---
authors:
- Usmaan
- Aya.elfadil
contributors:
- Usmaan
- Aya.elfadil
date: 2022-10-26 12:00:00+00:00
summary: A blockchain-based system that allows people to coordinate and self-govern
  themselves through a set of self-executing rules deployed on a public blockchain,
  and whose governance is decentralized, that is, independent of central control.
tags:
- blockchain
- decentralized organization
- autonomous corporation
title: Decentralized autonomous organization
---

## Definition

**Decentralized autonomous organization** (DAO) also known as
**decentralized autonomous corporation** (DAC) is a blockchain-based
system that allows people to coordinate and self-govern themselves
through a set of self-executing rules deployed on a public blockchain,
and whose governance is decentralized, that is, independent of central
control. The precise legal status of this type of business organization
is unclear. It functioned as a venture capital fund, utilizing
open-source software and lacking a conventional management structure or
board of directors. To be completely decentralized, the DAO was
unaffiliated with any nation-state, despite utilizing the Ethereum
network.

## Characteristics

1.  The absence of a single, overarching authority - a government or
    central bank, for example.
2.  The DAO can independently execute operations without human
    intervention.
3.  The DAO, like any other organization, is governed by its own set of
    rules.

- DAOs are initially considered decentralized due to their server-less
  decentralized infrastructure (a public blockchain). Second, as a
  result of their reliance on decentralized governance mechanisms, the
  decision-making process is contingent on the consensus of its members.
  This procedure typically involves voting in which DAO members can take
  part. Such decisions may concern, for instance, the allocation of DAO
  resources (e.g., funding projects or paying members), but they may
  also concern modifications to the DAO code. In other words, a DAO may
  be updated to operate differently, with a new set of encoding rules,
  with the consent of its members. This may be necessary to fix a bug in
  the code, but also allows it to adapt to the needs and desires of the
  community.
- DAOs are regarded as autonomous because, unless their code states
  otherwise, they are independent of their creators. Their operations
  are governed by the rules embedded in their code, as well as the
  (human) governance of their members. In addition, because they are
  deployed on a public blockchain, they are censorship-resistant, as
  there is no central authority that can shut down the DAO and its
  service. Thus, DAOs will continue to operate as long as there are
  members willing to execute their code, e.g., providing services,
  buying/selling resources, and hiring individuals.
- DAOs are organizations in the sense that they negotiate the
  interactions of a group of people, usually an open community of people
  who join as members. Members of some DAOs are token holders of a
  specific token that allows DAO participation, similar to corporation
  shares.

## DAOs Functioning

DAOs mainly function in three steps:

1.  **Setting the rules:** The first step of creating a DAO is to
    establish and define the rules that will govern the entire
    ecosystem. These rules are written in and stored in a smart contract
    that is open, transparent, and immutable.
2.  **Funding:** While decentralization is crucial to the success of
    DAOs. Throughout the funding phase, it will be able to distribute
    its tokens as widely as possible. Moreover, when acquiring these
    tokens, users are granted a variety of rights and privileges within
    the environment, one of these privileges is the right to vote on
    specific issues.
3.  **Autonomy:** After deployment, the DAO attains complete autonomy,
    i.e., independence from external control. Everyone who possesses the
    native tokens of the DAO has a stake in the network. Consequently,
    their voting power in the ecosystem is proportional to their stake.
    The required majority approval percentage can vary from proposal to
    proposal.

## Voting System

DAOs' most important characteristic is that they enable new models of
governance. Typically, internal processes and especially decision-making
processes rely on novel instruments such as tokens. The different
decision-making methods, such as holographic consensus, conviction
voting, and dandelion voting, represent a burgeoning diversity of
options that are being both theorized and tested in this field.
Therefore, it is essential to examine DAO voting systems in order to
comprehend the differences in DAO usage across platforms. Each platform
has its own voting system. There are four metrics used to compare these
decision-making systems:

- The percentage of users who cast a vote, which provides insight into
  the engagement of the community.
- The number of cast votes per voter, which shows how active voters are
  in terms of participation.
- The percentage of proposals that are accepted, which can indicate how
  the voting system may affect the outcome.
- The percentage of positive votes among those cast.

