DAO’s DECODED: A Comprehensive Overview of Decentralised Autonomous Organisations

13 min readSep 7, 2023

Introduction

Welcome to DAOs, where the internet meets decentralised ownership and decision-making. Imagine grassroots groups owned by their constituents. Decentralised Autonomous Organisations (DAOs) are the web3 equivalent of companies. In this digital world, blockchain-based rules control community-driven decision-making.

DAOs have a unique corporate structure. Every member is crucial to decision-making in this environment. Instead of top-down orders, bottom-up decisions empower and share ownership.

DAOs’ built-in treasuries, which members can access with consent, set them apart. This funding supports the organisation’s operations and objectives, which are decided by voting on applications, within set timelines.

However, the core of DAOs goes beyond governance and finance. They change how individuals view and interact with organisations in the digital age. We’ll examine DAOs’ complex operations, their variety, and their financial plans as we go deeper. Fasten your seatbelts as we explore Decentralised Autonomous Organizations’ capabilities, surprises, and more.

Decoding the Mechanics: How does a DAO Work

DAOs are digital entities that operate like companies, but with a twist. DAOs use smart contracts to impose and enforce rules instead of traditional rules and hierarchies. Smart contracts are digital agreements that only take effect under certain conditions, and guess who decides them? It’s DAO stakeholders.

DAOs emphasise equality, unlike traditional organisations with leaders and employees. Everyone involved should have a say and share goals. They employ internal finances to keep things operating smoothly and encourage collaboration. Anyone is welcome to join. The rules keep everything safe and equitable, and smart contracts enforce them. Every DAO decision is made via a vote, and the digital tokens you hold represent your voting rights. Smart contracts verify these tokens. Like a digital dance, every step counts, and changing the rules is just a transaction away.

Understanding the Difference between DAO and Traditional Organisations

A Decentralised Autonomous Organisation and a traditional company both require a founding member or team to start them, then they can begin to create value through a new protocol or service.

Some DAOs allow investors to pool funds and invest in early-stage startups and decentralised projects while sharing risk or profits. Forming a DAO requires fewer formalities and formal communication, with boardroom meetings replaced by Discord and Telegram conversations. Decisions are brought onto the blockchain using smart contracts, which optimise the process and remove the need for trust between parties. Smart contracts stipulate parameters of the DAO, eliminating the need for in-person meetings.

While there are quite a few differences pointed out, DAOs and Traditional Organisations largely differ in two key areas:

Funding

Traditional organisations obtain funds from founding members and partners to meet initial operational expenditures. Members can seek venture capital and private investment if needed.

DAOs empower investors to become owners and employees by connecting financial contributions to governance powers to aligned and shared goals. DAOs often have different funding mechanisms which we will explore later in this article.

Structure

Traditional organisations are hierarchical and delegate responsibilities from the top. This can hinder communication, job satisfaction, and innovation.

DAOs let members vote on operations using smart contracts. They encourage collaboration, transparency, and open discussion, with members agreeing on modifications before implementation as the organisation becomes more efficient and effective.

Here are a few advantages of DAO against traditional organisations:

Lack of trust needed between parties, as only the code needs to be verified to be trusted
Code is publicly available and extensively tested and audited before launch
Actions taken by a DAO are approved by the community and are transparent
No hierarchical structure, allowing any stakeholder to propose ideas
Internal disputes are easily solved through the voting system
Investors can pool funds and invest in early-stage startups and decentralised projects, sharing the risk and potential profits.

Decentralised Governance: The DAO Tension Triangle

The DAO tension triangle balances voice, exit, and loyalty in a decentralised autonomous organisation. It represents an individual’s right to join or leave the DAO, make decisions, and influence its direction. Governance systems shape these dynamics, which align with free will. Participating in DAO choices improves governance, but it’s important to balance voice with departure incentives.

Governance as the Voice. These rules establish the DAO’s legal structure, membership criteria, purpose, operations, voting mechanisms (both on and off-chain), and the protocols for its existence and dissolution. Much like a constitution guides a country, governance rules are the backbone of a DAO’s operations and decision-making, providing the framework for its entire lifecycle within the decentralised landscape.
Individuals as exits. Reflects a commitment to self-governance, personal rights, and the greater good, akin to the principles of individualism. This concept also includes registered or unregistered corporations operating as entities with analogous beliefs, embodying the idea of corporate personhood within the realm of decentralised governance.
Decentralisation as loyalty. Decentralisation in DAOs is like brand loyalty in the real world. It’s a belief system driven by technology and governance. When everything else is equal, DAO members stay or leave based on their allegiance to the DAO’s mission. Trustworthiness is influenced by the degree of decentralisation and the founders’ intentions. A DAO’s level of decentralisation depends on its capabilities, purpose, and accessibility through participation fees.

Of course, no organisation may it be traditional or DAO are safe from potential risks no matter how perfectly aligned said elements are.

Knowing the Risks Associated with Decentralised Autonomous Organisations

DAOs are designed to operate without the need for trust between third parties and to decentralise decision-making. They rely on hard-coded governance rules, smart contracts, and governance tokens to automate administrative tasks and enable peer-to-peer financial services. DAOs can be used in various sectors, including investments, decentralised networks, collector or social groups, and charitable organisations to name a few.

