Anyone who has spent time in the Web3 world has seen the acronym “DAO” thrown around, but plenty of people might not know much about this term or why it is an important innovation of blockchain technology. Many are already familiar with cryptocurrency and non-fungible tokens (NFTs) to some degree, and while both are important they are just a small component of what makes blockchain so awesome. One of the more amazing innovations made possible by blockchain is the “Decentralized Autonomous Organization“, or “DAO“.
In May 2016, long before the concept of Metaverse and Web 3.0 (or Web3) existed, Ethereum wasn’t even one-year-old yet and people were excitedly exploring the applications of blockchain programs. Then, a new project entered the scene called “The DAO“. The idea was straightforward: people would pool their ETH (Ethereum’s cryptocurrency) into a smart contract, and then collectively vote on where that ETH would be sent. The DAO was used as a decentralized venture capital firm, and was the most popular project of its time. Six weeks later a vulnerability in the program’s code allowed a clever user to siphon most of the ETH locked inside it, collapsing the project. While The DAO itself died that day, the idea of a DAO as a decentralized governing body survived, and has since thrived.
The Ethereum Foundation defines Decentralized Autonomous Organizations as, “Member-owned communities without centralized leadership.” In 2022, DAOs are everywhere. They have become a critical piece of infrastructure within most blockchain-based projects, and are the core governance structure of Web3. The oldest DAOs are comprised of token holders who are granted voting power based on the number of “governance tokens” they hold. However, newer DAOs are using NFTs instead of governance tokens to reduce the influence of wealthy members. DAOs could one day form the backbone of government blockchain voting systems, decentralized corporations, social communities, and collective bargaining entities.
For the past six years, the greatest struggle DAOs have faced has been the first word in the acronym: Decentralization. Decentralization is essential for the internet’s future, and DAOs can become the cornerstone of that future if their centralization issues can be resolved. According to a blog post published by blockchain analytics firm Chainalysis, in token-based DAOs around 1% of DAO members hold 90% of the token supply, and thus control the most voting power. Theoretically, if this 1% were to coordinate together then they could outvote and outmaneuver the 99%. The ability for whales to ram through a governance proposal just for holding the most tokens is the opposite of decentralization, and because of that, most new DAOs are opting for NFT-based voting systems, where each user can only own one NFT, and thus only one vote.
Another problem faced by DAOs is deciding who gets to make proposals. If everyone is allowed, then it results in proposal spam and reduced quality of each proposal, but if only a few are allowed then it results in centralized control over the governance process. Token-based DAOs often require a minimum amount of tokens in order to create a proposal, which is cost-prohibitive for most users but not for whales. Another issue with DAO governance has to do with blockchain transparency. As all on-chain votes are visible to everyone else, some members might cast an insincere vote out of fear of reprisal from other DAO members. In general, privacy is still a safety issue for Web3, which leads many DAOs to use “off-chain” voting systems instead.
DAOs have become a vital component of blockchain over the past six years. From the creation and destruction of The DAO in 2016 to the hundreds of DAOs in operation today, the idea of a decentralized governing body of community members built on blockchain is core to the ethos of the coming Web3 era of the internet. While they are still evolving and have plenty of issues, it is inevitable that many organizations will use DAO membership and voting for governance decisions, and DAO-owned businesses are already emerging, though not yet legally recognized.