✋What is a "DAO", and How did a random group of people almost buy the U.S. Constitution?
TL/DR: A DAO is a decentralized group that shares a common goal
Estimated Reading Time: 2 minutes and 40 seconds
After an eventful week of major headlines such as…
$LUNA dropping from a record high of $120 in April to practically $0,
a16z releasing their first annual “State of Crypto Report”,
Or the number of subscribers for this amazing newsletter growing by over 500% in 4 weeks!
There is plenty to talk about. But, let’s block all noise and dive into DAOs…
What is a DAO?
A DAO, or "Decentralized Autonomous Organization," is a decentralized community-led entity.
A DAO is fully autonomous and transparent: smart contracts establish the ground rules, execute the agreed-upon decisions, proposals, voting, and even the code itself can be publicly audited at any time.
Explain Like I’m 5 Version: Rather than having one person call the shots, A DAO is a type of business structure that is managed completely by its members.
The members of a DAO typically share a common goal.
That goal can include running a business as a group, buying the constitution, or even hosting exclusive social events for DAO-only members.
The possibilities are endless.
What makes a DAO different than a traditional organization?
There is no hierarchy. Each member of the DAO has an equal say in the future direction of the organization.
While traditional organizations typically have a President or a CEO responsible for making critical decisions…A DAO has neither.
Instead, A DAOs rules and transactions are all recorded on the blockchain. No one is able to edit the rules of the DAO, and any changes must be voted upon by the group.
Members receive tokens that give them the ability to vote on how they believe the DAO should operate.
What are some current examples of DAOs?
ConstitutionDAO was a project that crowdfunded $47 million dollars in $ETH in order to buy a rare, first-edition copy of the U.S. Constitution at a Sotheby's auction.
Since Sotheby’s did not allow DAOs to bid directly, ConstitutionDAO partnered with a crypto exchange to convert their crypto into dollars. They also were able to partner with a non-profit that made bids on their behalf.
Although they ultimately failed, the fact they were able to come together as a group and raise millions of dollars is quite impressive.
A few other examples include:
PleasrDAO: Which invests in rare NFTs
Seed Club: Helps build communities in Web 3
Uniswap: Largest DAO, and is a decentralized exchange where users can trade cryptocurrency.
What are some other real-world use cases for DAOs?
Charities and Non-profits can become DAOs. All members will be able to vote on how they would like their money and time to be allocated.
No need for crowdfunding platforms. People looking to fundraise for a company can simply start a DAO that will allow their users to also own a piece of the company.
A business can be run as a DAO. Members can vote on the strategy of the business.
What are some problems that could occur within a DAO?
Since there is not a single leader within a DAO, there is a lot of room for error. Some major cons include:
Security: Although DAOs are protected by the blockchain, an error while coding can lead to catastrophic hacks like the one in 2016
The concentration of tokens: Since users vote with their tokens, a small group of users could theoretically acquire a majority stake of the tokens
Lack of critical thinking: Since DAOs are mostly automated and need majority approval for changes, they may not be able to control extreme situations that occur in a timely manner
We are still so early…
I want to mention it is still extremely early for Web 3.
Currently, there are as many Web 3 users (10-50 Million), as there were internet users in 1995.
Based on this data, we are so early that Jeff Bezos would still be running Amazon from his garage, and the Google of Web 3 has yet to be invented.