Imagine a future where anyone, anywhere, can create or join a system to pursue their passions, build communities, and make a difference in the world. A future where the system per se is based on transparency and accountability? A Future where everyone has an equal say in decision-making.
What if we say that you can live that future today?
No, this is no clickbait, and we are certainly not lying.
Decentralized autonomous organizations, aka DAOs, are making this possible. And in recent years, there has been a surge in the usage of DAOs. In 2019 alone, there were approximately 30 DAOs, which grew to over 1,500 by mid-2021, as per DAOstack. Additionally, a report by Outlier Ventures suggests that by 2030, DAOs could account for 50% of the global economy, with a total value locked in DAOs reaching $1.2 trillion.
These statistics indicate a growing interest in and adoption of DAOs. They offer a new way for communities to collaborate, govern, and create value in a decentralized and trustless ecosystem.
This is a 2-Part series that sheds light on everything you need to know about DAOs. Right from what are DAOs to their types and from the advantages of DAOs to their growing importance.
This is Part 1.
What are DAOs, and how do they benefit? How DAOs work?
We know you might have zillion questions like these. This is why we have written this blog.
Hold your breath as we take you on a journey through the history of DAOs, the technologies that power them, and the opportunities and challenges they present. We will also explore real-world examples of successful DAOs and the limitations and risks of this cutting-edge technology. So, buckle up and get ready to explore the future of decentralized collaboration!
Excited to get started?
Overview of DAO – The Peaky Blinder Way
Have you watched peaky blinders? Yes, the same crime drama where Tommy Shelby, the boss of the peaky blinders gang, spearheads the robbery, gambling, and other crimes. Now think about working in an organization like peaky blinders where the boss, like Tommy Shelby, takes all decisions, and you have little to no say. Wouldn’t that be overkilling?
Well, such is the centralized organizations that follow a strict top-down hierarchy. Although centralized organization systems offer ensures a sense of discipline within the organization, it does not give a free hand to people at the lower level to make decisions.
This is where Decentralized autonomous organizations (DAOs) come into the picture.
What are Decentralized autonomous organizations (DAOs) DAOs, you might want to know?
A decentralized autonomous organization or DAO is a type of organizational structure in which decision-making power is distributed throughout the organization rather than concentrated in a single person or group at the top. In a decentralized autonomous organization, the decision-making power is dispersed among multiple levels and individuals, allowing for greater operational autonomy and flexibility.
Decentralized autonomous organizations often use a distributed or peer-to-peer network to enable decision-making and collaboration among members without a central authority. This allows for greater transparency, accountability, resilience, and the potential for greater innovation and creativity.
Image DAO as a community center where everyone can decide the tasks they want to take up. Wouldn’t it be interesting as opposed to working in a centralized organization? Well, stats also vouch for it – according to weforum.org, the number of participants in DAOs grew in 2021 from 13,000 to 1.7 million people worldwide. Wow. That’s so cool!
Why Are DAOs Becoming Popular?
The rise of crypto wealth has been staggering, from $200 billion in 2019 to $2.4 trillion by mid-2021. As investor interest in the web3 space continues to grow, the launch of multi-billion-dollar debut funds like Haun Ventures in early 2022 marks a new era of investment in tokens over equity. With larger cheque sizes, governance has become even more critical, leading many entrepreneurs to build themselves up as DAOs.
As a result, there has been a drastic increase in the demand for DAO solutions, with many investors setting up funds as DAOs, such as OrangeDAO, VC3DAO, and BessemerDAO. This trend has created opportunities for DAO consulting services, platform development, and blockchain development companies.
Additionally, DAOs are tapping more markets. According to a report by Deep Knowledge Analytics, the global market size of DAOs reached $1.7 billion in 2020 and would grow at a CAGR of 75.9% from 2021 to 2028. Another report by CoinGecko suggests that as of September 2021, the total value locked in DeFi protocols, many of which are governed by DAOs, was over $80 billion.
