What Does a DAO Do?
DAOs offer a number of advantages over traditional organizations. Because they are not subject to traditional hierarchical structures such as CEOs or a board of directors, they can be more agile and responsive to change. They’re also code-based, so they have the potential to be much more efficient than traditional organizations by automating many routine tasks such as approving crypto transfers or tallying votes and proposals, that would normally be done by human beings, freeing up time and resources for more important tasks.
They can also be more transparent than traditional organizations, because all transactions are recorded on the blockchain.
Built on The Blockchain
In order to understand what a DAO does, it is first necessary to understand the blockchain technology on which it is built. Blockchain is a distributed database that allows for secure, transparent transaction processing. Every block serves as a record of transactions and all the blocks together function as a ledger of all the transactions that have ever occurred on that chain, using a specific currency. It is the technology that powers Bitcoin, Ethereum, and other cryptocurrencies.
When it comes to DAOs, blockchain provides the infrastructure that allows for decentralized decision-making. Decisions are made through smart contracts, which are programs that automatically execute when certain conditions are met. For example, a smart contract could release funds from a financial pot when a majority of stakeholders agree that it is time to do so.
Blockchain also allows for decentralized asset management. That means that there is no central point of control for assets, such as money or shares. Instead, ownership of these assets is stored on the blockchain itself. This decentralization makes it difficult for anyone to manipulate or interfere with the assets in question.
The Shape of DAOs
There’s no set purpose, framework, or shape of what a DAO should be. It’s a community of friends or strangers that are cross-jurisdictional (local, global, or anything in between) working towards a common goal, supported by smart contracts, incentives, governance, and tokens. In some cases, a DAO may not even have a treasury or offer a token, but utilize a consensus mechanism to make decisions and take actions.
For example, you want to start a DAO in order to fund various environmental projects. You would first create a smart contract that outlines the rules and conditions of the organization, such as how much money can be spent on each project and how votes will be weighted (e.g. one vote per person). Once the smart contract is created, it is stored on a blockchain and anyone can join the DAO by sending money to the smart contract address.
Once the DAO has enough members, they can start voting on proposals. Let’s say one member proposes funding a project to clean up a local river. Other members can then vote on the proposal, and if it gets enough votes, it will be funded automatically through the smart contract. If the proposal doesn’t get enough votes, it will fail and no money will be spent.
On the other hand, perhaps you’re not looking to fund anything, but build a communal space for people to share, interact in, and vote on topics. Also a valid DAO. In fact, there are limitless types of DAOs.
Common Types of DAOs
Categorically, there are several types of DAOs, all built for different purposes and mandates. For example:
- Protocol DAOs: Protocol DAOs are one of the most common and popular options among DAOs. In most cases, protocol DAOs would leverage a DAO governance token in the capacity of a voting indicator for implementing the protocol and necessary modification. Uniswap and Curve are popular protocol DAOs.
- Investment/Venture/Utility DAOs: These DAOs focus on investing money into blockchain-based projects in order to generate a return for their investors. Good examples of investment fund DAOs include MakerDAO, BitDAO and Compound Finance.
- Grant DAOs: These are designed to facilitate donations and strategically disperse capital assets through the Web3 space. Grant DAOs such as MetaCartel and Aave Grants DAO fund ideas and projects that either power the specific DAO’s protocol or provide operational support to early stage projects.
- Operating System DAOs: These are the organizations that operate the platforms that create, launch and operate DAOs. DAOs such as DAOhaus and Colony are popular examples.
- Foundation DAOs: Foundations are philanthropic organizations that use donations to fund causes. The popular open-source project Gitcoin is a model of a foundation DAO. Gitcoin raises money from donors and then uses those funds to pay developers for working on open-source projects.
- Community DAOs: Community DAOs focus on bringing people together around shared interests or goals. The MolochDAO is one example of a community DAO; it fundraises for Ethereum development projects (similar to Gitcoin) but does so through an inclusive voting process that allows anyone to submit proposals and decide where the money goes.
- Social/Creator DAOs: These are focused on the self-organizing and community aspect of DAOs, and bring together like-minded and creative individuals. Examples include Developer DAO, which is a collective of Web3 developers, or Friends With Benefits, which is focused on building community and fostering creativity.
- Collector DAOs: The main purpose of these DAOs is to raise and pool funds so the collective community can invest in NFT art or other collectables, such as the ConstitutionDAO which attempted to buy a copy of the US Constitution.
- Media DAOs: These DAOs aim to create content driven by the community, rather than a media conglomerate, politics, and advertising dollars. Both BanklessDAO and Decrypt aim to promote a bankless culture, and any other topics that users want to see.
Each type of DAO has its own direction and priorities. This demonstrates that the creativity of the Web3 community is the only limitation to what decentralized organizations can accomplish.
Ergo, what a DAO does is make decisions -- whether those decisions are about giving grants, investing, or buying art is up to the community within the DAO.
Want to build your own DAO? Check out Grindery Nexus.