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Defining Web 3 Terms: DAOs

28 Jul
2022
4
MIN READ
By
Brian Wong
Defining Web 3 Terms: DAOs

Photo by Hannah Busing on Unsplash

Have you heard of the term DAOs?

A DAO is a crypto-native organizational structure that uses crypto rails that allow people worldwide to coordinate and work together. DAOs are crypto’s version of regular companies. But like all things in crypto, there’s an emphasis on removing a single centralized power. DAO stands for Decentralized Autonomous Organization. Let’s break down each word. Decentralized means “not centralized.” That means power is distributed amongst the individuals in the DAO rather than centralized in a single CEO or executive board’s hands. 

Similar to how individuals in a democracy have power over who is elected into office, members of DAOs have power over many day-to-day decisions that a CEO would normally make on their own. DAOs have different levels of centralization within their structures—there’s no one “right” way to decentralize. Autonomous means “self-governing.” Be careful not to confuse “autonomous” with “automated,” which means something slightly different. Think of autonomous driving vehicles—they’re self-governing, deciding which way to go on their own, with no outside intervention. Like a car that drives itself, and therefore “governs” itself, DAOs make their own rulebooks and follow them accordingly. 

How are DAOs different from normal companies today?

So, are DAOs just companies without an executive board? Not quite. 

The most prominent difference between DAOs and traditional companies is that DAOs hold votes in which members make decisions as a group, rather than a single CEO making the decision for them. 

To hold these votes, DAOs distribute something called a governance token to their members. Governance tokens are cryptocurrencies minted by the DAO that typically hold little value outside the DAO itself. Instead of being a store of value like Bitcoin or Ethereum, DAO governance tokens are used like voting chips. The more governance tokens you have, the more weight your vote has when you cast it. The votes are cast and recorded on the blockchain, leaving an immutable, or tamper-proof record of the vote.

Some DAOs are starting to explore other voting systems, like representative voting and one-person-one-vote systems, but right now governance tokens are the most common method because it’s the most secure. Another key difference is that many DAOs don’t have a top-down hierarchy, or if they do have a hierarchy, it’s typically more “flat.” That means they don’t have a stack of middle-managers, and everyone has some autonomy within their role. Instead of decisions made by CEOs at the top, transferring to managers in the middle, then to workers at the bottom of the hierarchy, everyone is their own CEO, manager, and worker in one. 

It’s often assumed that DAOs, like blockchain technology, eliminate the need to trust anyone else in the system. But this is only the case at the voting layer. Everything else about DAOs—all the messiness of daily work—involves the need to trust and work with other people. DAOs, like all human organizations, aren’t perfect. But DAOs are an exciting next step into a more democratic, equitable work environment for people all over the world.

 How did DAOs get started?

Decentralized autonomous organizations may sound like they’re a futuristic concept far off in the distance. And they kind of are—the first DAO was formed just in 2016, and since then, contributors to DAOs all over the world have been exploring uncharted territory. We’ve only just seen the tip of the iceberg.

Let’s take a look back to see where DAOs came from. 

Vitalik Buterin, the founder of Ethereum, first defined DAOs in a 2014 article. In the piece, he called DAOs “the holy grail” of organizations, but also “the thing that has the murkiest definition of all.” He said that DAOs have “automation at the center, humans at the edges.” Now, many years after the definition of DAOs debuted, DAOs are still chasing this goal of putting automation at the center—it’s harder than it looks. The first DAO was called, inventively, The DAO. Launched on the Ethereum blockchain in 2016, The DAO is most famous for a hack that drained its funds and, due to ideological differences, caused a split, or “hard-fork,” in Ethereum. 

In a short tragic summary, the first DAO crashed and burned in an infamous hack that left the Ethereum protocol slivered in two. Today, that other sliver, called Ethereum Classic, is still kicking. But most people own and interact with the other half, just plain Ethereum. After The DAO hack, no one thought DAOs had a chance. DAOs were off to a rocky start, to say the least. But a bull market in 2017 helped lay the groundwork for a few early DAOs to emerge

MakerDAO, the community behind the stablecoin DAI, was one of the first protocols to adopt a decentralized working structure and go full-DAO. Aragon launched a suite of DAO tooling. MolochDAO and DAOhaus were two early, influential DAOs as well. But the DAOs of the late-teens were in for another whopping bear market to put them into hibernation. The market crash of 2018 and 2019 put some DAO-building on hold until the next bull market.

A look at Modern DAOs

Decentralized Finance, or DeFi, boomed in 2020 (called DeFi Summer 2020), so throughout 2020 and 2021 we saw DeFi protocols start to release native governance tokens and form DAOs. Uniswap, Yearn, Sushiswap, Aave, and Compound were some of the biggest DeFi players that started experimenting with DAOs. By 2021, DAOs had invented a new way to IPO. Instead of becoming a publicly-traded company listed on the stock market, soon-to-be-DAOs released a governance token and handed ownership over to the community. 

Here’s a real-world example.

Airbnb IPO-ed, meaning there is an ABNB stock listed on stock exchanges. If Airbnb was a Web3 company, they might consider launching a token called ABNB, listing it on cryptocurrency exchanges, and creating a DAO, rather than going the Wall Street route. This new economic model—tokenization—led to DAOs formed by “retroactive airdrops,” or tokens sent to wallet addresses after that wallet address had interacted with the protocol. These airdrops built a lot of excitement. 

Imagine if you took an Uber ride sometime in the first year that Uber was in business. Then, a few years later, you get free UBER tokens in your wallet as a reward for being an early adopter. That’s what retroactive airdrops are like. Throughout 2021 and into today, we’ve seen growth in social, education, media, and investment DAOs. It seems that every group or company in Web3 is looking at the option of forming a DAO. 

Only time will tell if handing over ownership and power to the community is the right move for success. We’ve seen some DAOs thrive and grow, while others crash and burn, and still others slowly chip away at their work. DAOs are also starting to emerge around NFT collections and investments. Now, capital can be deployed from a community, not a small ring of investors. We saw this with the headline-makers of ConstitutionDAO and PleasrDAO. The DAO space continues to evolve.

What will the next round of successful DAOs look like?

How do you find a DAO to join?

DAOs are as diverse in their onboarding structures as traditional companies. Some DAOs have a large community of token-holders, but a smaller group of contributors who were hired via a traditional interview process. Others are wide open to new contributors to join at any time. Your method of joining a DAO will depend on the DAO you choose. But, how do you choose a DAO amongst the sea of options?

First, do some research. A good way to get a sense of the DAO landscape is to read about it. 

A few resources for finding DAOs include Boardroom’s This Week in DAOs, BanklessDAO’s State of the DAOs, Deep DAO’s list of top DAOs, and Forefront’s social token profiles. Explore the DAOs active today and see which ones have missions and communities that resonate with you. Start immersing yourself in the DAO space and see what interests you. Take your time to learn about the ecosystem by reading articles, listening to podcasts, following DAO thought leaders on Twitter, and starting to engage with communities that interest you. A good way to get your feet wet is to join a DAO that doesn’t require a job application or a hefty token holding to get started. Read the descriptions of the DAOs on their websites, Twitter pages, or Notion pages to get a better understanding of the requirements for joining. You may notice that there aren’t many job descriptions posted.

This is because DAOs typically let contributors join, look around, and see what interests them.

DAOs don’t typically hire for roles—they simply let new contributors flow in and see if it’s a good fit. So, don’t get stuck looking for “jobs.” Once you find a DAO that interests you, I recommend jumping right in and joining their Discord. Then, you can start working.

Looking to start exploring DAOs? Check out our course that explain DAOs deeper inside our app right now!