What is a DAO?

A Decentralized Autonomous Organization (DAO) is an entity without governance from central leadership (i.e., CEO and board of directors). Decisions such as how money is raised and invested are voted on by a community of investors who use a specific set of rules that are enforced on the blockchain. The investors vote by using tokens that are given in exchange for money invested.

History of DAO

The first DAO, The DAO, was launched in April 2016 after raising about a hundred and fifty million dollars’ worth of Ethereum in exchange for a token called DAO. The goal of The DAO was to act as an investment firm, redistributing funds to profitable companies and projects. The organization’s tokens represented votes on where to invest. Ideally, profits would return to token holders, like a stock dividend, but outside of the regulated market. Unfortunately, investors didn’t obtain these profits. In June 2016, hackers stole a third of The DAOs funds. In 2017, the Security Exchange Commission released an investigation that found crypto tokens like The DAO’s should possibly face the same regulations as securities.

Types of DAOs

1.   AMM (automated market maker) DAOs

      AMM DAOs use smart contract protocols to facilitate decentralized financial services to consumers.

2.   Grant DAOs

The investor community donates funds into a grant pool and votes on allocating and distributing funds for DeFi

projects.

3.   Social DAOs

     These DAOs are developed to focus on a particular objective, such as preserving arts and culture

     or championing a charitable cause.

4.       Collector DAOs

        Acquires cultural collectables for its members that may include Non-Fungible Tokens (NFTs).

5.       Venture (Investment) DAOs

Developed to level the playing field for beginning investors and allow investment in projects such as real estate

and sport teams.

6.       Entertainment DAOs

Creative projects such as books, television shows, and movies are funded and controlled by a group of investors.

DAO Advantages

1.       No single person is in charge of the decision making.

2.       Any DAO member can view the organization’s financial transactions.

3.       A requirement for joining a DAO is that each stakeholder understand its’ governance rules that are typically

encoded in the DAO smart contract.

The stakeholder works within the DAO to ensure that the members’ interests and incentives are aligned.  

DAO Disadvantages

1.       Any flaws in the DAO smart contract code increase hacking vulnerability.

2.       Difficult to update and fix bugs in the smart contract code due to the immutability of the blockchain.

3.       No legal framework.

Because DAOs can operate across multiple jurisdictions, any legal problems could result in lengthy legal battles.

Will DAOs take over Limited Liability Corporations (LLCs) and traditional venture capital organization (VCOs)?

Proponents state that DAOs provide more transparency and inclusiveness compared to LLCs and VCOs. However, critics state that DAOs likely will not overtake LLCs and VCOs because they don’t offer any legal protection and rely on popularity to fuel growth.