DAOs: Coordinate Everything
A 3 minute explanation of Decentralized Autonomous Organizations
What is a DAO?
DAO stands for decentralized autonomous organization. DAOs can take many different shapes and forms, but at their core they are decentralized groups of people working together towards a common goal.
Decentralized: DAO members can live anywhere in the world, so long as they have an Internet connection. Unlike traditional organizations, there's no need to be in the same place or even same time zone.
Autonomous: DAOs are owned and operated by their members. In the case of protocol* DAOs, they are governed by smart contracts.
*For those not in the weeds with crypto, a protocol is essentially code that allows computers to work together. Think of email or the Internet as two famous protocols. In crypto, we have protocols that allow us to take out loans (Aave) or swap tokens (Uniswap).
One of the defining features of DAOs is that they have a shared bank account. Usually this isn't a real bank account, but rather a shared wallet (a multisig). These shared bank accounts are owned and controlled by the members of the DAO and are used to fund DAO operations and investments. Further, DAO finances are all on-chain (written to the Ethereum blockchain). That means they are freely auditable by anyone, resulting in much more accountability.
Another common characteristic of today's DAOs is that power is spread more evenly among DAO members. Rather than having 1-2 people with 100% control of the organization, DAOs tend to have flatter org structures and spread their governance power more widely.
Sometimes, DAOs can look a lot like decentralized companies, with DAO members working together on a commercial project that generates revenue. They can have their own treasury (bank) accounts, payrolls, and revenue sources. MakerDAO is a great example. MakerDAO created one of the world's first stablecoins, Dai. Today, the DAO is in charge of governance of the protocol, voting on budgets and changes to the protocol.
Not all DAOs are created around businesses, though. DAOs are spun up to manage grant programs, buy NFTs, or coordinate social groups. A few examples:
The Aave Grants DAO was created to manage the Aave Grants program. Working together in a distributed manner, the DAO will distribute $1 million per quarter for two quarters to fund grants related to the Aave ecosystem.
PleasrDAO was created purely to collectively purchase NFTs.
Friends with Benefits is a vibrant Discord community that has a token, a shared bank account, and a decentralized member base.
Here's a great illustration by @Cooopahtroopa on the DAO landscape:
You don't need 50+ members and a lot of assets in order to be a DAO. If you and your friends want to bid on an asset with a shared bank account, you're a DAO!
What Advantages do DAOs Hold Today?
Level the geographic playing field - historically, people outside of major cities in the US were at a disadvantage when it came to getting involved in interesting projects. Most of the capital funding startups was in Silicon Valley and New York, and with most startups, you needed to be in those areas to get a job. DAOs are much more meritocratic. Can you do good work? Good, join us! We don't care where you're located.
Move without anyone's permission - Thanks to the decentralized nature of DAOs, there is very little that regulators can do to stop a DAO. Thus, DAOs are much freer to pursue opportunities than traditional LLCs.
Accept contributors from many projects - In traditional startups, an employee has to go all in on one company. The payoff for doing that can be big, but more times than not, the company will fail. DAOs enable people to contribute to many different projects (on their own schedules) without being a full time employee.
Allow people to contribute to projects anonymously - Talent is what matters with DAOs. If you can do good work, a DAO will allow you to be paid for that work, even if they don't know who you are in real life.
What Disadvantages do DAOs Hold Today?
Unclear regulation - While there is some progress on the regulation front (like Wyoming's DAO law), it's often quite unclear how DAOs are seen by lawmakers. Where do they owe taxes? Where is liability placed? All of these questions remain unanswered at the moment.
Problems with coordination - All of our tools are built for centralized companies. Today, DAOs still use traditional tools like Zoom, Discord, and Notion. While these tools do the trick, they're suboptimal for DAOs. Having participated in several DAOs, it's clear that the available tools aren't built for decentralized teams. DAOs are actively working on solving some of these issues.
Low engagement - Because most DAOs allow contributors to come and go as they please, they don't necessarily have full time employees. That can make accountability hard. Since we don't have the proper tools and processes for running DAOs in place, it can be hard to hold contributors accountable, leading to a freeloader problem.
I believe these issues are temporary; as I work with LlamaDAO I've come across a number of DAO pain points. These pain points are either actively being solved (like with Coordinape, for helping determine contributor compensation) or will be solved with internal software. Just like AWS was created to solve an internal issue, DAO-specific software will be created to solve internal DAO problems. That software can then be opened up and shared with other DAOs.
My (bold) prediction: most people reading this will end up as a DAO member at some point in the next 10 years. Once DAOs are more optimized for coordination, they’ll become ubiquitous.