the DAO based on these vulnerabilities. As a result, about 3.6 million ETH were stolen, worth about $50 million at the time, and its fallout resulted in an Ethereum hard fork replicating the attack— the reason we now have both Ethereum and Ethereum Classic today, as a spectrum based on two opposing endpoints arguing about “to fork or not to fork”.
Where are DAOs used?
DAOs are useful ways to organize communities, especially if they remain anonymous, as usually, DAO does not require users to provide any KYC-related information.
Thus, the purpose of a DAO can be anything: a charity community where members can decide how they want to spend donations, the latest one mostly supported by the crypto community is UkraineDao, described below; a freelancer network of contractors who pool their funds for office spaces and software subscriptions; a community of developers who share tips and tricks amongst each other and further train upcoming developers; a decentralized venture fund that collectively raises funds for emerging protocols in DeFi; a metaverse DAO in control of the policies aimed to determine how the virtual world will behave, etc.
Some DAO examples
With the rise of DeFi protocols, DAOs have been increasingly popular, as evidenced by the many yield farming and decentralized exchange (DEX) platforms such as Compound (COMP), yearn.finance (YFI), Uniswap (UNI), Sushiswap (SUSHI), Curve (CRV), Aave (AAVE) which rely on them for governance. While these DAOs are primarily DeFI protocols, there are also a plenitude of DAOs serving other purposes, for example, social DAOs like FWB or media DAOs like Bankless and, of course, this form of governance is drawing attention in the NFT space.
Concerning the latter one, the emergence of DAOs begins with the niche DAOs such as SquiggleDAO committed to supporting the growth and cultural relevance of generative NFT art or DivineDAO created within the ongoing abundance of the LOOT project ecosystem, to the metaverse DAO such as one described below.
Decentraland DAO
Decentraland is the first fully decentralized virtual world. Through the DAO, users are in control of the policies created to determine how the world behaves. In fact, The Decentraland DAO allows token holders to vote directly on in-game and organizational policies. This mechanism affects everything, from the types of items allowed to investments for the DAO’s treasury.
To take part in the DAO’s governance, users need to convert their MANA, Decentraland’s native cryptocurrency, into wrapped MANA (wMANA) and lock it in DAO. Each wMANA represents one vote in governance proposals. MANA can be purchased on exchanges or by selling collectibles on the Decentraland market. The Decentraland DAO also has its own MANA treasury to fund its decisions and operations.
LAND also provides voting power. However, it doesn’t need to be locked up in the DAO and provides two thousand votes per LAND token. The project uses open-source code to regulate its rules. Anyone who has staked their MANA or owns LAND can both create and vote on proposals.
Over the coming year the Decentraland DAO will be scheduling votes to decide on a range of issues, including (but not limited to)
Upgrading LAND and Estates to add more features and protocol upgrades
Specifics and dates of future LAND auctions.
Size of marketplace fees, which are always in MANA that gets burnt.
Primary sale fees, which are always in MANA get burnt.
Addition and replacement of community-run content servers.
Allocation of MANA grants to development efforts.
Addition of new wearables to the Decentraland World, Builder, and Marketplace.
Replacing members of the Security Council.
The formation of DAO at the time of the Ukrainian crisis: UkraineDao
UkraineDAO is a new effort to use the power of WEB3 technology and community to raise funds for Ukrainian organizations that are helping those suffering from the war in Ukraine. By choosing DAO structure, it is possible to see all the transactions initiated by the community members. Thus, 100% of the proceeds go to support Ukrainians suffering from the war.
UkraineDAO has been organized by members of the investment group PleasrDAO, the NFT studio Trippy Labs, the Russian art collective Pussy Riot, and many Ukrainian humanitarian activists. The project has already raised over $3M worth in ETH-based tokens.
There are two different ways you can donate: 1)by sending cryptocurrency directly to UkraineDAO.eth; 2)by participating in the 1x1 party bid. In the latter option, you will receive a LOVE token, which has NO utility nor value, as it is a charitable donation. If you are interested in this charity fund, please visit their website or check their Twitter account.
Closing thoughts
DAOs hold the potential to transform a broad range of industries with the use of decentralized governance models powered by smart contracts. In the evolving crypto ecosystem, the dynamics of DAOs remain positive and overcome security concerns while providing a high level of transparency. Furthermore, the potential use cases for DAOs are truly limitless. However, it is difficult to admit that the DAOs will completely overcome the centralized governance model.