> Blog > What is a DAO?

Published July 27, 2022

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Ever since the early days of the internet, people have congregated online to share ideas, build communities, and work on projects together. From the original bulletin board systems (BBS) to modern-day forums like Wall Street Bets, these virtual meeting places allowed like-minded individuals from around the world to connect and collaborate in the digital space.

As the internet evolved, so have the ways in which people interact and organize online. In recent years, a new type of online entity has emerged that takes the concept of the virtual community to the next level: the decentralized autonomous organization (DAO).

A DAO is a digital entity that operates according to a transparent set of rules encoded on a blockchain. It’s essentially an organization run by code, not by people.

Blockchain technology affords DAOs their key feature: decentralization. Unlike the current iteration of online communities that we use every day, no single authority or entity controls a DAO. Instead, these communities are governed by the code that they’re built on, and by the community of users that interact with them.

Decentralization on the internet is still a novel concept to most people. Sixty-five percent of respondents to a recent survey on behalf of FTT DAO didn’t know what a DAO was.

So how do DAOs work and why are they important? Here are some key facts about this new kind of entity.

How Does a DAO Work?

In a traditional organization like a corporation or a non-profit, there is a centralized group of individuals, like an executive team or a board of directors, who make decisions about how the entity will operate.

So how can an organization operate without key decision makers? The answer lies in code.

When a DAO is created, its rules and governance structures are encoded on a blockchain. This could be anything from how the organization’s finances are managed to how disputes are resolved. These rules are codified in a smart contract, a program that automatically executes when a set of predetermined conditions are met.

Smart contracts remove human fallibility from the day-to-day operations of the organization, making it possible for a DAO to exist and function without a centralized team of decision-makers.

Three Key Components of a DAO

  • No centralized legal entity: A DAO is not a legal entity like a corporation or an LLC. This decentralization affords DAOs a number of advantages, chief among them being that they’re not subject to the laws and regulations of any one jurisdiction.
  • Token-based membership: In order to participate in a DAO, users buy into the organization by purchasing the collective’s native token. These tokens give users voting rights and access to the organization’s shared resources.
  • Transparent governance: Because DAOs are governed by smart contracts, all decisions made by the organization are transparent and viewable by anyone on the network.

Why are DAOs Important?

As the world moves toward an increasingly digital future, traditional models for conducting business and organizing society are losing touch with the way we interact with each other today. From the way we work to the way we vote, it’s clear that our current system is in need of an upgrade.

DAOs offer a new way of organizing ourselves that is more aligned with the digital age. By decentralizing power and placing it in the hands of the community, DAOs incentivize cooperation and collaboration over personal ambition and competition.

The immutable code that powers these organizations creates a level playing field where everyone is equal, and the best ideas can rise to the top regardless of who comes up with them.

Additionally, because DAOs are powered by smart contracts, they offer transparency that can help to root out corruption and waste, as well as improve upon traditional models for managing financial resources.

Lastly, democratizing the governance of an organization also means democratizing its ownership. By tokenizing organization membership, DAOs make it possible for anyone in the world to own a piece of the pie, regardless of their location, beliefs, or economic status.

As a stakeholder in a DAO, members share in both the profits and the risks taken by the organization. This model has the potential to create a more equitable and sustainable form of capitalism, where power is decentralized and everyone has both a stake and a say in their organization’s future. Of the respondents to our survey who were DAO members, 12% were members of one DAO, and 10% of those were members of two. These members are taking advantage of the decentralized nature of these organizations and having a say in what the organization does next.

The History of the First DAO

In 2016, Stephen Tual, Simon Jentzch, and Christoph Jentzch launched a project on the Ethereum blockchain called The DAO, the world’s first decentralized autonomous organization.

The DAO was intended to be a decentralized venture capital fund, where members could pool their resources and vote on which projects to invest in.

The young project raised over $150 million worth of ETH from over 11,000 investors in just 28 days, and brought the world’s attention to new developments in blockchain technology.

However, after its launch, a hacker or group of hackers exploited a bug in the organization’s code, and stole $60 million worth of ETH from The DAO’s fund. This was a cataclysmic event that caused a deep fissure in the Ethereum community.

Unable to reach consensus on how to move forward, The DAO hack prompted the fractured Ethereum community to decide on a hard fork, a permanent split in the Ethereum blockchain that led to the creation of Ethereum Classic, a separate Ethereum blockchain that still exists today.

While The DAO was ultimately unsuccessful, it did pave the way for new organizations to learn from its mistakes and explore the concept of blockchain-based, collective decision-making.

While there haven’t been any hacks with as high a profile as The DAO hack in 2016, decentralized autonomous organizations do still face challenges today.

Challenges Facing DAOs Today

Security: The first and most obvious challenge concerning DAOs was evidenced by the 2016 hack’s monumental security breach. These organizations are essentially advanced computer programs, and computer programs can be subject to faulty coding, bugs, and security breaches. Developers have come a long way since 2016, but any time you are trusting your money to code, there is always going to be some level of risk involved.

Scalability: Because they are powered by blockchain-based smart contracts, DAOs are only as scalable as their underlying blockchains. During periods of high network activity, an entire organization can become bogged down and hampered by slow transaction times. This is why choosing the right blockchain is one of the most important decisions you can make when launching a DAO.

Legal ambiguity: Decentralized autonomous organizations are a relatively new phenomenon, and as such, they currently stand in a legal grey area. It is unclear how existing laws and regulations apply to these organizations, and this ambiguity could pose challenges in the future.

