A DAO stands for Distributed Autonomous Organization. You've probably heard about DAOs as you are browsing and researching crypto projects.
This guide is to show you what it is and what you need to look for when joining a DAO.
A DAO takes the idea of Bitcoin where each node/miner has "vote" on what chain of blocks to approve. Instead of computers voting for blocks, DAOs enable members to vote on proposals and ideas for the direction of the community.
A DAO is simply an organization where members have a say in how it is run. This is the opposite of a company where all the decisions are made in a top-down manner. A crypto DAO uses tokens as voting shares and membership.
The core idea behind a DAO has been around for a very long time. Many religious institutions are structured like a DAO where participants get a say in how the institution is run. As well as farming co-ops and local community groups that are built around a similar bottom-up governance model.
The first major crypto DAO was simply called The DAO and raised $120 Million before it was hacked.
However, this did not stop the community from improving on the concept and building and creating other DAOs.
Their are DAOs for everything from organizing and managing crypto projects to social communities, to investing. Each have their own structure and governance. The most common type of DAO you will come across is the project DAO. A project DAO is structured around managing a project. It also creates a layer of protection for everyone involved, because there is no central organization to tax, control, or regulate, it can be very hard for governments to shut down.
Examples of these types of DAOs are the Cardano DAO, Enzyme DAO, and Uniswap DAO. Project DAOs enable the investors into the project to have a say in how the project is run. This increases the amount of trust as the entire governing process is transparent and open.
Things To Consider When Starting a DAO
As with anything crypto, it is easy to only see the positives that any new technological development provides. However, there are a couple drawbacks to DAOs.
- Time intensive: Operating a DAO is like running a mini-government. Issues must be debated and discussed, meetings must be held, proposals must be made. Operating and running a DAO is no small feat.
- Slow: Because of the added administrative burden, DAOs tend to move slower. This can be a good for decisions that have serious long-term consequences.
- No Gains: Unless the creators of the DAO pull the rug and walk away with all the money, their is not really an outcome where the owners of a DAO walk away with a small fortune (unlike running a business)
- Grey Legal Area: Most governments don't have any legal structures ideas on what to do with DAOs.
- Centralization: Even though the goal is to be decentralized, all DAOs start as centralized
What Makes a Good DAO
When researching a project, a good DAO will be very boring. You won't want to invest in DAOs that have complex governing frameworks, constant arguing, and needy. Ideally a good project DAO is there to simply vote on improvement proposals and provide an opportunity for the community to help develop and test the project. A good DAO in my opinion is a DAO that doesn't require much except reading the occasional post and voting on a few major improvement proposals a year.