While DAO structures have the potential to reduce commercial disputes, there are still risks involved. Some of these risks include:

Regulatory Risk. If a DAO governs a DeFi protocol, it could face regulatory action if its services violate securities or other regulations in any jurisdiction. Regulators in Hong Kong, SAR and other jurisdictions have said that DeFi projects might need licences and regulation.
Smart Contract Risk. DAOs can have coding errors which may lead to malicious actors exploiting these weaknesses. Cyberattacks and exploits cost $3 billion in 2021 and 2022. Input or data-entry errors and manipulation of ‘oracles’, which transmit off-chain data to smart contracts, are examples of other risks.
Governance Risks. When one or more people own freely traded tokens, DAO voting rights can be used for governance attacks or other concerns. Governance concerns can also develop when one communal group has more power owing to history or position.

However, Despite these risks, DAOs continue to gain popularity in the industry as they offer a more transparent and efficient way of conducting operations without relying on intermediaries whatever type of ecosystem DAOs may cover.

Decentralised Diversity: Exploring the Many Faces of DAOs

Within the context of the blockchain ecosystem, Decentralised Autonomous Organisations, or DAOs, can take many different forms, each of which is optimised for a unique set of functions and purposes.

DAO Operation Systems. These projects provide templates, platforms, and tools for communities to establish DAOs. They commonly offer smart contracts and interfaces for on-chain activity.
Protocol DAOs Protocol DAOs empower communities by allowing them to issue fungible tokens, giving token holders the authority to propose and implement changes to the network. This enables liquidity mining, yield farming, fair launches, and more. These DAOs provide a framework for community-owned and operated networks.
Grant DAOs Community pools funds and uses a DAO for decentralised decision-making, directing capital toward contributors through governance proposals, emphasising social capital over financial incentives in Grants DAO governance and niche communities’ resource allocation agility compared to conventional entities.
Social DAOs Prioritising social capital over financial capital, social DAOs turn collective ideas into digital cooperation. They redefine community interaction and foster digital communities. They prove Web3 has value beyond money and that the internet can unite like-minded people.
Collector DAOs Collector DAOs let members pool assets to invest treasury monies in blue chip NFT art and other collectibles. Curator groups act as the underlying glue behind a specific artist, platform or series to help establish longevity. Collector DAOs seek to curate which NFTs have long-term value.
Investment DAOs Venture DAOs are organisations that pool resources to invest in early stage web3 firms, protocols, off-chain investments, and to have access to portfolios that are not available in traditional finance.
Media DAOs Media DAOs empower content consumers by letting them own narratives and disrupting interaction structures. They encourage contributions and offer content selection governance, making consumption two-way. Media DAOs promote news and awareness through an open agenda.
Service DAOs Service DAOs allocate talent to open internet working groups. Legal, creative, governance, marketing, development, and treasury management are covered. Work is rewarded with ERC20 tokens, influencing crypto-native employment.

No matter which field or sector a DAO is venturing into, it’s crystal clear: Every DAO should make sure they’ve got their financial ducks in a row with a carefully crafted and thought-through strategy. Having a robust financial plan is the key to a DAO’s success, no matter what path it’s treading.

DAOs and Dollars: Decentralised Autonomous Organization Financing Strategies

Funding a decentralised autonomous organisation (DAO) entails the crucial task of upholding a robust treasury, effectively overseeing operations, and diligently ensuring that the various communities involved are successfully attaining their desired objectives.

The funding strategies for a DAO depend on its design and purpose. They can include raising capital from members, launching a token, getting venture financing, earning revenue from DeFi protocols, or selling NFTs. Additionally, Guilds, or subDAOs, possess the ability to put forth initiatives that make valuable contributions to the treasury.

Here are a few financing strategies DAOs adapt:

Tokens

One of the most common ways DAOs raise funds is by issuing a governance token which can be obtained either through purchase or distribution to individuals who actively contribute to the DAO’s operations. Creating a token is usually the initial move to gather funds and replenish the DAO treasury which helps to distribute voting power and ownership among members.

Venture Capital Backing

Various DAOs get money from venture capital firms. Syndicate DAO is an intriguing example because it has received money from Andreessen Horowitz and Carta this year. It is critical for DAOs, however, that no single investor actually acquires more than 10% of the community token or the governance token. Giving venture capitalists too much sway over DAO governance could compromise the DAOs’ essential decentralised architecture.

Crowdfunding

Public goods DAOs often rely on grants and crowdfunding to secure funding. Some examples could be Gitcoin grants, grant proposals, or crowdfunding protocols. Communities have also come together for various causes, like donating to nonprofits. To raise funds through grants or crowdfunding, it’s crucial for the community to rally behind a compelling project or cause.

Real world assets

DAOs are diversifying their treasuries by investing in real-world assets. One major case this year was MakerDAO investing $500M worth of DAI into real estate, US treasury and corporate bonds, and more. This adoption offers opportunities for yield generation and diversification of counterparty risks, with more DAOs expected to invest in these assets.