With the creation of significant digital value through NFTs or the metaverse, DAOs are becoming the native entity for value creation in cyberspace. Many blockchain protocols are built as global collaborations across borders, and DAOs are expected to enable trustless and decentralized collaborations by coding governance rules. DAOs will be invincible in the future, with the potential to revolutionize how we collaborate and create value. #DAOisTheFuture
Why Do We Need DAOs?
DAOs are like rebellious teenagers of the business world, breaking all the rules and doing things their way. What’s more? They are internet-native organizations with a slew of advantages over their traditional counterparts. With a traditional organization, trust is essential – especially on the part of investors – but with DAOs, only the code needs to be trusted.
But what makes this code trustworthy? Well, for starters, it is publicly available and can be extensively tested before launch. Once the DAO is launched, every action it takes has to be approved by the community, making it completely transparent and verifiable. In other
words, it is like a digital democracy, where every member has a say and can contribute to the organization’s growth.
DAOs also enable investors to pool funds and invest in early-stage startups and decentralized projects while sharing the risk and the profits. It is a win-win situation for all involved. If DAOs had been humans, we would have played “shoot your shot” with them!
How Do DAOs Work?
DAO is becoming a hotbed for aspiring entrepreneurs to raise funds and give back to their communities. Now that you know why we need DAOs, let us see how DAOs work.
A group of community members creates the rules of a DAO using smart contracts. These contracts establish how the DAO should function and are open for everyone to see, making the process transparent.
Once the rules are set, the DAO needs to find a way to raise funds and distribute governance. Typically, the DAO does this by issuing tokens to investors, who can then vote on decisions related to the DAO’s operations.
After the funding is completed, the DAO is ready to be deployed. Once the code is finalized and pushed into production, it can only be changed if the community of token holders reaches a consensus through member voting. No single entity has the authority to modify the rules of the DAO.
(We can create such an image/ give a demo of our MxDex – DAOs)
What Are the Types of DAOs?
There are several types of DAOs, each with unique characteristics and functions. Here are the most common types with examples
Service DAOs : These DAOs are designed to provide a specific service or set of services, such as file storage, identity verification, or prediction markets. Examples: Gnosis (prediction market), Filecoin (file storage), and BrightID (identity verification).
Investment DAOs : These DAOs are created to pool funds from investors and make collective investment decisions. Investors hold tokens that give them voting rights. Examples: The LAO, MetaCartel Ventures, and MolochDAO.
Social DAOs : These DAOs are formed around a shared social or cultural interest, such as art, music, or sports. They may fundraise, organize events, or collaborate on creative projects. Examples: Friends with Benefits (art and NFTs), PleasrDAO (collectibles), and Yield Guild Games (gaming).
Political DAOs : These DAOs are formed to promote a particular political agenda or cause. They may lobby for legislative change, support political candidates, or organize protests. Examples: Democracy Earth (digital democracy), DeFi Education Fund (crypto advocacy), and Blockchain Association (lobbying).
Reputation DAOs : These DAOs are designed to provide a decentralized reputation system for individuals or organizations. Members earn reputation points by contributing to the DAO, and these points can be used to establish trust in online transactions. Examples: SourceCred (open-source development), BrightID (identity verification), and Gitcoin (crowdfunding and grants).
Hybrid DAOs : These DAOs combine features of multiple types of DAOs to achieve specific goals. For instance, a hybrid DAO may combine the investment and social functions of an investment DAO and a social DAO to fund creative projects. Example: Hybrid DAO is Seed Club (accelerator, investment, and community DAO).
What Are the Benefits of Using DAOs?
DAOs offer several benefits for businesses and organizations. Some of them are:
Decentralized Governance : DAOs allow for decentralized decision-making, which benefits organizations looking to democratize their decision-making processes. This can be facilitated by developing a custom DAO platform or leveraging existing DAO solutions.
Transparency : DAOs operate on blockchain technology, which provides transparency in decision-making and financial transactions, enabling organizations to increase stakeholder accountability and trust.
