Tech & Innovation

Crypto and DAOs: What are decentralized autonomous organizations?

Crypto and DAOs: What are decentralized autonomous organizations?
Image: photo-illustration by Quartz
By
Jasmine Teng
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Table of contents

I. How it works

II. A short history of DAOs

III. Pros and cons of DAOs as company structures

IV. What’s next? Web 3.0

V. Reading list

Imagine a company owned and run by its shareholders, without a CEO. Imagine its rules, its governing structure, even its basic functions are locked in and automated by immutable code—specifically by blockchain technology.

Or “a needlessly obtuse way of describing an internet community you have to buy a custom crypto token to enter,” tech journalist Ryan Broderick wrote in his newsletter Garbage Day.

That’s the central idea behind decentralized autonomous organizations (DAOs), which have become increasingly popular amid a maturing tech ecosystem, particularly in finance. But the idea goes beyond corporate structure: Proponents say that the rise of DAOs will transform how people run communities in general, overhauling not just companies, but the broader internet—and eventually, society at large.

I. How it works

DAOs are flat organizations underpinned by blockchain technology. Their functions vary widely, including developer collectives (Gitcoin), venture funds (The LAO), gaming guilds (Yield Guild Games), or social communities (FWB). What they have in common is that they are all member driven, not top-down or hierarchical. For now, most DAOs have financial missions. For example, PleasrDAO and The LAO pool investors’ money to invest in digital art pieces or other startups, respectively.

Often, people stake cryptocurrency or money into these DAOs in exchange for tokens, which grant them voting power in community decisions. “It’s like a board meeting every day with 1,000 people that don’t know each other—[and] might not like each other—across Discord channels, Telegram, etc.,” Lorien Gabel, CEO of blockchain infrastructure company Figment, said at Mainnet, a crypto conference held last month in New York City. “It’s kind of amazing to watch, but it requires a lot of time and effort, so it’s difficult.”

The bylaws of DAOs—which can include automatic payouts or certain voting structures—are encoded on a blockchain. These bits of code run automatically, so no single person can bend the rules to their liking. This type of automation hinges upon smart contracts: Developers write programs that stipulate the conditions of the agreement or transaction. They’re basically complicated if-then statements; for example, a contractor will automatically get paid for work they did after they meet the initial conditions written in the contract.

But like with everything else in crypto, hard guidelines don’t exist. A slew of projects are still experimenting with new DAO frameworks, and the nitty gritty of how these rules are set up varies from group to group.

What matters to DAO proponents, more broadly, is how the organizations fit into the vision of Web3, a decentralized vision of the internet where users own their data and no single company holds monopolizing influence.

II. A short history of DAOs

Early days-2013: The concept manifests

Though the concept had been brought up in niche internet communities after Bitcoin’s creation in 2008, the term DAO didn’t come about until 2013. That was the year that Dan Larimer, co-founder of investment firm Invictus Innovations, and Ethereum founder Vitalik Buterin wrote about them in Bitcoin Magazine, calling them decentralized autonomous corporations (now organizations). 

2016: The first experiment, and failure

In 2016, the very first DAO—creatively named The DAO—launched on Ethereum. The DAO was supposed to be an investor-driven venture capital fund; its 18,000 investors could crowdsource investment decisions. It raised $150 million in ether (Ethereum’s native cryptocurrency), but hackers exploited vulnerabilities in its code to make away with more than $50 million. The Ethereum community ended up voting to “fork” (that is, create a new branch of) the Ethereum blockchain, which “reset” the blockchain to before the hack occurred and allowed members to regain their money. The original blockchain that still has the record of the hack is now known as Ethereum Classic.

At this point, DAOs still had to be manually coded; the ecosystem had yet to flourish. But the project—and the hack—served as a learning experience for the community, especially in the dangers of “haphazard coding,” as Ethereum co-founder Gavin Wood said at the Dutch Blockchain Conference in 2016: “This is like an immune system response, one way or another. We’re going to go into a fever for a while. But when we come out [of] the fever, we’re going to know for sure that this is what you don’t do if you want to make a system work.”

