What are DAOs? Frameworks to Recognize

by Tak Lo

February 19, 2022


DAOs are becoming increasingly influential in crypto and here we lay out the framework for navigating how they work.

What are DAOs? This is a question that many people are asking, and it's not an easy question to answer. DAOs (Decentralized Autonomous Organizations) are still a relatively new concept and there is no one-size-fits-all definition. This article will explore some basic ideas about Decentralized Autonomous Organizations (DAO), why they matter, their future potential, and examples where DAOs have already been implemented successfully across industries.

What are DAOs?

A DAO is an entity that operates independently and transparently through blockchain technology and smart contracts. They can be used for anything from online voting systems to gambling platforms; from how they are traditionally viewed as autonomous organizations, or how they are currently viewed as Web3 companies.

DAOs were originally conceived of as autonomous organizations that have no central authority figure controlling them; instead, they were ideally governed by smart contracts which run independently from any human intervention (though humans still have input into how these contracts are written).

Cryptocurrency coding digital black background open-source blockchain concept Free Photo

What makes up a DAO?

There are mainly three core components that make up an effective DAO, and the tooling that is available now revolve around these three things.

  • Community: the collective that manages and owns the DAO, and tokens and/or NFTS are used to represent voting rights within the DAO
  • Treasury: how the community coordinates and deploys capital to achieve its goals
  • Governance: how to govern discussions, proposals, and voting through an incentive structure

What are some examples of DAOs?

There are already several successful DAOs out there, some including its original meaning and purpose and those that have taken a new spin on things:

  • The LAO: formulated after the original investment DAO ran into legal and technical challenges. As of the writing of this article, over 15,199 ETH has been raised for the DAO. The LAO is organized as a Delaware limited liability company where capital is pooled and proceeds are shared similar to an investment syndicate, and not a venture capital fund with a separate GP. This DAO is interesting due to its attempt at defining and legitimizing what is an investment DAO.
  • AssangeDAO: a single purpose DAO created to raise ETH for Julian Assange’s defense fund for legal fees and raising awareness. The most impressive thing is they raised $53mn in just one week, with Ethereum’s Vitalik Buterin as one of its contributors. This single purpose DAO format is interesting because of its singular focus on funding one thing; and if not successful, having those funds returned to investors.
  • The One DAO: In their words, a collective of anonymous people from all over the globe buying the largest, most opulent house in the world. Parties in the Club, bowling tournaments 21 rooms for the DAO members to enjoy and hosting crypto events throughout the year. The interesting piece about this DAO is its foray into traditional real estate assets.

What are some issues with DAOs?

As with anything new, there will always be some teething problems regarding DAOs. One of the current conversations is the concept of decentralization or centralization in DAOs. This goes into the issue that the difficulty in DAOs isn’t about tooling, but the human organizational elements. Further, this also comes down to the issue of leadership, and in my view, leadership still matters.

There are also discussions of what the optimal number of DAO members should be. DAOs lend themselves to be a more scalable form of human capital engagement and therefore they should lend themselves to more and more members. Furthermore, theoretically the larger the number of members, the larger network effect and capital raising base for a DAO. Having said that, with so many members the engagement of members tend to die down, and more members tend to fall under the free-rider problem. Perhaps one framework is the use of Dunbar’s number, or about 150 members, to drive the core of the DAO.

Why should I care about DAOs?

DAOs are making impacts across the cryptospace and are catching the eye of many notable figures. Here are what other subject matter experts are saying about DAOs and its evolution in the future.

  • Yury Lifshits from SuperDAO: “Investment DAOs are only ~10% or less among all new DAOs. Most new DAOs are about building something, not investing/acquiring something”

DAOs are emerging as a better way to launch a startup. There is the potential for higher valuations from investors, token-holders-fueled marketing, and a crypto-based employment/payroll.

What's the future of DAO?

The future of DAOs is still very much up in the air, but there is no doubt that they have the potential to revolutionize how business and governance are conducted. As more people become aware of them and their benefits, we can expect to see more and more DAOs being created. Therefore, it is essential for businesses and individuals who want to stay ahead of the curve to start thinking about how DAOs could be used in your particular industry or sector.

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Tak Lo

Building web 3 funds and products. My funds invested in @tributelabsxyz @RED___DAO @neon_dao and other DAOs.