Trustless Collaboration : DAOs allow for trustless collaboration. Meaning members can work together without needing to trust each other. This can be achieved through smart contracts, which execute transactions automatically when the pre-defined conditions are met. DAOs as a service can help organizations leverage this technology without needing in-house expertise.
Efficiency : DAOs can operate more efficiently than traditional organizations, as they are automated and run on code rather than manual processes. DAO development companies can help organizations develop and deploy custom DAO solutions that streamline operations and reduce costs. Now that you know how DAOs can help, let us learn why you should consider DAOs for your business.
How can DAO development services help your business?
DAO development services can bring significant benefits, including increased customer engagement, better fundraising opportunities, and improved security for managing digital assets. Here are a few ways how DAO development services help your business.
Increased Customer Engagement : By implementing a DAO for your business, you can increase customer engagement and loyalty. The decentralized autonomous organization provides a transparent and efficient way for businesses to communicate with their customers.
Better Fundraising Opportunities : DAO offers a global pool of potential investors, allowing businesses to raise more capital than traditional fundraising methods. With no central authority controlling the DAO, it is cost-efficient to set up and run.
Improved Security : DAO development services provide a decentralized platform for managing digital assets, ensuring the safety of users’ private keys. It enables users to manage digital assets securely and efficiently by utilizing smart contracts to create a transparent and secure environment for investment management.
How to Create and Run DAOs?
1. Define the structure of the DAO project.
If you wish to create a DAO from the ground up, it is important to determine its core structure. Remember that a decentralized structure is not a one-size-fits-all solution for every organization or project. Additionally, you can also ask the following questions to yourself when finalizing the DAO structure:
- What are the goals and expected outcomes of the DAO?
- What decisions will the DAO make?
- Is your company ready to adopt a community-focused decentralized ownership structure?
- Is there a particular industry problem that the DAO can solve?
- Will your community and customers benefit from a DAO?
- Is it possible to launch your business without a DAO?
- What technical and developer resources are required for launching the DAO?
- How do you imagine your community contributing to your DAO vision?
- Are you ready to adapt to the changing dynamics of the crypto markets?
2. Deciding the Type of DAOs
Once you have zeroed down on the structure of your DAO, the next step is to choose the type of DAO that best suits your needs. A DAO service provider will help you gauge the right DAO structure. While your DAO does not have to operate within the traditional framework of Nation-State and City-Stage governance, it is essential to keep the DAO governance models in mind when outlining your broad DAO structure.
Choosing the right type of DAO can be overwhelming, so here are some examples to help you decide:
Philanthropy DAOs : These are dedicated to aiding social responsibility projects in the Web 3.0 world. The Big Green DAO is an example of a Philanthropy DAO, a charity organization that strives to raise awareness about growing food.
Entertainment DAOs : These DAOs offer an opportunity to creators to bring their idea to life while maintaining control over their administration. Entertainment DAOs offer decentralized entertainment. Flufworld is a popular entertainment DAO where members can customize 3D NFT Fluffs and license them out.
Protocol DAOs : These are the most prevalent forms of DAOs focusing on decentralized protocol governance. They are often used in the DeFi space, with famous examples such as Uniswap and Yearn Finance.
Investment DAOs : These types of DAOs enable crypto owners to invest in new projects, startups, or other ventures, powered by smart contracts.
Grant DAOs : These are similar to Investment DAOs but are solely focused on supporting DeFi projects. The Uniswap Awards is a well-known example.
Social DAOs : These platforms promote social networking within the crypto community, allowing individuals to discuss common interests and ideas. Blockster is a popular social DAO.
Collector DAOs : These DAOs enable artists who create art with nonfungible tokens (NFTs) to demonstrate ownership of their work. PleasrDAO is an example of NFT collectors, DeFi promoters, and digital creators collectively forming an NFT DAO.
Media DAOs : These DAOs enable content product owners to contribute directly to exchange for the native currency as a reward for their work. Forefront is an example of a Media DAO that offers several alternatives for DeFi specialists, such as a crypto education hub and growth opportunities for incubated enterprises.