DAO Treasuries: Financial Backbone of Organisations

The DAO treasury is like a shared piggy bank that helps the organisation keep growing and improving. DAO members use specific governance mechanisms to decide how the treasury funds are distributed.

Native tokens still rule the DAO holdings. Diversification is important, but treasuries have been affected differently. Not all treasuries lost value because of the token price decrease.

Because they hold 60% of the DAO treasury, the top 15 DAOs provided an adequate sample size of the ecosystem. The stability of these treasuries is partly due to market conditions, but DAO portfolios and administration systems also contribute.

Is diversification important for Uniswap’s treasury, considering its stability? BitDAO has raised capital from a single investor, Bybit, unlike Uniswap. Bybit deposits funds to BitDAO’s treasury on a schedule and gets 60% of the token allocation. They don’t use a vesting schedule, which adds more instability to the treasury. If Bybit, as the centralised authority, decides to dump tokens, it could topple the treasury value since they hold the majority of vested tokens.

Keeping most native tokens is like holding onto unissued shares that have no value in their current state. But the difference is that Uniswap tokens can be vested and used for grants and contributor compensation.

A DAO’s ability to cover its expenses and reward its investors is essential. If it’s possible, then the next step is to maximise profit so that the DAO’s journey can continue to operate indefinitely. The unpredictability of the crypto space means that this second aspect is frequently overlooked.

DAO Fundings: Allocations and Current Status

Decentralised autonomous organisations offer more democratic governance and decision-making than traditional organisations. Token holders manage DAOs, elect working group leaders, and distribute the protocol’s money. DAO initiatives are funded via initial native token issuance and protocol fees in the DAO treasury.

DAOs have adopted working group structures to distribute tasks effectively. These groups are autonomous, lean groups focused on predetermined tasks within the DAO. They are paid by the DAO with community treasury resources. Protocols, stored on the blockchain, are designed to run autonomously and in perpetuity, without maintenance or upkeep. They are typically created by small teams and used to shift tasks from core teams to the broader community, facilitating progressive decentralisation while ensuring contributors adhere to rigorous standards.

In 2022, DAOs allocated $102 million for internal labor. Over 58% of the funding was allocated to Product & Development expenses, while Growth received the second highest share at 22%. The composition of each category is crucial for a DAO’s long-term success as it shares and has its own roles and purpose.

Now that you’ve understood how a DAO works, I think you now have the drive and fuel to participate and join a DAO but pretty much don’t know how and where to steer the wheel yet.

The Quick Guide to Joining a DAO

The rapidly growing DAO ecosystem offers diverse opportunities for contributors, offering 24/7 remote collaboration and low barriers to entry. DAOs require specialists and have substantial treasuries to compensate contributors, making it an attractive investment opportunity.

To get involved in a DAO, start by browsing their discord or governance platform for daily activity and coordination. Participate in onboarding and new joiner activities. Test the waters by finding a group or division that matches your skills, such as developers, marketers, designers, accountants, product owners, community managers, or governance operators. The key is to choose your own involvement method.

To join a DAO, you need to:

Identify your goals: DAOs require assistance in various aspects like business development, community building, governance, operations, and marketing. Different types include NFT DAOs, Grants DAOs, and Service DAOs. Identifying personal goals and pitching methods is crucial for starting your DAO journey. For instance, a fashion enthusiast might consider MetaFactory, a Web3 merch DAO, or a front-end designer in DeFi.
Starting with a DAO: To dive deeper into a DAO, familiarise yourself with its flow by finding active communities on Discord chat servers. Joining a designated writer channel and checking for rules and FAQ sections can help you understand the community’s way of doing things. Discord’s “Rules” and “FAQ” sections are also helpful for understanding the community’s current happenings.
Equip yourself with the right tools: During your DAO journey, you may encounter popular tools like
Collab.Land: A token-based community management system
Coordinape: An allocation system for distributing funds to contributors
Discourse: an open-source forum platform
GitBook: Adocumentation platform
Snapshot: A decentralised voting system
SourceCred: An open-source resource for tracking community contributions
Tally: A cross-protocol governance dashboard

Familiarise yourself with these tools in order to thrive and be of advantage.

Ready? DAO Now: Once you have identified your objectives, acquainted yourself with the various possibilities, and acquired the necessary resources, the next step is to simply proceed,get your feet wet and dive into it. Remember, knowledge is good, but experience is the best teacher.

Conclusion

In essence, Decentralised Autonomous Organisations (DAOs) are digital entities resembling companies but with unique features. They use smart contracts for rules and collective decision-making, promoting equality and eliminating traditional hierarchies.

DAOs differ from traditional organisations in funding and structure, raising funds through tokens, venture capital, crowdfunding, and real-world assets. They encourage transparent decision-making and collaboration. The DAO ecosystem offers diverse forms, each tailored to specific functions. Regardless of their specialisation, financial planning is key for DAO success. Joining a DAO involves identifying goals, engaging with the community, and using the right tools. It offers various opportunities for contributors to participate in different roles and projects.

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