DAOs are collectively-owned, blockchain-governed organizations.
In 2021, a few internet strangers started a Twitter group chat and conspired to do something wild: buy the United States Constitution. It started as a joke when someone noticed one of 13 surviving copies of the historic document was going up for auction at Sotheby’s auction house for an estimated price tag of $15 million. The group pooled together funding, started a group chat, and announced the project on Twitter. In less than seven days, ConstitutionDAO raised over $48 million in cryptocurrency, one of the largest crowdfunds in history. To create a movement seemingly overnight, they started a DAO, or a Decentralized Autonomous Organization. Anyone who contributed to the project received tokens that would allow them to vote on the fate of the document. It seems appropriate that a founding document of democracy should be stewarded collectively by the people, and a DAO was the perfect solution.
It was the first time in history the auctioneers at old-fashioned Sotheby’s shouted out prices denominated in the Ethereum cryptocurrency, the more programmable Bitcoin competitor that the DAO used to raise its funding. But there was a looming problem. Bidders usually conceal the maximum price they are willing to pay to avoid being outbid, but in a DAO, all funds are transparently recorded on a blockchain. This was one reason that, despite the momentum, ConstitutionDAO was outbid by billionaire crypto-skeptic Citadel CEO Ken Griffin. The symbolic defeat was not the end but a new beginning for DAOs, as ConstitutionDAO raised more money than any Kickstarter campaign in history and ignited an overnight movement, inspiring a new generation of DAOs.
What is a DAO?
A DAO is a collectively-owned, blockchain-governed organization working towards a shared mission. Most DAOs pool funds in a shared treasury where members vote on how they’re used.
In a traditional company, investors and founders own the vast majority of shares. In a DAO, members act as peers - contributing capital, proposing and working on projects, and making decisions as a group. Top-down management is replaced by blockchain based rules, encoded in smart contracts, for example, funding a project if a vote passes. This enables DAOs to raise money for causes without pressure from investors in pursuit of returns, freeing them to run experiments, think on a longer timescale, or focus on public goods and charity.
Some DAOs, like ConstitutionDAO, are financial flash mobs - organizing in mere hours around a cause or mission. Others like Krause Hause, which aspires to buy a basketball team or VectorDAO, which gives artists equity in projects they work on, pursue ongoing, long-term projects without a definite end.
Why Are DAOs Important?
DAOs are allowing people with similar interests across countries who have never met in real life to trust each other, work together, and coordinate in a fairer way than ever before. They allow us to work with like-minded strangers on the internet because decisions are made via democratic proposals, transparently verifiable and automatically executed on a blockchain. Before DAOs, it was necessary to trust a high-integrity CEO and team since in most organizations, a CEO has unlimited power to distribute a budget and hire or fire. Dictatorship is effective, but high variance. As Vitalik Buterin, the founder of Etheruem says, “Small things being centralized is great, extremely large things being centralized is terrifying.” Things like currencies, nations, and valuable infrastructure should be more decentralized, because the efficiency gains of centralization are not worth the destruction potential. DAOs change the frame from “won’t be evil” to “can’t be evil.” DAOs are also democratizing access to assets. In an era where tech platforms are consolidated and centralized and wealth-building assets like real estate feel inaccessible, DAOs offer a path for people to own a piece of something. Ownership is often one of the biggest wealth-building tools, whether it's owning real estate, fine art, startup equity, yet there is usually a high barrier to entry.
A DAO is “decentralized” because no one single person controls it. It is sovereign, built on cryptocurrency, theoretically outside any state’s jurisdiction depending on its philosophy on compliance and whether it needs to interact with the real-world. It is “autonomous” because it operates based on transparent rules written into code in smart contracts, making it harder for bad actors to tamper with the integrity of the system. One of the primary problems with co-ops, democracy, or other collective systems is relying on trusted administrators to make sure votes are counted fairly or resources are distributed according to plan. Blockchain helps us avoid an Animal Farm scenario since administrators cannot skim off the top.
When Should You Use a DAO?
DAOs thrive when it comes to owning things together, rallying people towards a cause, stewarding and safeguarding valuable internet infrastructure, and harnessing the collective intelligence of a community. One promising use case for DAOs is pooling money to buy things with a high barrier to entry like fine art, real estate, and digital collectibles like NFTs. Like Lilliputians coming together to combine their strength, DAOs allow everyday people to pool capital quickly and buy things previously only a wealthy person could afford and issue tokens that represent governance rights. Because participants feel a sense of ownership, DAOs often have flourishing communities of engaged, passionate contributors. Many organization builders choose DAOs specifically for the explicit purpose of creating a highly-engaged community. DAOs are starting movements, like UkraineDAO which raised over $8m for the Ukrainian defense effort, or ChoiceDAO which organizes community response and capital for reproductive access in response to the US Supreme Court decision that allows states to ban abortion.
DAOs are great for certain things, but not everything. When it comes to building new products, that’s often best left to a small, nimble team that is compensated for their risk with significant equity. Top-down management is highly efficient, especially if there’s a benevolent leader. Efficiency isn’t everything. Democracy isn’t the most efficient form of government, but it’s usually fairer than dictatorships, so we have collectively made the tradeoff to move a bit slower in exchange for a more robust, fairer system.
My hope is that these principles help you discover best practices for your DAO, apply DAO principles to your organization, and enjoy stories from the world of DAOs.