A decentralized autonomous organization (DAO) is a business structure that is based upon the concept of decentralization. This is in alignment with how many view the digital world. Essentially, a DAO is a digitally-native business that is built on the Internet. It is truly decentralized without traditional management structure. There is also an autonomous governance system in place.
This is something called a decentralized autonomous corporation (DAC).
Origins
Some of the foundation can be traced back to the 1990s, stemming from the discussions among the Cypherpunks. It was not until the introduction of blockchain that the DAO started to gain momentum. In fact, some consider Bitcoin to be the first DAO since it is run without the oversight of any individual or company. There is no leadership or management structure although there is a foundation that is responsible for the coding.
The release of Ethereum brought the smart contract into operation. This was vital for DAOs. The idea is to use blockchain as a secure ledger, tracking transactions without the need of a trusted-third party. Cryptocurrency was born out of the idea of eliminating counterparty risk.
Blockchain transactions are timestamped and are part of a distributed database. The idea is that any costs associated with blockchain are offset by the lack of a third party required and repetitive record keeping.
Legalities
The DAO is a legal challenge.
Legal systems seek to hold someone responsible. This goes counter to the concept of a DAO which is autonomous in nature. The idea is the coding, either on a base layer or through the smart contract, is what makes the decisions. No humans are involved in the process once it is set up.
A DAO exists exclusively in the digital realm. There is no physical presence putting it in any geographic area. This means there is no mailing address or articles of incorporation. Here is where the legal system finds itself obsolete when trying to navigate these waters.
One of the keys is going to be if the organization is truly autonomous. Is it set up to run without humans. Bitcoin has enough servers running around the world that, as long as the power is on, the network will keep running. Every 10 minutes, new blocks will be produced.
Autonomy is a tough subject for the legal systems around the world. They are going to have to grapple with this regarding vehicles as the software gets to the point where cars can operate on their own.
Governance
A DAO is structured in a way that each member has a certain stake. This is usually denoted by the tokens that are distributed. From this basis, governance can be established.
There will be some type of voting system set up based upon each person's involvement. It could simply be based upon stake or incorporate other activities that are done in support of the DAO. All of this can be coded into the smart contract.
Membership in the DAO is confirmed by the holding of some token in a wallet. This can be a fungible or non-fungible token (NFT). Many project that our identities, at some point, will be tied to NFTs.
One of the features is that a DAO could be hyper-democratic in nature. Due to the use of technology, especially real time interaction, decisions can be made without the use of executives. In a traditional corporation, board members are elected by the shareholders to represent them. These people are responsible for the executive team, who are delegated the decisions of the company, within the confines of the Board's mandate.
Direct voting is something that society has not experienced to any great deal. Even the election process in democracies is a representative form of government.
With a DAO, membership is verified by the blockchain which looks in the wallet doing the voting to see if it qualified. If so, the vote is cast and records based upon the parameters established. This is a radical departure from the existing framework our companies and governments operate under.
Decentralized Hive Fund (DHF)
An example of a DAO that is in operation is the Decentralized Hive Fund (DHF) built on the Hive blockchain. This is a DAO that is responsible for distributing funds for development and other projects that support the ecosystem.
This does not utilize a smart contract since they do not exist on that network. Here we see the base layer code running the DAO.
Community members vote on proposals based upon the staking of the main coin. This provides a total that is updated with each vote. Anyone is free to submit a proposal for funding and members can cast votes at any time.
It is a vote tally that operates in real time. People can submit or withdraw a vote as they see fit. Funding will continue as long as the minimum level is maintained. If a proposal falls below that, the payments cease.
The up-to-the-moment tabulations make the governance of the system highly organic. This network employs the same type of voting regarding its block producers. Here we see how a node operator who does something against the community can quickly be removed from consensus.
It is basically an on-going election that never ends.
Constitution DAO
In November 2021, a group of people decided they wanted to buy one of the original copies of the U.S. Constitution. A DAO was set up and $47 million in ETH was raised to go towards the purchase.
This was being auctioned off by Sotheby's. The winning bid of $43.2 million was able to secure the copy, more than the DAO put forth. The organizers of ConstitutionDAO believed that they would have had insufficient funding to "insure, store, and transport the document" if they had made a higher bid.
The DAO was disbanded not long after the auction.
Many of the contributors were for smaller dollar amounts. The average contribution was $217. One of the problems was the transaction fees on Ethereum, which where high at the time. Some incurred fees in excess of $70 to send the money.
Many feel this showed the power of the DAO. It was an example of what is possible in terms of innovation and crowdsourcing.
The Future
While mostly in the digital realm, DAOs do afford the opportunity to hire people as needed. There are times when services to the DAO are required and, like most business, experts are brought on.
Since DAOs are tied to blockchains they tend to carry with them greater transparency as opposed to other business structures. Also, members can enter or exit as they see fit since it only requires the buying or selling of the token.
Finally, all transactions take place on-chain, meaning it is located on an immutable databases.
This provides a solid basis for entrepreneurs and other innovators to experiment with this. Legalities will continue to be an issue and engaging with established entities might be problematic.
The Securities and Exchange Commission (SEC) labeling token and coins as securities is another barrier that will have to be negotiated. People are not going to participate if they face consequences for voting in a DAO.
It is unlikely these will disappear. The world is moving towards autonomy in many different areas. Artificial intelligence is going to provide a radically new approach to things. DAOs could be coupled with this to form business entities which require little human oversight.