DAO: Decentralized. Autonomous. Organization.
“The whole phrase is a misnomer. They’re not decentralized, not autonomous and they are not organizations,” Monsterplay blockchain consultancy founder David Freuden tells our Magazine.
In May 2020, Freuden and other people will write a 51-page report on DAOs to help them reach their full potential.
„We need DAOs,“ he says.
„The idea that „shareholders first“ is only a thing from the 1980s and 1990s is wrong.“
Companies started to care more about making money than about making good things.
Many things have changed in two years. He had high hopes for DAOs.
DAOs had more than 1.6 million participants at the end of 2021, up from just 13,000 at the start of the year.
In 2021, the US state of Wyoming made it legal for DAOs and the Marshall Islands to be legal.
Australia may do the same thing in 2022.
Yeah, but what is a DAO?
The term „DAO“ refers to a governance model that has become popular in the decentralized finance industry. Members buy (or are given) governance tokens that let them vote on how the DAO runs and spends its money.
It started with DeFi as a way to invest. DAOs were born from that.“
There’s no way you can separate a DAO from tokenomics, says Freuden.
They usually have a goal, which can be to keep a promise or help a good cause, but they also usually want to make money.
Because if you can’t answer why the DAO won’t last, he says.
Because „if you don’t have tokenomics, it is not a DAO.“
DAOs can be operating system DAOs, protocol DAOs, investment DAOs, grant DAOs, service DAOs, social DAOs, collector DAOs, and media DAOs. They come in a wide range of types now.
Freuden liked the idea that people could work together for a good cause.
People in the crypto world are „speculators“ or „builders.“ Crypto needs a DAO for the „builders.“
Speculators and builders, or both, sometimes have different expectations, which causes a lot of problems but can also be very interesting.
Productivity coordination organisms
There are many different types of DAOs out there, but the most common way to start one is with a unique product like a cryptocurrency or an investment fund like FlamingoDAO.
DAOs let people make tokenized and rewarded contributions to open-source projects without borders.
Product or goal is important.
Uniswap, for example, became a DAO after it launched its service.
A well-run DAO can get things done.
So, it’s a way to have a distributed, rewarded workforce.
Basically, DAOs are organisms that help people work together more efficiently.
DAOs reward contributions that are based on merit.
Freuden: People who work for the DAO „make unrestricted contributions and enjoy fragmented employment that is based on tasks, not jobs.“
A new way of getting people to work together is what DAOs are all about in the end.
DAO? Distributed not decentralized
In decentralized autonomous organizations, each word can be interpreted differently. DAOs can emphasize one aspect or at the expense of another. Decentralization is a trade-off for autonomy and vice-versa.
Matan Field, CEO at DAOstack, has long argued that a DAO is a distributed governance system. Power is distributed collectively. Yet, the decentralized aspects of a DAO can be understood by two different factors. This sheds light on the conflicting definitions of a DAO.
A DAO can be decentralized because it runs on a decentralized infrastructure. For example, it could be created on a public permissionless blockchain so that another party cannot take over.
A DAO is distributed because it’s not organized hierarchically around executives or shareholders. There is no concentration of power around its leadership.
Option two is clearly distributed rather than decentralized.
Yet, not all of these endeavors are “automated.”
Autonomous: Think quorum, not robot
Think of a quorum instead of a machine. This is better.
DAOs can be autonomous in the sense that smart contracts have self-enforcing and self-executive abilities. This means that DAOs can be autonomous.
When you make a sale or buy something on the blockchain, you’re actually just making a simple version of a smart contract.
There are a lot of different ways that smart contracts work on the Ethereum network.
They aren’t like legal contracts at all. They are lines of self-executing computer code called „persistent scripts“ by Vitalik Buterin, who came up with them.
When the members of a DAO agree on a set of rules, they make them happen on their own.
DAOs are not fully automated, but they are „automated when the governance committee gives the go ahead.“
This can make them different from traditional organizations, which have rules that someone has to interpret and follow.
