What are decentralized autonomous organizations—and why should you care?

By Mark Sullivan

February 21, 2022

What are decentralized autonomous organizations—and why should you care?

So much hype swirls around the blockchain and cryptocurrencies and NFTs that it can sometimes be hard to see the real utility in the technology. It’s hard to understand the intrinsic value of a crypto coin or an NFT, when their prices are based mostly on their value as a speculative instrument.

Understanding the utility of DAOs, or decentralized autonomous organizations, is a little more straightforward, although the concept is still very young and has been tried in only a small number of organization types so far.

What is a DAO?

A DAO is a way of organizing people and their interests on the internet using the blockchain. The blockchain is a public ledger system that exists only on the internet. It uses a complex cryptography system to ensure that everything written to it (“blocks”) is verifiable. This ledger, which is typically kept up by a bunch of internet elves called “miners,” can be used to store what are effectively the legal bylaws of an organization in documents called smart contracts.

What are some examples of DAOs?

You might form a DAO to raise money for a charity, or to form an investment firm where all the members contribute funds in exchange for equity in some company or project. Each participating member might pay a certain amount of cryptocurrency, and the amount would dictate how many tokens the participant might receive from the DAO. The pay-in and pay-out might operate according to a schedule written into the smart contract.

The popular cryptocurrency Bitcoin can be considered a DAO, where people enter into agreements to buy and sell the cryptocurrency according to a set of terms, and everything is tracked on the Bitcoin blockchain.

Most of the DAOs that exist today run on the second biggest blockchain, the Ethereum network. Ethereum describes a DAO as “an internet-native business that’s collectively owned and managed by its members. They have built-in treasuries that no one has the authority to access without the approval of the group. Decisions are governed by proposals and voting. . . .” In other words, the participants run the DAO, not a central administrator, and must approve any movement of currency into or out of the DAO’s coffers.

For example, in November, a group of crypto enthusiasts set up a DAO called ConstitutionDAO to raise money to purchase one of 13 first printings of the U.S. Constitution. The group failed to win one of the Constitutions, which were auctioned by Sotheby’s, but did succeed in quickly raising $47 million for the cause.

Another DAO called LinksDAO is raising funds to buy and develop its own crowdfunded golf course. The group sold club memberships in the form of non-fungible tokens (NFTs), raised more than $10.5 million doing it, and is now sold out. The owners of the NFTs get a stake in the club and the right to participate in decisions about how to develop the golf club.

What’s the benefit of a DAO?

DAOs are set up so that they do not require the participants to “trust” each other. Indeed, they can be total strangers. That’s because participants either do or don’t fulfill the obligations prescribed in the smart contract. The contract terms–along with all actions by participants–are written into the code on the blockchain, where the information is public and permanent.

Baked into the thinking behind DAOs is a mistrust of centralized human control. “There’s no CEO who can authorize spending based on their own whims,” reads the Ethereum FAQ, “and no chance of a dodgy CFO manipulating the books.”

There’s a school of thought that says human beings don’t misbehave in a vacuum because they’re evil, but because they act within an organization that affords them power that can be abused. They might act against the best interests of the organization because of greed, prejudice, desire for fame, or a hundred other flaws. Sometimes this happens behind closed doors (as when an executive pays $1,000 for a haircut and signs his own expense report), or in the open (as when a CEO decides to host disinformation on his company’s social network).

In theory, the decision-making power in a DAO is distributed to include all participants, and automated to minimize the need for day-to-day administration.

What can DAOs do that legal contracts can’t?

In some ways, a DAO smart contract is like a legal agreement that’s written in code by software developers. Skeptics often ask what DAOs can do that good, old-fashioned legal covenants can’t. It’s a good question. Blockchain enthusiasts argue that smart contracts add an element of automation to legal agreements. For instance, a smart contract governing a fundraising effort might contain—then dispense—a crypto token to a participant who has just donated a certain amount of money to the DAO’s cause.

Smart contracts can also be shorter, smaller, and more quickly produced than standard legal contracts, DAO proponents say. Plus, by using cryptocurrency registered on the blockchain, it’s possible to raise money far more quickly than via fiat currency processed through traditional banks.

What are the drawbacks of DAOs?

Despite the name, the DAOs that exist today aren’t totally decentralized or purely democratic. They still rely somewhat on the participants trusting the group of human beings who initially set up the DAO and its goals and general terms. That group of humans must also be trusted to decide on a governance model that fits. In some models, every participant that contributes crypto–no matter the amount–is issued a single token, signifying one vote to cast in future decisions of the DAO. But in some DAOs, it might be unfair if a participant who contributed a large amount of crypto was granted the same say in important matters as someone who contributed a small amount.

It’s still early days for DAOs. These organizations, and the technology that underpins them, are promising enough that they should be watched closely as they mature, refine themselves, and find new use cases.