Crypto companies operate differently from traditional organizations. Instead of one central person, everyone can contribute. Why do these companies choose this method of work, and does this method operate really well?
Have you ever noticed that your boss or a manager doesn’t listen to you? This is a common thing at work. The new type of organization changes all that, with a flatter management structure.
What Is a Decentralized Organization?
The worlds of business, investing, and the creative sector are being shaken by a new type of organization.
These Decentralized Autonomous Organizations, or DAOs, are managed by cryptocurrency holders and are based on rules that are automatically enforced on the blockchain. They are headless, and replace conventional hierarchies with flat governance structures, and are headless.
The DAO’s supporters contend that they will fundamentally alter how commerce is conducted. They are giving it their all. Many DAOs are already operational and have produced a ton of very great content.
DAO is a type of organization that does not rely on a top-down hierarchy and instead distributes control among all members.
The DAO operates like a machine, with pre-written smart contracts dictating the tasks it is given to complete.
How Did the DAO Originate?
The concept of DAO (the first name is decentralized autonomous corporations, DAC) was born in 2013. The key principles of the DAC were the decentralization of companies, the tokenization of their shares, and the openness of transactions with a publicly verifiable code. Over time, the community improved the idea and adapted it to any organization of people with or without a profit motive. This is the concept of modern DAOs
Blockchain can be considered the basic infrastructure for building a DAO. In other words, a decentralized autonomous organization is an application that is deployed on top of an existing network. Bitcoin is considered by some to be the first rudimentary open-source DAO where miners and developers maintain the integrity of the system.
Ethereum is by far the most popular blockchain for running DAOs, but the development of alternative L1 networks like Solana and NEAR could change things in the future.
In 2016, one of the first DAOs in history called “The DAO” was launched. Investors invested in it more than 14% of all ETH circulating at that time.
The goal of The DAO was to create a community-driven venture fund that would invest in projects based on voting. However, just three months later, hackers hacked The DAO and stole $60 million worth of ETH.
Although this experiment with the DAO was unsuccessful, it opened the door for the development of distributed communities.
How Do DAOs Work?
DAO is a combination of rules with a code. A set of rules is attached to a control structure and embedded in code. This concept is implemented through smart contracts and provides a governance mechanism.
To decide on any proposal, the community votes using native tokens. In most cases, the DAO operates a model in which the strength of a participant’s vote depends on the number of tokens.
The voting process itself can take place both on specially created DAO services, and on separate platforms like Tally or Snapshot. Using Snapshot allows you to save time on the formation of additional voting methods.
DAO members work together, based on the rules prescribed in the smart contract and a common goal. All rules are transparent.
Membership in the DAO can be divided into two categories:
- Token-based membership.
DAO tokens are freely traded on decentralized exchanges and are mainly used for governance. Governance tokens give a right to vote.
Users can receive tokens from the DAO in exchange for providing services to the organization itself. An example of such a situation was an airdrop from Uniswap for early adopters.
- Membership based on shares.
Share-based DAOs are not necessarily open to everyone. Instead, they often screen potential members before allowing them to join and require a certain fee (such as ETH or DAI) to be paid.
What Are the Advantages of DAO?
- No clear hierarchy. In the DAO, each stakeholder can participate in voting and decision-making.
- Transparency. The history of decisions made is available to everyone.
- Openness. Almost everyone with internet access can become holders of a DAO token and thereby gain the right to make decisions.
- The DAO concept allows people to interact with each other to achieve a common goal without the need for trust.
What Are the Disadvantages of DAO?
- Regulation. Currently, there is no clear regulation regarding DAO.
- Hacker attacks. Such decentralized structures are subject to the risk of attacks.
- Speed and controversy. The lack of a clear hierarchy can cause a split in the community and slow down the decision-making process.
Types of DAO
There are several categories of DAO. This classification is not exhaustive, and we see new experiments almost every day.
- Grant DAOs
The first area of application of the DAO was grants. DAO members invest in such projects and then vote on who to provide the funds to, and under what conditions.
Grant DAOs were originally managed through tokens that could not be transferred to others (non-transferable). This is necessary to recreate the institutions of reputation and social capital in the anonymous world of the DAO.
Grant DAOs have demonstrated the flexibility of niche communities in allocating capital compared to formalized organizations.