Why a DAO? They move fast
A DAO can change quickly to meet the needs of the people in the area. This is a quick way to set up a governance system.
It’s a tool that helps people share their knowledge and make decisions together quickly.
When Putin invaded Ukraine, Alona Shevchenko, Nadya Tolokonnikova, the founder of Pussy Riot, artist Trippy Labs, and digital artist collective PleasrDAO came up with UkraineDAO, which was quickly put together by these people.
As soon as possible, the DAO started selling NFTs of the Ukrainian flag. This was a way for them to help charities in Ukraine.
For a DAO to be useful, it needs to have one goal, move quickly, and raise money for a country where people don’t trust banks very much.
This could be a big moment for DAOs.
Since receving 1st donation 68 hrs ago, @Ukraine_DAO raised $4MM.#KPIs
$63K USD per hour.
$1,000 USD per minute.
2,115 ppl in party bid#Alpha
Frens, this is ur alpha! ??
And ur investment ? has instant return in Karma. #??
NOT INVESTMENT ADVICE.
Common sense advice. pic.twitter.com/OtkKEsmVvG
— CryptoStΞvΞ | UkraineDAO | PleasrDAO (??,✨)ᵐᶠᵉʳ (@DefiHope) February 28, 2022
The ConstitutionDAO was another clever use case for DAOs for Freuden, as well as many other people, who thought it was a good idea.
ConstitutionDAO was a „beautiful experiment in a single-purpose DAO,“ but it didn’t work out. It tried to buy a copy of the U.S. Constitution from a Sotheby’s auction.
ConstitutionDAO raised $47 million from 19,000 people in just one week in November 2021, but a hedge fund manager beat them to it.
To get back or lose money, transactional gas fees had to be too high.
Yet, as a „beautiful experiment,“ a Special Vehicle DAO like the ConstitutionDAO proved to be very good at organizing and getting money for a specific project.
As time goes on, we may all be praising UkraineDAO’s geopolitical goals in support of the DAO idea.
The founder of DAO platform.io and MIDAO Directory Services says that some of the best use cases for DAOs today are when the DAO structure is part of the reason why the project is there.
People who live close together are important to the project.
Crowdsourced product development is an example of how this works.
It is more likely for a DAO to succeed if people who want to join are excited about the idea of joining a DAO instead of starting their own company.
There is a reason he thinks „distributed is better for the acronym“: DAOs „still need some kind of hierarchy.“
Miller says that DAOs are also a „new way to organize people and, most important, resources.“
Because of the „worst tech options for running a DAO,“ he started DAOplatform.io, a DAO tooling adviser that is now moving to a DAO. He says the main parts of a DAO are „multisig admin keys and a voting system.“
So, today, he is trying to help people figure out which tech stacks are best for DAOs.
According to Miller, there are three things that are important.
“Firstly, tokenization for which there are many methods and tools. Secondly, governance mechanisms, on chain or off chain, and connected to the DAO’s treasury. And, finally, community.”
How a typical DAO works…
It can be possible for DAOs to become more than just glorified Discord groups, but only if they have a clear goal.
That mission is going to be a mix of financial speculation and utopian dreams.
The spectrum can be very different.
This is why a group called the Dash DAO was set up. The founder of a cryptocurrency project left the project in 2017.
It’s the story of a prophet who didn’t choose anyone to follow him.
So, building a tokenized evangelical missionary community that was spread around the world through a DAO was a good thing to do
As a „libertarian/anarchist visionary,“ Evan Duffield forked Bitcoin in January 2014 to make it instant and almost free, or with very low gas fees. Dash is named after him.
He went away for a while, so DASH naturally became a DAO.
Today, 200,000 stores in the United States, including Walmart and Barnes and Noble, accept Dash so that people can use crypto in stores.
This payment system runs on gift card rails, just like a gift voucher.
When Arden Goldstein, the head of marketing for Dash’s DAO and blockchain, says that Dash is the first DAO to work, he’s talking about DASH Corp Co, which is the legal entity for the DAO.
