How does a DAO work?
DAOs operate like any other traditional company, but the only difference is that the former uses smart contracts, while the latter uses traditional means to govern. These smart contracts are the structural foundation of DAOs, outline the institutional policies, and contain the group's finances. Since the contract controls the group's finances, no individual can use the funds without the group's consent.
Smart contracts exist on blockchains—most commonly Ethereum's—and once they go live, only a vote will allow changes to its terms. Any action taken by users that goes against the contract's protocol isn’t permitted. The blockchain technology allows this to happen because a smart contract's code is impenetrable once it goes live on the ETH network. Since all data is public, it makes it almost impossible for anyone to make changes without others noticing.
This makes DAOs independent of any intermediaries or central authorities. Decisions are made together as a collective effort.
Although a DAO idealistically has all decisions made by the people, this isn’t always the case. In many cases, users delegate their votes to others, while in some, decisions are made quickly by a small group of people. The degree to which DAOs are collective organizations run by votes varies.
Types of DAOs
DAOs come in various types depending on their objective, roles, and principles. Although most of them operate similarly, their philosophies stem from different standards for each kind.
Every type of DAO seeks to incentivize different individuals with distinct sets of skills, abilities, and expertise to supply the group with innovative ideas, development, and growth. As a result, each DAO exists for a specific use case. The different types of DAOs are:
- Protocol: Protocol DAOs are some of the most prevalent kinds of DAOs. They primarily use code or an algorithm that works on decentralized protocols, where no single entity is the user. Instead, a collective contributes in equal amounts to make decisions. MakerDAO is one of its most prominent examples.
- Philanthropy: Philanthropy DAOs aren't as popular as other types of DAOs but exist for good causes. They specialize in helping socially responsible projects with the united mission of affecting the Web3 ecosystem.
- Investment: A well-known use for DAOs is to solicit contributions for the entire group through investments. Investment DAOs work similarly to conventional investment funds. Although there isn't a single central regulating body, managing a pool of assets is the same as with traditional organizations. Investment DAOs are also called venture DAOs, and they typically collect money for blockchain investments and cryptocurrency ventures in their early stages. Investment DAOs provide a unique route for new Web3 investments. They also provide portfolio access, which was previously not feasible with traditional methods.
- Grant: Similar to investment DAOs, grant DAOs are a significant addition to the growing class of DAO types. These DAOs are suited to supporting and financing start-ups in the DeFi (decentralized finance) sector. Grant DAOs are typically created as charitable extensions of broader DeFi-related organizations or as entirely distinct companies within the DeFi community.
- Collector: One of the main goals of collector DAOs is to raise money to purchase blue-chip NFTs (non-fungible tokens) and other digital assets for the DAO group. In fact, you could consider collector DAOs to be NFT DAOs. In light of NFTs' increasing prominence in the Web3 space, collector DAOs could establish a robust platform for users and DAO members.
- ConstitutionDAO: ConstitutionDAO was a unique DAO with a particular purpose. The core team created the DAO in November 2021 to buy an original copy of the Constitution of the United States. The DAO group managed to raise $47 million in ether. However, the bid didn’t win at auction. Our developer, Miguel Pief, was a core member of ConstitutionDAO and is a prominent member of the online crypto community.
Why do people form DAOs?
You need to have a lot of faith in the individuals you're collaborating with if you want to begin a project with them that entails fundraising and money. But it's difficult to accept that an individual you've never communicated with face-to-face will have your back when it comes to money matters. That’s where DAO comes in.
DAOs allow you to put faith in their code without trusting other individuals. A DAO's code is completely transparent, creating several new international collaboration opportunities.
Here are a few characteristics that back this up:
- Completely transparent: DAOs are entirely transparent, democratic organizations where all activity is accessible and viewable to the public.
- Everybody gets a vote: All decisions taken on a DAO must be a collaborative effort of each voting member. Votes are tallied and accepted through the DAO’s built-in protocol without the oversight of a central authority.
- Decentralization: DAOs are flat, decentralized structures, meaning no single individual or entity controls the group or the platform.
Governance problems with DAOs
Disputes are challenging to settle on DAOs as no individual can take the initiative to intervene or resolve a matter. As the saying goes, "code is king" with DAOs, and no decision can be taken unless all members vote in the majority and the DAO's protocol approves of it.
This may seem like a simple fix. All the members simply have to vote, right? Some members may be inexperienced and unaware when resolving disputes regarding funds. Additionally, voter turnout is usually low. This is because DAOs tend to grow to become enormous communities. As a result, it becomes highly challenging to foster constant innovation. It gets increasingly complex to develop and participate as a DAO's membership grows.
As the number of DAOs increases, ensuring that every individual's opinion is voiced becomes extremely difficult. Companies like Worldcoin are doing their part to ensure that they keep governance fair at all times by aiming to provide one coin of their cryptocurrency to every individual on the planet, and also enabling one person one vote through an individual’s Proof of Personhood ID.
With many such issues, it’s difficult to start a company with a product as a DAO from the start. That’s why many companies start to be more centralized and eventually become a DAO over time.
Attempts to solve problems
Just like every other aspect of the world of crypto, DAOs come with their fair share of drawbacks. There are a set of efforts in place that attempt to resolve these issues, such as:
- Better tooling: DAOs are entities designed to democratize and streamline financial systems through decentralized protocols and voting. DAO tools improve DAOs and help them better achieve their goals. Better tooling will ensure each DAO is closer to its specific purpose.
- Delegation: Delegating allows users to pass their voting rights on to other organization members who don't wish to vote. This can occur when a member is unavailable or undecided. As a result, they won't be forced to vote and can pass it on to an active member of the DAO.
- Learning the structure and best practices over time: DAOs, blockchains, and crypto ecosystems are relatively new concepts that most people are still discovering and familiarizing themselves with. Figuring out the best practices for different systems and implementing changes to improve them take time and patience.
If you’re interested in learning more about DAOs, you can check out some of them for yourself. Here are some of the most popular DAOs:
- MakerDAO: MakerDAO is the entity behind the world's first stablecoin, DAI. You can participate in MakerDAO's collective by voting on improvements to their protocol.
- DAOhaus: DAOhaus is a "no-code" organization that users can leverage to create and run new DAOs. DAOhaus' community owns and runs the platform. It’s a great foundation if you wish to launch your own DAO.
- MolochDAO: MolochDAO is an open-source DAO that offers grants to fund projects and initiatives that enhance the Ethereum network.
- RaidGuild: RaidGuild is a developer community with a strong presence in the Web3 community. It’s an excellent place for those looking to develop and write code for DAOs, dApps, DeFi, and more.
Keeping governance fair
DAOs offer plenty of opportunities to developers and group members alike. However, they come with governance issues that could lead to disputes with no resolution. Enter Worldcoin, which is a new-age crypto company that intends to put a free share of its coin in the hands of every human.
At Worldcoin, we pride ourselves on our ability to keep governance fair while ensuring our users maintain complete privacy and anonymity. To know more, visit our website and subscribe to our blog.