Popular DAOs Today

MakerDAO: MakerDAO is a decentralized autonomous organization built on the Ethereum blockchain that issues the Dai stablecoin. Dai is a digital currency that is pegged to the US dollar, meaning that its value stays relatively stable even when the market is volatile. The DAO’s ultimate goal is to create a decentralized banking system that gives everyone in the world access to financial services.

Aragon: “The DAO for DAOs” is a decentralized autonomous organization that helps people create and manage decentralized organizations. Aragon provides a platform of tools and services that make it easy to launch and manage a DAO.

Uniswap: Uniswap is a decentralized exchange built on the Ethereum blockchain. Released in November 2018, Uniswap allows users to trade Ethereum-based tokens directly from their wallets. The exchange is non-custodial, meaning that users always maintain control of their own funds. Being a DAO, Uniswap’s native token UNI gives holders a say in the governance of the organization.

Aave Protocol: Aave is a decentralized lending platform built on the Ethereum blockchain. Aave allows users to earn interest on their cryptocurrency deposits, or take out loans using their crypto assets as collateral. The Aave Protocol is a DAO, and its native token LEND gives holders a say in the governance of the organization.

Other popular DAOs worth noting include Flamingo, Colony, MetaverseDAO and BitShares. Today there are hundreds of DAOs in existence, and more people are congregating in these organizations every day.

Launching a DAO

One of the most groundbreaking aspects of DAOs is that anyone can launch one. All you need is an idea for a decentralized organization and a bit of technical prowess to build it.

Before building your DAO, you’ll need to choose a smart contract-enabled blockchain where you’d like your organization to live. Blockchains like Ethereum, Solana, and Cardano all host vibrant ecosystems of decentralized applications and autonomous organizations, and they’re generally a good place to start.

After choosing your platform, you’ll need to encode your organization’s governing rules into smart contracts on the blockchain. It’s important to think carefully about how you want your organization to operate before coding the rules, as these contracts will be difficult to change once they’re deployed.

Next, it’s time to secure funding. Most DAOs recruit members and achieve funding by selling governance tokens, which give users voting rights and access to the organization’s shared resources. These tokens are generally sold through an initial token offering (ITO).

Once your protocol is coded and you’ve funded the organization, it’s time to deploy. This is kind of like sending your kid off to college. After they’ve left the nest, you’ll have much less influence over how they operate, so give them the best foundation you can before setting them free.

Once your DAO goes live on the blockchain, stakeholders who have purchased tokens can begin participating in the organization according to the rules encoded in its smart contracts.

What the General Public Knows About DAOs Today

While the DAO movement is gaining a lot of traction within the cryptocurrency space, the technology is still in its early stages of development, and with the exception of a few well-known examples, most people have never heard of them.

In our recent survey, the majority of respondents (65%) did not know what a DAO is. That means that if you’re reading this, you still have the chance to become an early adopter of this technology.

Respondents were most interested in participating in DAOs as an investment club or fund (32%), followed by trading on decentralized exchanges (19%), so it’s clear that the financial services will be the first major application when DAOs go mainstream.

At this time, the majority who did not know what a DAO was (53%) weren’t interested in joining one, but 60% said they’d join if a friend recommended it. The same can’t be said for TikTok influencers, as the majority (61%) would not join even if an influencer recommended one.

But when asked about joining a co-op, 61% of respondents said that they would be interested. This is an interesting find and could potentially tie back to the lack of knowledge about DAOs, as they operate very similarly to co-ops.

A majority of respondents to the survey (65%) did not belong to a Discord group, and 58% were not involved in cryptocurrency trading either.

Of those who do trade crypto, the majority trade on Coinbase (36%), followed by Crypto.com (21%). FTX users represented 7% of the group.

The majority of respondents (47%) use social media platforms to learn more about emerging opportunities in cryptocurrency, DAOs, and NFTs.

42% of respondents said that they spend 1-10 hours researching opportunities before entering a new market or investment, and the majority (28%) use stocks to build wealth, followed by crypto and then real estate.

The majority of respondents’ net worth was under $10k (30%), but 28 respondents or about 3% reported a net worth of over $1 million.

Most respondents to the survey stated they sought investments with a medium risk profile.

From these results, it’s clear to see that there’s a great opportunity for DAOs to become more mainstream, as most people are still unaware of their existence. The good news is that once people learn about DAOs and see how they can benefit from them, they’re likely to join one.

What’s also interesting is that while the majority of respondents don’t currently trade cryptocurrency, they’re still interested in learning about opportunities in the space. This suggests that there’s a great opportunity for DAOs to educate the general public about their benefits and how they work.

The Future of DAOs

As the world becomes more digital and less centralized, DAOs will likely play an increasingly important role in how we organize, invest, and work. These organizations offer a new way of conducting business and managing resources, and could be a crucial component of the next generation of the internet. While there are still some challenges to be overcome, it’s exciting to think about all the possibilities that DAOs offer.

Whether it’s increasing autonomy, democratizing decision-making, or providing easier access to financial services, DAOs have the potential to positively impact the lives of people around the world. Only time will tell what the future holds for these organizations, but the ideas behind them are sure to continue gaining traction in the years to come.

FTT DAO is a passionate community of FTX fans who embrace the exchange’s overlying mission to foster effective altruism. If you’d like to get involved with a DAO yourself, consider joining the FTT DAO today!

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