There was a lot of controversy about The DAO, the first real DAO, which was started in 2016. It was hacked, there was a hard fork in Ethereum, and it was shut down.
Then, how do you know if you’re doing well?
Goldstein says that in crypto, the way to measure success is different.
It’s not just that a „healthy DAO“ is one where people work together to achieve common goals.
How does one make a DAO work? People are given money for finishing a task, which makes them want to.
When tasks are done, this is very important.
„Yes or no, 1 or 0, voting is not a new idea.“
Getting people to keep participating and keep building a community is the hard part.
Volunteers are rewarded by a DAO:
Nothing is stopping people from building there.
The DAO „idea“ isn’t new.
You have to be in it to win it.
It costs 1000 Dash to become a MasterNode in the DAO.
These people are motivated to do marketing and other things for DASH because they get paid for them.
It’s basically a team that the company hires to help it get new users set up all over the world.
There are a lot of people who are crazy or very active on Discord when you join a DAO.
Nobody is fired (usually).
There are some open-source coding communities where you can get paid full time for your work if people notice it.
There are rewards for people in the DAO community from all over the world who work to spread the word about the brand.
It is also very useful in countries where inflation is high and governments are not democratic. Dash is a good product for these countries.
According to the number of wallet downloads, Russia, Brazil, Venezuela, India, China, France, Italy, and the Philippines have the most members of the Dash DAO group.
It makes sense that this DAO would be used by people who want to help.
A DAO is based on local knowledge.
When Dash.org is blocked in Venezuela, DAO members help people use a VPN to get around it.
Members of the DAO are investors, evangelists, and local experts who sell DAO products.
For ideas and grant applications, people vote on them every month on a Dash platform.
That said, the DAO can decide at any point not to fund you.
When it hired a PR firm, the community said that not enough people were talking about it, so the DAO cut the money to the firm.
So, how can a DAO handle real-world contracts?
Does the DASH DAO work?
“Sometimes, I see the DAO de-fund projects I saw a lot of value in,” Goldstein explains. “As a full-time employee, I still have to put in a funding proposal.” But, with monthly votes, it is still “much faster than other companies I’ve worked on.”
Because it doesn’t have a head, the Dash DAO community looks at itself this way:
There is a CEO of the company that is in charge of the DASH Core Group project, Ryan Taylor.
In other words, the DAO can make rules for him.
He is in charge of the tech development, investment arm, and incubator.
DAO users „will lose it if there is any press,“ says Dash CEO Ryan Taylor.
Because you don’t know who your customers are or who your investors are, „we don’t know who owns the most tokens.“
Even so, „the people with the loudest voices usually don’t have the most MasterNodes and aren’t the most invested, so they try to make up for that by yelling and screaming the loudest.“
Goldstein, on the other hand, says she worked hard because she was the only woman in the DAO.
„I was proud of the DAO when I turned the logo pink for a day and the men in the DAO came out in support.“
This hasn’t attracted a lot of women to join the DAO.
People who dream of utopia face a lot of problems, just like the Kibbutz, communism, or even the space race.
Governance problems remain
How can DAOs deal with bad behavior by major token holders?
In early February, there was a lot of discussion on crypto Twitter about inclusion, diversity, and cancel culture because of a lot of things that happened with decentralized projects that people didn’t like.
Again, this spotlight on founding teams brought up the question of how a DAO deals with any alleged wrongdoing by the group.
In a business, bad behavior can get you fired.
Most of the time, in a DAO, the founders have a lot of tokens and the keys to the blockchain (multisignature) or something else.
An employee of the Ethereum Name Service (ENS) made offensive remarks about the LGBTQ community and other hot-button issues, which sparked a conversation about how to deal with these kinds of issues.
This is how it worked: The screenshots show comments that were made in 2016. They were brought to the attention of the not-for-profit behind ENS in early 2022.
An agreement between him and the legal person who works for the company linked to ENS has been broken.
He has a lot of DAO governance tokens, but what about that?
Millegan is a member of the DAO, which means people who own tokens that let them vote on important decisions can ask for him to be removed.