## Examples of DAOs

1.  [Dash](https://en.wikipedia.org/wiki/Dash_(cryptocurrency)) (2015)
2.  [The DAO](https://en.wikipedia.org/wiki/The_DAO_(organization))
    (2016)
3.  [Steem](https://en.wikipedia.org/wiki/Steem) (2016)
4.  [Augur](https://en.wikipedia.org/wiki/Augur_(software)) (2018)
5.  [Uniswap](https://en.wikipedia.org/wiki/Uniswap) (2018)
6.  [ConstitutionDAO](https://en.wikipedia.org/wiki/ConstitutionDAO)
    (2021)
7.  [AssangeDAO](https://en.wikipedia.org/wiki/AssangeDAO) (2021)
8.  [FreeRossDAO](https://www.freerossdao.org/) (2021)

## Issues on the DAO

Although the DAO held a massive proportion of all issued ether tokens in
2016, it has faced some issues and criticisms:

### Legal Status Issues

The legal status is ambiguous and may vary from one jurisdiction to
another. The U.S. Securities and Exchange Commission has viewed certain
prior approaches to blockchain-based companies as illegal offerings of
unregistered securities. A DAO may be functionally equivalent to a
corporation without legal status as a corporation: a general
partnership, despite its frequently ambiguous legal standing. If known
participants or those at the interface between a DAO and regulated
financial systems are not in compliance with the law, they may be
subject to regulatory enforcement or civil actions.

### Security Issues

There are several potential security flaws. For example, once the system
is up and running, A DAO's code is difficult to change, including bug
fixes that would otherwise be trivial in centralized code. Corrections
to a DAO necessitate the creation of new code and the agreement to
migrate all funds. Although the code is visible to all, it is difficult
to repair, leaving known security holes open to exploitation unless a
moratorium is declared to allow bug fixing.

Researchers discovered several flaws in The DAO's code. Based on these
security flaws, hackers attacked the DAO in June 2016. The hackers
gained access to 3.6 million ETH, which was valued at around \$50
million at the time. This sparked a massive and contentious debate among
DAO investors, with some suggesting various solutions to the hack and
others calling for the DAO to be permanently disbanded. The DAO's
operating procedure allowed investors to withdraw money that had not yet
been committed to a project at any time; the funds could thus quickly
deplete. Despite safeguards aimed at preventing shareholders' votes from
being used to win investments, there were a "number of security
vulnerabilities." This allowed a large withdrawal of funds from *The
DAO* to be attempted in mid-June 2016. The Ethereum blockchain was
forked on July 20, 2016, to save the original contract. This incident
also played a significant role in the subsequent hard forking of
Ethereum.

## Characteristics of a successful DAO

A successful DAO must have at least five of the following
characteristics:

1.  A purpose.
2.  A voting mechanism.
3.  A governance token or share system.
4.  A community.
5.  A good funding management.

## Creating a DAO

A DAO is created in three steps:

1.  A coded governance system should be used to update the rules of the
    smart contract once it is launched.
2.  Sources of funding and governance must be defined; normally,
    governance is funded through the sale of tokens with voting rights.
3.  Deploy smart contract on the blockchain, from that point on,
    stallholders will determine the future organization of the market.
    The developer(s) have the same level of influence as any other
    stakeholder.

A platform is required for the creation of a DAO. The platforms that
provide DAO deployment as a service allow users to create their own DAO
using a customizable template. *Aragon*, *DAOstack*, *DAOhaus*, and
*Snapshot* are the most important platforms. All are free/open-source
projects in various stages of development and maturation. All platforms
will offer roughly the same structure, but their implementations may
vary. Some DAO systems utilize on-chain polling while others utilize
off-chain polling. Which option you choose depends on what your DAO
deems essential. In addition, when deploying your DAO to a blockchain,
you must have sufficient crypto to cover transaction fees.

### Aragon

Aragon is possibly the largest DAO platform, with 1700 DAOs managing a
total of \$900M. Aragon intends to expand the use of DAOs as a free and
open-source technology to enable the creation and management of various
types of decentralized organizations, including corporations,
cooperatives, nonprofits, and open-source projects. Aragon allows DAOs
to be created on Ethereum, Polygon, Andromeda, and Harmony. Through its
Aragon client, the project offers open-source software for the creation
of customized DAOs. Apps (sets of smart contracts) that can be voted on
to be installed or removed from DAOs enable customization. A Finance
application is used to allocate the DAO's funds; an Agent application is
used to interact with other Ethereum smart contracts; a Token
application is used to manage membership, and a Vote application is used
as a decision-making system. In addition to being administered by a DAO,
the project's funds are managed by its own non-profit organization.

You must first have an *Ethereum Name Service* domain in order to
generate an Aragon. Second, make sure you have enough cryptocurrency to
pay the DAO creation fee (0.2 ETH plus gas fees). Third, use the Aragon
DApp to create an organization that is linked to the ENS domain; there
are several predefined organizational structures available. Finally,
configure your settings, including the length of the vote and the
required percentage of support, before launching the DAO.

### DAOstack

DAOstack is a platform designed to address the governance scalability
issue. Matan Field, the co-founder of DAOstack, asserts that the larger
a DAO is, the more difficult it is to manage it, which parallels the
traditional challenges of group governance. In essence, we can define
DAOs in which all decisions are made by vote and a majority of 51
percent is required to pass. This model suits small DAO communities
where the number of proposals is limited by the number of members.
However, the more members there are and thus the more proposals each
member must review in order to participate. Simple solutions, such as
lowering requirements (i.e. voting by a relative majority), introduce
new flaws.