Choosing the right type of DAO Will help you gauge various factors that align with your project’s goals, governance needs, and community dynamics. Once you are done selecting the best DAOs, it’s time to check DAOs for governance.
DAOs for Governance
A DAO (Decentralized Autonomous Organization) for governance refers to a decentralized organization that operates on a blockchain or other distributed ledger technology, using smart contracts to execute the organization’s rules and decision-making processes.
They can be used in various settings, including community initiatives, social impact projects, and corporate governance. They have the potential to enable more efficient and transparent decision-making processes, reduce the need for intermediaries, and increase trust among stakeholders.
Think of DAO as the first wedding of your house, where everyone collectively works towards making it successful. #DAOisAwesome.
Before we delve deeper into DAO in governance, here are a few statistics to give a detailed thought on:
- The total value locked (TVL) in DAOs reached an all-time high of over $17 billion in August 2021, up from just $1 billion at the start of 2021. (Source: DeFi Pulse)
- The number of DAOs has been growing steadily, with over 2,500 DAOs created as of October 2021. (Source: DAObase)
- The top 5 industries using DAOs are DeFi, art and collectibles, social media, gaming, and governance. (Source: DAObase)
- The most popular types of DAOs are investment DAOs and protocol DAOs, which account for most of the total number of DAOs. (Source: DAObase)
- Regarding voting power distribution in DAOs, a few members often hold most of the voting power. (Source: “The State of DAOs” report by ConsenSys)
- The use of DAOs in traditional corporate governance is still in its nascent stages, and some companies have already started experimenting with the concept. For example, in 2021, Uniswap became the first major decentralized exchange to form a DAO for its governance. (Source: Coindesk)
Hence, it is true to say that DAOs are revolutionizing how organizations work and will work in the future.
- Benefits of Using DAOs For Governance
DAOs offer a novel approach to organizing communities, as they allow stakeholders to participate in decision-making processes in a transparent and decentralized manner. Instead of relying on a centralized authority or governing body, DAOs rely on the collective decision-making of their members, who hold a stake in the organization’s success. Here are the benefits of DAOs in governance:
- Increased Transparency and Accountability
DAOs offer increased transparency and accountability. Since all decisions made within a DAO are recorded on a blockchain and are publicly accessible, there is a high level of transparency in the decision-making process. This makes it easier for members to hold each other accountable and for external stakeholders to monitor the DAO’s operations.
For example, the MakerDAO protocol, which is a decentralized platform for creating and managing stablecoins, is governed by a DAO. All proposals and votes made by MakerDAO members are recorded on a blockchain, enabling transparency and accountability in decision-making. This helps build trust among stakeholders and ensures that the protocol operates fairly and equitably.
- Community Ownership and Governance
DAOs enable community ownership and governance. DAOs are typically designed to be governed by their members, who hold a stake in the organization’s success. This means that decisions are made by the community rather than by a centralized authority. This can lead to more democratic and inclusive decision-making, where all members have a voice and can contribute to the governance process.
For example, the Aragon Network is a DAO platform that enables communities to create their DAOs. Aragon DAOs are governed by their members, who hold voting power over proposals and decisions. This means that the community can work together to make decisions that benefit everyone rather than relying on a centralized authority to make decisions on their behalf.
- Decentralized Decision Makin
DAOs enable decentralized decision-making. Meaning decisions are made through a decentralized voting process, where all members have an equal say in the outcome. This can lead to more efficient decision-making and greater buy-in from members who feel their voices are being heard.
The Compound is an example of decentralized decision-making through DAOs. Its token holders propose changes and vote on them. In 2020, they distributed governance rights and voting power to COMP token holders, changing the power structure. The Compound also uses a delegate system for members to delegate their votes to a representative. It ensures that all members have a say in decision-making. Three cheers for Compound!!!
So, there you have it – a great start to the comprehensive guide to DAOs. In the next part, we’ll see how DAOs impact traditional working models, the challenges and limitations of DAOs, and the way forward. So, hold your breath and patience as we unveil part 2 of this series.
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