What Is a DAO and How Does It Work?
A DAO, or decentralized autonomous organization, is an internet-native group whose rules are encoded in smart contracts and whose decisions are made by member votes, usually by token holders. DAOs manage treasuries and protocol decisions.
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A DAO, or decentralized autonomous organization, is an internet-native group whose rules are written into smart contracts and whose decisions are made by member votes. Membership and voting rights are usually represented by a governance token. DAOs are set up to manage a protocol’s treasury, fund developers through grants or pool money for a shared goal.
How does a DAO work?
A typical DAO decision follows a few steps. A member shares an idea on a forum, the community debates it, and a formal proposal is then put to a vote. If it meets the required quorum and majority, it passes.
How a decision gets carried out varies. In some DAOs, a smart contract executes it automatically after a waiting period, for instance by releasing a payment from the treasury. In others, a multisig wallet controlled by elected signers implements it. The second approach reintroduces trust in people between the vote and the action.
The DAO: the first major experiment
“The DAO” launched on Ethereum in 2016 as a community-run investment fund. It quickly raised a large amount of ETH, but in June 2016 an attacker exploited a reentrancy bug in its contract and moved a significant share of the funds into another contract.
The Ethereum community decided to reverse the theft with a hard fork. Users who rejected that decision kept the original chain running, and it lives on today as Ethereum Classic. The episode was an early lesson that governance by code is only as good as the code.
Types of DAOs, with examples
- Protocol DAOs: govern the parameters and treasuries of DeFi protocols such as Uniswap, Aave and MakerDAO (now Sky).
- Grant DAOs: fund projects and developers within an ecosystem.
- Investment and collector DAOs: pool members’ money toward a shared goal. ConstitutionDAO, formed in 2021 to buy a copy of the US Constitution at auction, raised a large sum in days but was outbid.
Most DAOs run on a combination of discussion forums, voting tools such as Snapshot and multisig wallets such as Safe.
How decentralized is a DAO really?
To find out, look at token distribution, the threshold for submitting proposals, voter turnout, who controls the treasury and who holds emergency pause powers. If most tokens sit in a handful of wallets, that small group effectively makes the decisions.
Legal status varies by country. The US state of Wyoming passed a law in 2021 allowing DAOs to register as limited liability companies. In many other places, a DAO’s legal nature is unclear, and members may not automatically be shielded from liability.
Frequently asked questions
How do you join a DAO? In most DAOs, holding the governance token gives you voting rights. Others restrict membership through applications, NFTs or community approval.
How is a DAO different from a company? In a company, the board and executives make decisions. In a DAO, rules are written in code and major decisions go to a member vote, although many DAOs still rely on a core team and traditional legal entities in practice.
Where is a DAO’s treasury held? Usually in multisig wallets or in addresses controlled by a governance contract. Balances and spending can be followed by anyone in a block explorer.