- DAO operating systems
Operating systems are the first echelon of DAO. They are used to create new DAOs.
These projects provide templates, frameworks, and tools for communities to pool resources and start their own DAO.
Such DAOs typically provide smart contracts and interfaces to make it easier to manage a decentralized community on-chain.
DAO operating systems allow you to create your DAO without even having special technical skills.
- Protocol DAOs
Protocol DAOs put the reins of control away from the core team and into the hands of the community, providing another option for projects to launch their tokens.
Unlike early DAOs that used non-transferable tokens, protocol DAOs were the first to issue circulating ERC20 tokens with secondary market value.
Such tokens are often used to govern protocols, meaning that their owners have the right to propose, vote, and implement changes to the fundamental principles of how the protocol functions.
Decisions on the distribution of tokens are usually made by voting, which opens the door for liquidity mining, profitable “farming” (yield farming), fair launches, etc.
Protocol DAOs help other platforms launch their tokens, ideally owned and operated by the respective community.
- Investment DAOs
The logical continuation of protocol DAOs, which give rise to new tokens, are communities called upon to invest in these tokens.
DAOs have been non-commercial for a long time, but new DAOs have appeared – clubs of investors whose activities are aimed at making a profit.
Although such DAOs have many more legal restrictions than grant DAOs, they have shown that anyone can assemble a group to invest large sums with a low entry threshold.
Investment DAOs allow community members to pool capital and invest in projects at their earliest stages.
- Service DAOs
With the growing number of new tokens, more and more projects need new staff. This led to the emergence of service DAOs. Such DAOs use the blockchain to allocate human resources and transfer workers from one DAO to another.
Service DAOs create decentralized working groups to work for the benefit of the open internet. These are recruiting agencies, initially tailored to the needs of the crypto community.
From legal to creative, from management to marketing, from software development to capital management, service DAOs create the conditions for hiring workers ready to advance the Web3 era. They are often paid in ERC20 tokens, thus providing ownership of the fruits of their labors for a particular platform.
Service DAOs move the very concept of “work” into the future and form the principles of employment in the world of cryptocurrency.
- Social DAOs
What does it mean to be a DAO member?
In an industry dominated by speculation, social DAOs, as tautological as it may sound, favor social over financial capital. Social DAOs are a natural evolution of group chats where friends become colleagues.
Social media has turned anyone and everyone into a media campaign, and social DAOs are turning every group chat into an online business. They offer a new definition of what it means to be part of a community and help you join the network’s growing Aboriginal tribe.
Social DAOs make it clear that cryptocurrency is not only about money, but there are no better places to find people with similar interests than the Internet.
- DAO for collectors
NFT tokens. By now, everyone has heard of them. For some, this is meaningless hype on JPEG pictures for avatars, for others – an object of desire.
With their popularization, DAOs appeared that collect them. Curator teams at these DAOs find artists, platforms, and series to help ensure the longevity of their work.
These DAOs often determine which NFTs have long-term value.
- Media DAOs
In the age of globally available information, the levers by which this information is disseminated must also be freely available. Media DAOs seek to return these levers to the end consumer of content on the Internet.
They change how authors, streamers, and readers interact with content. Whether it’s media mining programs to attract new investment or the right to decide which topics will be featured on the front page, media DAOs make content consumption a two-way process.
Media DAOs share the media agenda with the masses to inform people more effectively.
What Are the Prospects for the DAO?
The development of better collaboration tools that will enable the community to overcome passivity and increase effectiveness is what autonomous decentralized organizations are waiting for. They will get assistance with this from operating systems (DAO tools).
Moving closer to official recognition is DAO. Wyoming approved a law in April 2021 recognizing decentralized autonomous organizations as a new type of business entity. The first DAO was authorized a short while thereafter. However, the SEC stopped the first legally recognized entity’s token registrations in November 2021, claiming that it had given prospective investors “misleading information.”
A flurry of investment DAOs surfaced in 2021, allowing token holders to make investments in NFTs, Web3 initiatives, cryptocurrencies, or other DAOs.
So here we are in 2022, and it is interesting what new concepts and tools the developing sphere of decentralized autonomous organization will bring to the world of WEB3, blockchain, decentralized finance, and cryptocurrencies.