One of the most innovative things to come out of the web3 revolution is DAO, or “decentralized autonomous organization.” A DAO is essentially an organization that isn’t controlled by a centralized governance body or a board of directors. Instead, all the decisions within the protocol are made by token holders that use their voting power to vote on various proposals. While DAOs are a pretty cool concept, it might surprise you to know that they had one of the rockiest starts you can ever imagine. So let’s turn back the clock to 2016.
The DAO hack that split Ethereum
In April 2016, the Ethereum community was on cloud nine as “The DAO” was successfully launched. The idea was to create a decentralized hedge fund. DAO members would go through various project proposals and use their DAO tokens to vote on the most promising ones. The projects approved by the DAO would then get the required funding.
While the idea was very cool, there was a severe vulnerability in its underlying code, which led to a devastating $50 million hack in May 2016. The Ethereum community was split on how to react after the hack. Some decided that the best course of action was to fork (or split) the protocol and roll back the events. Essentially, this ensured that the hack never happened. Others disagreed and decided to split from the chain and make Ethereum Classic. The community that remained is Ethereum as we know it today.
The DAO situation today
Post-2020, DAOs have become somewhat of a phenomenon. Let’s take a look at the top 5 DeFi protocols on Ethereum.
These are all billion-dollar protocols that are entirely community-owned. When it comes to DeFi, decentralization is the very ethos of their operational structure. As such, DAO isn’t a “cool to have” but a “must-have.”
So, the obvious question here is, how do DAOs enforce anything? Who oversees things in an organization that has no centralized overseeing authority? The answer – smart contracts.
What are smart contracts?
Smart contracts are at the heart and soul of the multi-billion dollar decentralized application ecosystem, including DeFi and NFT. Smart contracts are automated agreements between multiple parties defined by code executing on the network. There are two things that you need to know about smart contracts:
- They run by themselves without the need for centralized intervention.
- Smart contracts are sequential, meaning every line of code must execute in a proper linear fashion.
The code defined in a smart contract automatically executes when specific criteria are met.
DAOs run on smart contracts. The smart contract establishes the rules with which the DAO must operate. Of course, the rules defined within a smart contract can be changed by the DAO any time they want.
DAOs vs Hierarchical organizations
Businesses currently operate using a hierarchical and vertical organizational structure. Basically, the folks at the top dictate how the organization works. So let’s compare them with DAOs and see how they measure up.
|Decision-making||Decisions made by governance token holders.||Decisions made by the Board of directors or C-Suite and leadership teams|
|Speed of decision making||Slow||Fast (since the number of decision-makers is usually small).|
|Automation||DAOs are autonomous, meaning the underlying smart contract can self-execute without human intervention.||Requires human intervention.|
Moving beyond governance – DAO use cases
Over the last couple of years, we have seen many exciting DAO use cases that went beyond just being a means of DeFi governance. Let’s go through some examples.
In 2021, Sotheby’s put up a rare edition of the US constitution for auction. So a bunch of folks came together to form the “ConstitutionDAO.” They raised a staggering $40 million from 15,000 contributors. Even though they didn’t win the auction, this was one of the best examples of decentralized crowdfunding.
Have you ever wanted to own a Picasso? What if you joined a group and raised enough funds to have joint custody over the Picasso painting? That’s what PleasrDAO does with NFTs. The DAO members have fractional ownership of the collected art pieces.
Created by UK-based Ukrainian activist Alona Shevchenko, UkraineDAO has raised funds to support those affected by the Russia-Ukraine war. Most notably, UkraineDAO auctioned an NFT image of the Ukrainian flag for 2,258 ETH.
DAOs have fully recovered from their rocky start and have now become an accepted governance tool and even a means of social activism. Given the many shortcomings of a centralized structure, DAOs could become more prevalent in the near future.