That doesn’t make sense. He is a „delegate,“ which means that he has 370,000 votes that were „delegated.“
It’s still true that he is the biggest delegate in the DAO, and he is still that way today.
As you can see, what would have happened if he didn’t agree with the DAO’s choice?
What Freuden says isn’t simple.
“Do the members of a DAO have a right to throw someone out that built the project?”
Yet, if their original goal is no longer viable, they „should be broken up.“
When a DAO fails, do they give back the money and break up?
It’s like having a prenuptial agreement for a marriage that doesn’t work out.
VCs might try to get rid of a bad CEO before the company goes public.
While DAOs use treasuries as a way to run their businesses, they are usually run by the people who made the project in the first place.
As for Uniswap, venture capital firm a16z has so much voting power that it gave some parcels to student-run blockchain groups in order to make it look like there was some kind of distribution.
This raises the question of whether DAOs can really work at a large scale, though.
And, how can these voting methods change from having tokens?
There are some ways to deal with the whale token holder problem.
It is common for there to be more than one type of token. For example, there is a utility token on top of a governance token and quadratic voting for whales is one example.
Multisignatures keys and time locks on decisions also protect against automated decisions, but there are also other ways to protect against them, too.
It will be up to each DAO to figure out how it should be set up based on the assets at stake.
As it turns out, voter turnout is often a bigger problem.
Can DAO governance work at scale?
There are also a lot of DAOs where people don’t do much.
Because they don’t understand the technology, they don’t want to help, or they’re too busy.
„The bigger the DAO, the fewer people who vote,“ says Freuden. That’s „apathy but also culture,“ he says, and it’s both.
Freuden’s report cites Dunbar’s Law, a British anthropologist who said that people can only have about 150 relationships at a time.
“The more the DAO grows, the less influence each person has. This is because their perception of their voting power becomes less important when they are a smaller part of a larger group.
This can be seen through Dunbar’s Rule and the Ringelmann Effect, which say that as the size of a group grows, its members become lazier, less involved, and less connected. This can be seen through these two rules. ”
Freuden says that to run a DAO, we need to know how people interact.
Because of this, he thinks DAOs may be best used as an investment fund vehicle that is based in Cryptoland and works better if they are small in size.
SyndicateDAO, for example, made it possible to set up 450 new investment group DAOs in just three weeks.
For example, FlamingoDAO, a well-known NFT curation investment DAO, could only have 100 investors because of rules from the U.S. Securities and Exchange Commission.
„LAO“ is a member-directed venture capital fund and an LLC in the United States.
They have limited the number of people who can join to 100, in accordance with U.S. securities law, with a minimum contribution of 120 ETH.
There are still questions about how FlamingoDAO made its investments.
No, not all of the 70 or so members had a say.
Art and NFTs are very uncertain.
Thus, there is a belief that investment DAOs work well in small petri dishes because they make money for everyone.
This is because the club has pooled money (a maximum of 7% per member) and crowd-sourced knowledge.
A lot of DAOs will work differently because they have different goals, different stages of technology development, and different personalities.
People who work in the tech field are used to having meet-ups and hackathons where they can work together on a project or new idea.
But, someone or something is still in charge of the hack.
Mass voting via holographic consensus
However, there are a lot of smart people working on new ways to solve every problem.
Miller, the CEO of DAO platform.io, says that DXdao is an example of a successful DAO.
An „collective“ called DXdao is „a group of people who work together to make and run decentralized products and services.“ The DAO runs entirely on the blockchain.
When you do good things for your community, you get „governance rights.“ You must do good things to keep getting these rights.
For example, DXdao, which is a fork of DAOstack, uses holographic consensus, which is a voting algorithm that DAOstack founder Matan Field came up with.
The system lets a group of people who aren’t all the same make decisions for the whole group.
DXdao’s Luke Keenan tells Magazine that „a small prediction market economy grows around the likely outcome of a proposal as tokens are staked on it.“ This increases the issue’s power by acting as a gatekeeper for voters.
