What Is A DAO [Everything You Need To Know]

In this article, you will discover what is a dao, how they work, and why you should join one.

DAOs are one of the most innovative decentralized governance frameworks that are part of the crypto industry. Many people right now are hesitant to use DAOs for a few reasons but learning about DAOs should make you and others more confident about joining one.

So, let’s get started:

What Is A DAO?

DAO stands for ‘Decentralized Autonomous Organization’, this may be quite complicated to understand at first. DAOs can act almost like a “shared bank account” or as a form of a venture capital fund. It does not follow a typical management structure as it is completely open source based. DAOs were first built on the Ethereum network but other networks are starting to implement them such as Avalanche, Binance, and Solana.

The purpose of a DAO is to allow all members of the organization to have equal voting rights. These voting rights will allow members to decide on what to do with the DAO’s treasury funds (all the money stored in a DAO’s fund reserves). What makes a DAO so powerful is that the organization as a whole act as a “whale” with huge funds to play around with. It allows members as a group to invest money into upcoming projects, earns passive income off their staking, and generate new ways to earn revenue.

How Do DAOs Work?

DAOs work from the bottom up where members decide on the DAO’s financial activities. This is usually through the ownership of the DAO’s token, but there are a few steps to take before this phase happens.   

There are three major steps that take place for a DAO to be created:

1. Smart Contract Development 

Smart contracts are batches of code that automatically execute when requirements are met. Ethereum was one of the first blockchains to use smart contracts but nowadays there are multiple blockchains that deploy smart contracts.

The developers of the DAO will create sets of rules to take place within the smart contract. This gives people, who own the DAO’s token, participation rights and can then stake their money into the DAO. 

What makes smart contracts great is that it prevents DAOs from being spammed which ensures fair voting proposals. Smart contracts are autonomous and unambiguous as they are built on open source blockchains. This allows for any company to audit the contract as all transactions are completely transparent.

2. DAO Funding

The developers will need to find a way to fund the DAO, and this is usually done by selling a token to the public. Owning the token will then verify that you have ownership in the DAO and will be able to participate in voting rights. These tokens can take on the form of usually either a ‘currency’ or NFT.

3. DAO Implementation

Once the smart contract is developed and there is a treasury of funds to use, the DAO will be deployed onto its blockchain. The developers of the DAO no longer have control over decision-making as the stakeholders now take full ownership. 

Are DAOs Legal?

Yes, DAOs are legal. Although the entire crypto industry is facing obstacles in terms of regularity and legality, the creation of DAO’s are not considered illegal. However, there are a few countries that still don’t recognize DAOs as legal entities which does bring limitations to what a DAO can do. Right now, a DAO may struggle to enter commercial contracts associated with governments or other entities. 

Here are two exceptions that help recognize a DAO’s legality at this stage of time:

“Under Vermont´s Limited Liability Company Act, a DAO can register as a Blockchain Based LLC (“BBLLC”) and therefore provide limited liability to its members. Additionally, Wyoming passed legislation in April 2021 that allows a DAO to be legally recognized as an LLC.”

Why Should You Invest In DAOs?

What makes DAOs so powerful is that it eliminates big investors’ biased decision-making. Being part of a DAO will allow you to be part of decision making of something you believe in:

For example, HerStory DAO empowers and funds Kickstarter projects created by black women and non-binary artists. Another example is MetaCartel Venture DAO which invests in early staged decentralized projects. Many other great examples genuinely show the power of DAOs, which enable people like you and me to make more impactful decisions in the world.

Investing in DAOs also gives you the potential to earn profit as many DAOs invest in projects with tremendous growth potential. Once profits are made, it’s split between all the members who are part of the DAO. The concept of a DAO is more powerful than investing in your usual stocks, as you’re essentially receiving profits while making significant decisions in the company. 

Why Do People Criticize DAOs?

People are always critical to change, and because the crypto industry is still so new, there are many controversies. But when it comes to DAOs, people who are part of some form of corporate governance seem to criticize DAOs the most. 

DAOs are not favored in the business world because they work in the complete opposite way of a typical corporate governance framework. Corporate governance frameworks are usually a top-down structure where the developers/founders have the most control in decision-making. Top-level managers are the ones who are responsible for company goals, decision making, rules setting, and selecting who is part of the organization. 

DAOs, on the other hand, are controlled by all members in decision-making, and anyone can join a DAO as long as they pay their fair share. Moreover, people are not used to a decentralized structure as we live in a society where most organizations are controlled through centralization.

Another reason why people criticize DAOs is that there have been hacks in the past few years which bring fear, uncertainty, and doubt. In fact, someone had managed to hack over 60 million dollars from a DAO by finding a loophole within the smart contract. So it’s understandable why people are worried about investing in the crypto world as it is more vulnerable to hacks and scams. 

In the future, DAOs and other digital assets will be virtually impossible to hack. This will make more people be confident in joining these DAOs.

What Are The Best DAOs?

Here are a few of the most popular DAOs that are in the crypto industry right now:

Olympus DAO

Olympus DAO is one of the most interesting DAOs of 2021 as it aims to develop a non-pegged stablecoin that is not pegged to any fiat currencies such as USD. This DAO uses the OHM token in which the value of this token is based on the number of funds in the DAO’s treasury. The token is stabilized by burning the total amount of tokens when the value decreases and minting the token if the base value increases. Members of this DAO can stake their OHM token and earn yearly returns of more than 800%.

Maker DAO

Maker DAO is an organization that allows for peer-to-peer lending and borrowing of cryptocurrencies without needing an intermediary or middleman. This DAO allows anyone who has Ethereum cryptocurrency and a Metamask wallet to lend themselves a stablecoin called DAI. The DAO requires members to lock up their Ethereum and the more locked up, the more DAI they can borrow. Unlocking their Ethereum will mean that they intend to pay back their loan including any additional fees.

Pleasr DAO

Pleasr DAO is an organization that uses its treasury to purchase NFTs that require a large sum of investment. An example is Edward Snowden’s NFT which was purchased for $5.5 million dollars from the DAO. The main objective of this DAO is to allow all members to own a part of a blue-chip NFT. Any NFT that generates passive income or provides great utility would be then shared among the DAO.

Bit DAO

Bit DAO is one of the largest DAOs in the crypto industry. It has gotten as far as to partner up with Sushi Swap DAO which has a market cap of over $1.5 billion dollars. The aim of this DAO is to provide funds to members of the DAO who want to create projects/products for the crypto industry. Another purpose of this DAO is to partner up with crypto projects to collect and accumulate tokens that are contributed to the treasury.

Do DAOs Have A Future?

Decentralized Autonomous Organizations absolutely have a future. The crypto industry is worth trillions of dollars, which means crypto is not going away. Another reason why I believe the deployment of DAOs will be the future is that the world is striving for a decentralized society. 

However, because we are so early into DAOs, it is important to do your research. There have been a few incidents where the developers of DAOs have rug-pulled stakeholders by running away with the treasury fund.

If you want to prevent yourself from being scammed in the crypto industry, then make sure to read our article on crypto scams.

Find out everything you need to know on crypto scams in this article here.