2016-present: DAO platforms emerge

Undeterred by the hack, DAO-as-a-service startups, such as Aragon, Moloch, DAOstack, and Colony, began emerging as early as the same year. These platforms allowed people to form their own DAOs without having to manually code them, streamlining the process and allowing the ecosystem to take off.

It’s easier than ever to design and launch DAOs. “DAOs today are tangible, but pedestrian,” crypto investment firm Dragonfly Capital’s general partner Ashwin Ramachandran and managing partner Haseeb Qureshi wrote last year on Medium.

The crypto space has gotten a huge boost as decentralized finance (DeFi) protocols and NFTs gain traction. Now, people are piling onto DAOs. At the beginning of 2021, there was $480 million locked into DAOs; now, there’s more than $10 billion. VC heavyweight Andreessen Horowitz is excited: In August, it threw $20 million at Syndicate, a blockchain startup that helps people launch DAOs. Earlier in the year, the venture firm doubled down on crypto with its $2.2 billion fund.

III. Pros and cons of DAOs as company structures

Pros

  • Cutting out the middleman. No matter their function, DAOs are run primarily by their members. To invest in startups or various other assets, they don’t need to go through banks or general partners or institutions that may take a cut.
  • Corporate transparency. Users have full access to and influence over organizational processes and decisions.

Cons: 

  • Inefficiency. Each decision has to be voted on by the community, though there are some systems that allow people to elect representatives.
  • The value of the token can be volatile. If people lose faith in the organization, the value of its token can plummet, rendering its pool of capital worthless. Misaligned incentive structures can attract speculators, driving down the value of the community.
  • Potential centralization. Initial fundraises can centralize governance tokens in the early cohort of funders, defeating the purpose of a community-run project.

IV. What’s next?

The DAO market is still in its early days. Before the ecosystem can expand and go even more mainstream, proponents and other stakeholders have some questions to answer.

  • Community growth: Community participation is crucial to ensure the survival of the organization. How will these groups recruit and retain participants—especially in an equitable and accessible manner? How will they foster active contribution and participation? How will institutional knowledge be passed on as people migrate across projects?
  • Governance structures: What is the most effective way to run a community? Take Reddit, for example, where moderators already face a litany of problems with unruly users and hate speech. Add money into the equation and it’s a veritable recipe for mayhem. “Governance is amazingly chaotic,” Figment CEO Gabel said at Mainnet. “I think we actually are really early in what governance looks like in these new worlds, essentially. […] So right now if you’re a token holder, […] it’s extremely difficult to actually participate in any way that doesn’t consume every part of your day.”
  • Regulatory obstacles: Decentralized projects don’t operate outside of the realms of existing legal structures: “The law doesn’t evaporate,” per OpenLaw founder Aaron Wright. The SEC has already cracked down on a number of blockchain projects for selling unregistered securities, while China has banned crypto trading and mining outright. However, Wyoming recently passed a landmark bill to recognize DAOs as LLCs, granting them more legal protections.

The building blocks and tools are there, but how to deploy and maintain them properly remain open questions.

“The way I see it, DAOs are in a state of amorphous evolution, we don’t yet know what impact they will have on society,” Web3 contributor Yalor Mewn writes in Gitcoin’s DAO report. “We have great hopes and aspirations for what they ‘could’’ become, a tool for empowering individuals, for supercharging communities and overcoming the capture and extract models of past tech. But at this point the best thing anyone can do is dive in with both hands and help these entities find their footing.”

Some advice for those looking to dive into DAOs? Research, research, research. The people and the mission are what make or break a community.

  • The first thing to do is set up a wallet (MetaMask or Rainbow are popular picks) and buy some ether, or other crypto native to the blockchain you’re interested in.
  • Familiarize yourself with the landscape and find DAOs that might align with what you’re looking for. The easiest way is to browse through crypto Twitter, read project descriptions and analyses, and join Discord communities.
  • Observe the space! There’s no rush to jump into a DAO right away. Fundamentally, what motivates you to join and work for a community—DAO or otherwise—should be the mission and the people.

As Gitcoin founder Kevin Owocki said in a webinar hosted by crypto research firm Messari, “Focus on the vibes before you focus on the cryptoeconomics.”

V. Reading list