In addition, proposals that have been given a financial incentive (boosted) have fewer requirements to be considered successful, which makes the system run more smoothly.
DXdao „makes decisions by taking away voting power as an economic reward.“
Field, who says that „scalable DAOs are indeed my focus,“ says that the main point is that holographic consensus „doesn’t need a quorum to make a vote work.“
“Rather, it provides a different parallel process to do so. This other parallel process is a ‘prediction game’ played (for profit) by the ‘predictors’ who can be anyone and not particularly voters — they can even be A.I. bots — who make predictions about whether a certain vote will be eventually approved or not by the voters. If, for a long enough period of time, enough stake is being placed over the prediction that the vote will be approved, then the voting process is considered valid, even when the voting quorum is low.”
Field: „In other words, a quorum is not a good way to run a DAO at a large scale.“
It doesn’t matter how many people vote on everything.
If only 5% of people vote, that’s fine.
But, if the proposal moves a lot of value or makes a big change, you need a longer, say, 30 day voting period and more people to vote, says Miller.
Clearly, the DAO space is getting better.
Getting people to vote isn’t as important as tools like Orca and processes that make it easier for smaller groups of people to have more power.
Miller also says that „studies in psychology show that if you reward people too much for doing a good deed, then you make them less likely to do it.“
„So, based on the things your DAO does and what kind help you want, you might want to offer symbolic rewards like POAPs or contributor levels, rather than just giving tokens to everyone who helps.“
“Free lunches offer less intrinsic rewards. Random rewards can provide more incentive.”
Link between culture and incentivization
They can also reward early users with a product that they can effectively own. This is one thing DAOs and Web3 in general can do.
They want people to start taking part as soon as possible before there are network effects, at least in theory.
He calls DAOs a „double-edged sword.“
They grow „evangelical communities in the developing world,“ but they may not be able to grow all the time.
It always has to have someone in charge, she says.
if no one wants to do a job, they won’t.
Members of the DAO sometimes feel like they have a sense of ownership or entitlement.
People who work at Goldstein’s company don’t have the power to see his calendar or read his daily report, but they think that they should be able to.
The person might say, „I own three MasterNodes, and I want to know X, Y, and Z.“
As with many decentralized projects, having strong community leaders who can change the culture is very important.
DAO community builder Freuden says that this person has a big impact on cryptoland because they make people want to join the DAO.
They „spread the word about the DAO’s culture, the cause, and rally the troops.“ They also need to speak in English, not tech, because they have to spread the word.
They need to keep the morale of their members high.
So, the community builder’s job is very important.
It might be easy to build a group of people around a coin that promises to make them rich, but it’s important to keep the DAO members excited when the technology stops working.
This is a job for people.
But, there is a lot of attention on tools that measure contributions and then give tokens, like SourceCred or Coordinate, which do this for people.
These funds are meant to encourage development and get things done. Many DAOs also have large growth funds, grant programs, and community funds that are meant to do this.
Possibly, DAOs only need a certain number of people to join, a group of people who want to help, and a legendary community builder to lead the flock.
For example, DAOs can bring together a group of people who are passionate about the same thing in a single day.
It’s important for groups that work together to make sure everyone has the same goal in mind, but this isn’t always the case.
The most important thing about a DAO is that it has a lot of people and a good reason for being there.
Games have a lot of people, which is how DAOs will work, but we’ll have sub-DAOs all over the place, like sub-committees.
„In theory, holographic consensuses can handle, in principle, a higher and higher rate of proposals by turning this tension between scale and resiliency into an economic cost,“ Field says.
Scalability can happen, but it’s not a given.
The DAO’s main innovation is still the fragmented workplace, but it isn’t the only one.
So, for Freuden, „voting is a part of being involved.“
The goal of the DAO is to let people do things without permission and to let people make things without permission.
DAOs allow people to work from home.
20 years from now, DAOs may be the AI-powered self-organizing concept that people have long hoped for, but they may not be real.
For now, that seems like a long way away.
But, we’re seeing the growth of a new kind of organism that helps people be more productive.