What are DAOs?

It stayed quiet for a while, but with the DeFi hype, more and more of them are popping up in the crypto landscape: DAOs – Dcentralized Autonous Organizations that are becoming the drivers of the accelerating tokenization dynamic and thus the hope of a great crypto utopia. Redistribution processes, democratization, inclusion, reduction of bureaucracy: the expectations placed on DAOs are high, but not unrealistic.

Crowdfunding 3.0

No matter how different the goals you can pursue, the basic concept is quickly summed up. DAOs are decentralized investor groups that pool capital together and decide on the use of funds and rule changes in transparent voting procedures on the blockchain. All members of a DAO are entitled to vote. There is no hierarchy, presidency or collusion. All activities can be traced transparently and no decision can be made without the consent of the collective.

At the heart of a DAO is the shared treasury — a kind of treasury — managed by a smart contract. Once set up on the blockchain, nobody can make changes to the contract. The deposits are therefore safe from unauthorized access – assuming a bug-free contract.

The subtle differences

In the rough structure, all DAOs are the same, but the design can take on very different forms. Companies, NGOs, municipal projects, urban planning, DeFi or Metaverse: the range of applications is wide. Most DAOs are open, “entry” is via the appropriate governance tokens. But there are also more exclusive representatives who demand a kind of dowry. The level of “automation” through smart contracts and AI also varies, as does the voting done between on- and off-chain.

With reservations, BTC and Namecoin can be described as the first DAO representatives, but according to current understanding, DAOs started on the ETH blockchain. The first prominent DAO was also a crucial test. The DAO “The DAO” was a big hit in 2016. In a short time, the organization collected 150 million US dollars from over 11,000 investors – the largest crowdfunding project to date. Less than three months later, the super meltdown: The DAO was hacked, 3.6 million ethers, at that time around 60 million US dollars, were drawn from the apparently faulty contract. The result: A hard fork that encapsulated today’s ETH from the original version – known today as ETH Classic.

Rising from the Ruins

It took some time for the DAO hype to surge again with the wave of decentralized finance (DeFi) applications. Meanwhile, DAO history reads as a success story. Total capital under management by DAOs is currently over US$9 billion. By comparison, just a year ago, Total Treasury was under $1 billion. The analysis service counts over 4,800 DAOs DeepDAO currently, of which the Uniswap DAO is the largest with over 300,000 members.

While legitimate interest in DAOs is forming, some expectations still need to be curbed. Regulatory, DAOs hang in a vacuum. Apart from the US state of Wyoming, which formally recognized DAOs as LLCs – comparable to GmbHs – since July 2021, DAOs operate in the gray area. The authority to act outside of DeFi is yet to be seen.

The CityDAO, which buys land, divides it up into parcels and sells it via NFTs, is an example of the organizations’ leeway gradually spilling over into real life, but it’s still a field test. Smart contracts are also not legal contracts. If hacks do occur, investors lose out.

DAOs: Not a fad

It’s impossible to predict where the journey will lead, but the fact is that DAOs are a tremendous opportunity – on many levels. Wherever people organize themselves digitally and make decisions collectively, the swarm-intelligent administrative apparatus opens up new possibilities, optimizes decision-making processes and translates a promise that is deeply rooted in the token economy into reality: inclusion. Anyone can participate in DAOs – regardless of geographic or social background. Even if there are still many regulatory issues, not every expectation can be met, and success depends on a creeping awareness of the crypto topic, examples such as the CityDAO give a foretaste of the gigantic potential of DAOs.