With the growing global interest in cryptocurrencies, NFTs, blockchain, decentralization and web3, it is common to come across terms that are confusing or difficult to understand. The same thing has happened to the vast majority of us; we find a topic that appeals to us, but when we enter related Twitter threads or Telegram channels we don't understand anything. Fortunately, there is a lot of information available on the web, and today we will try to shed light on something that is generating a lot of attention: Decentralized Autonomous Organizations, or DAO.
The concept behind DAOs has been around for quite some time, although it has gained special relevance in recent years. If we look for a “manual” definition, we could say that they are organizations that are governed by the code; they are based on what is known as smart contracts —intelligent contracts— and they are mostly executed on the Ethereum blockchain.
Living up to their name, DAOs (an acronym that comes from Decentralized Autonomous Organization) start from the idea of being organizations without a specific leading figure, such as the CEO in a conventional company. In addition, they are presented as transparent, open access, democratic, and without hierarchy.
As we mentioned before, the backbone of a DAO is the smart contract. This contract includes the rules that have been defined for its operation, and also works as a “safe box” for the group's finances. The absence of a centralized authority is based on the voting process carried out by its members; this means that no one can take the power to act on behalf of the DAO without the approval of others. And no one can change the smart contract when it is already active, since everything is publicly registered and verifiable in the blockchain.
Clearly, what I just mentioned is an oversimplified version of what a decentralized autonomous organization entails, but it does pave the way.
Photo by Shubham Dhage on Unsplash
The DAOs and governance tokens
As I told you in previous paragraphs, a key point of the DAO is that all the actions to be carried out are subject to a voting process . Governance tokens are commonly used for this, which are delivered to members through different channels. Some receive them as consideration for providing liquidity to a project —that is, injecting money or its equivalent in cryptocurrencies—; Others obtain them on decentralized exchange platforms, since there is no limitation to trade them. Thus, by having these tokens, users are enabled to vote.
Although the latter is the participation modality that is most commonly seen among DAOs, it is not the only one that exists. Other organizations use a system based on shares that cannot be purchased directly, but permission must be requested to join through a specific proposal.
One of the most successful and internationally recognized decentralized autonomous organizations is MakerDAO, which is in charge of developing Dai, a stable cryptocurrency or stablecoin. This body recently released a case that serves to perfectly exemplify how these entities based on smart contracts work.
What happened was that a person posted on the Maker forum that they had made a serious mistake in which they had “burned” 10M Dai — that's $10M. This meant that the cryptocurrencies had been sent to an address from which the user could not recover them by their own means; however, the technical means did exist so that the DAO itself could recover them and return them to their owner. But for this to happen it was necessary to have approval through the executive vote.
Therefore, after confirming that the Dai in question did indeed belong to the person reporting the “loss”, MakerDAO put the proposal to a vote. Thus, of some 85,000 holders of the $MKR token, more than 58,000 gave their yes to the recovery and return of the millionaire sum.
If you want to read the full story, you can do so in the following Twitter thread:
The DAO, the great fiasco that redefined the future of Ethereum
Technically, The DAO was not the first decentralized autonomous organization, but it did break out with a bang back in April 2016. It made headlines at the time because it was launched after a very successful crowdfunding campaign ( crowdfunding) with the sale of the $DAO token; to the point that 11.5 million ETH were raised, which at the time was equivalent to 150 million dollars, taking into account that Ethereum was worth around 13 dollars.
The DAO Logo However, shortly after its release it was discovered that there were multiple security issues in The DAO's code. And in June of the same year, before the vulnerabilities could be fixed, the organization was the victim of a hack through which the equivalent of 50 million dollars in Ethereum was drained from its “vault “.
The DAO case sparked a controversial discussion that had an unexpected outcome. Part of the developer community of the Ethereum network opted for a hard fork to “undo” the theft and recover the funds; that fork has given us what we know today as ETH, while the original blockchain version became Ethereum Classic (ETC).
But beyond having recovered the stolen funds, The DAO was already doomed to fail. In a matter of months, the main exchange platforms stopped operating with the DAO token and the organization was condemned to ostracism.
DAOs as a social phenomenon
Something that makes DAOs so fascinating is that you don't need a physical space to start them. A Discord server, a Telegram channel or a Twitter account can be the starting point for the creation of a new decentralized autonomous organization. This explains why we find more and more examples of organisms of this type that are born from a movement that lives fully on the digital plane, but with implications for real life.
Perhaps the most representative case of this is that of ConstitutionDAO. We are talking about a group of people who got together to buy the last original copy of the United States Constitution in private hands. The initiative experienced an unprecedented fury that captured the attention of the whole world; Thus, he managed to raise more than 48 million dollars in just a couple of days to participate in the auction of the historic document at Sotheby's.
And although the DAO did not achieve the objective of buying the Constitution —although for a brief moment it was believed that it did—, it became a perfect demonstration of the immediate impact that initiatives of this type can achieve, for better and for worse. It is that, in the first place, that of ConstitutionDAO was the largest crowdfunding case ever carried out that has been thought for the purchase of a physical object. But it also suffered the consequences of its meteoric rise, and was quickly plunged into chaos.
This is because this decentralized autonomous organization had no alternative plan. Its creators were confident that they would be able to buy the document without encountering major resistance, something far from what actually happened. And after the failed takeover attempt some controversial decisions were made , such as abandoning the $PEOPLE token to adopt a new one called $WTP (We the People). Thus, a strong discussion was sparked in the Discord of ConstitutionDAO, since the change was not put to a vote, but was decided by the group of people who started the project; something that clearly violated the principle of decentralization, the most important in the operation of a DAO.
And while the decision was reversed, the damage had already been done. The price of the original token suffered the consequences of the internal chaos in the organization, which also opened the door to speculators who began to buy it wildly hoping for a recovery. Meanwhile, many of those who opted to recover their contributions through refunds found that they could not do so because the price of gas (the fee paid for transactions on the Ethereum network) was higher than the amount initially donated.
Clearly, the ConstitutionDAO is a case that marks the positive and negative extremes that DAOs present today. And it also happens that the circumstances behind its conformation have been extraordinary, enhanced by doing it on the fly and without planning.
The great challenge is to understand the tools at your disposal
Photo by Christin Hume on Unsplash Although the formation of a DAO can arise from any idea embodied in a chat or social network that has enough followers, there are many other tools that must be taken into account. And we are talking about utilities that go beyond how the distribution of tokens or the voting system is managed.
To interact beyond life in virtuality, many decentralized autonomous organizations choose to adopt a “legal wrapper” . That can be a nonprofit organization, or even a limited liability company. This gives you rights and responsibilities to interact with other entities that do not act under the same format.
And there is also a lot of software that is becoming transcendental for the day-to-day of DAOs. If we think of economic obligations, for example, this type of organization must pay salaries and their corresponding taxes; and for this there are solutions such as Superfluid and Opolis, as the best known.
We might think that this is the “boring” part of decentralized autonomous organizations, but it is part of the package. So that the success of the DAO is not ephemeral, its members must understand that there is a long way to go that is as or more important than the immediate impact. That is why the cases of ConstitutionDAO and MakerDAO end up being so different from each other, despite having been powered by the same methodology.
Today decentralized autonomous organizations are all the rage in the crypto world, but their great challenge will also be to earn a place outside of it. That will mean continuing to challenge conventional hierarchical structures; and in turn show the common people how decentralization has come to change their lives for the better.