DAOstack proposes the Holographic Consensus (HC) decision-making system
to address this issue. Members of the DAO in HC submit and vote on
proposals, which are approved by an absolute majority (51 percent ).
Nonetheless, there is another method for passing proposals. As a
proposed middle layer, a prediction market would allow community members
to "bet" on whether a certain proposal will pass or fail by staking a
certain amount of their tokens (cryptocurrencies). If a proposal
receives a sufficient number of votes, reaching a predetermined
threshold, it may bypass the requirement for an absolute majority vote
and be approved with a simple majority. Depending on whether they
guessed correctly (earning tokens) or not, players may then settle their
wagers (losing tokens). If HC functions properly, it will serve as a
filter for the community, which may prioritize proposals that garner
interest from stakeholders. Thus, takers eliminate bad proposals,
enhancing the scalability of large DAO communities. And the DAO may rely
on stakeholders, as they are incentivized to align with the DAO's
overall opinions, as they must predict whether the voted proposals will
ultimately pass or fail. Initial studies indicate that HC operates as
intended.

### DAOhaus

DAOhaus is a platform that enables the creation of DAOs that mimic the
Moloch DAO's behavior. Moloch DAO was a decentralized solution to
funding Ethereum 2 and other community grant coordination issues.
DAOhaus DAOs implement a simple voting system, which is essentially a
non-quorum system in which a simple majority is always sufficient to
approve a proposal. This course of action simplifies the development and
testing of their voting system. A key feature of these DAOs is the "rage
quit" mechanism, which allows you to withdraw your portion of the DAO's
resources if you disagree with the outcome of a vote. After the voting
results have been determined, there is a "grace" period during which DAO
members may resign if they disagree with the outcome. Additionally, if
there are more than 30% of rage quits, the vote will be rejected
automatically.

This voting system has two important characteristics: shares and
tributes. Shares refer to the number of resources that each DAO member
possesses, regardless of the number of cryptocurrencies held by the DAO.
And tributes refer to the number of shares that the applicant for a
proposal pays to the DAO.

### Snapshot

Snapshot is an off-chain voting mechanism that can be customized. Votes
are cast using digital signatures via wallets based on a snapshot of
token owners. A specific block is selected, and the holdings of all
token holders and/or speculators are recorded. This prevents users from
purchasing additional tokens to sway an open vote. Keeping votes
off-chain is advantageous for multi-chain projects in which users
possess governance tokens on multiple blockchains.

You must first own an ENS domain in order to create your voting system
on Snapshot. Regardless of which blockchain your project operates on,
this must be on the Ethereum mainnet. Second, associate Snapshot with
your ENS domain. Third, personalize your space's settings, such as
administrators, voting power strategies, terms, and so on. Finally,
double-check your space. This will require at least 1,000 members as
well as proof of ownership of the related project.

For more information:

- [How to Build a
  DAO](https://www.youtube.com/watch?v=DFpEWATDego&ab_channel=SarahAmann)
- [How to Create a DAO in 10
  Minutes](https://moralis.io/how-to-create-a-dao-in-10-minutes/)

## Future of the DOA

Despite the fact that DAOs have the ability to change the industry and
be a disruptive force in corporate structuring as a whole, they confront
security and legality concerns. As is common knowledge, the SEC asserts
that some blockchain-based enterprises may have conducted illegal,
unregistered securities offerings. New investors also lack knowledge of
cryptocurrencies, not to mention the technical proficiency required to
comprehend the computational structure and consensus mechanisms within
the smart contract in order to feel comfortable investing in it. Wyoming
is the first state to recognize DAOs as legal entities. DeepDAO
estimates that there are around 181 DAOs, with a total of \$13.4 billion
as assets under management (AUM).

## Videos

- [Stanford BioE 60: Beyond Bitcoin - Decentralized Autonomous
  Organizations (DAOs)](https://www.youtube.com/watch?v=SYPzqRaN4zA) (44
  minutes)

## Sources:

- <https://www.reddit.com/r/CryptoCurrency/comments/ragxwq/i_spent_5_hours_researching_what_a_dao_is_so_you/>
- <https://en.wikipedia.org/wiki/Decentralized_autonomous_organization>
- <https://www.investopedia.com/tech/what-dao>
- <https://jisajournal.springeropen.com/articles/10.1186/s13174-021-00139-6>
- <https://academy.moralis.io/blog/decentralized-autonomous-organizations-what-is-a-dao>
- <https://moralis.io/how-to-build-a-decentralized-autonomous-organization-dao>
- <https://academy.binance.com/en/articles/how-to-create-a-dao>


## See also

- [Cooperative](cooperative.md)
- [Liquid Democracy](liquid-democracy.md)
- [Economic Democracy](economic-democracy.md)
- [Prediction Markets](prediction-markets.md)
- [Issue-Based Direct Democracy](issue-based-direct-democracy.md)
