What are DAOs?
Decentralized Autonomous Organizations (DAOs) give online groups with common goals the means to pursue those goals from a flat hierarchy. Here’s how DAOs are making waves in NFT and Crypto Communities, and how you can create your own.
Blockchain technology seeps further into public discourse year after year, and what once were niche terms like cryptocurrency and NFTs are now common knowledge among people not known for keeping up with modern financial technology. With the blockchain has come a slew of new terms. These include DAO, also known as decentralized autonomous organizations. The name brings to mind hackers, but specific goals don’t define groups as DAOs—the nature of their organization does.
A DAO is a group of individuals who enter into a contract with each other to reach an agreed-upon goal. These goals can be related to cryptocurrency or not, but their decentralized nature makes them privy to the crypto space. For many people, DAOs first became visible when one called ConstitutionDAO organized more than 17,000 people and raised over $40 million to purchase a copy of the United States Constitution. Unfortunately, they were outbid by hedge fund billionaire Ken Griffin, but the event proved that DAOs could be powerful market forces.
What is the purpose of a DAO?
As suggested by the name, ConstitutionDAO existed solely for the purpose of raising funds for a specific auction, but a DAO can exist for any reason. What makes them unique is that unlike the vast majority of financial institutions, they have no leader. All members of a given DAO sit in the same tier of a hierarchy, though you could make the argument that those contributing larger funds are more important. However, decisions are made collectively as a result of group discussion. Though they rarely ever meet in real life, they use smart contracts to solidify decisions and establish rules. Those with stakes in a DAO have discussions and submit proposals, and these contracts are created in the event of majority approval.
In many ways, smart contracts are what make DAOs possible. Because they exist as pieces of code on the blockchain, they can be arranged to be completely transparent and not rely on human input. In theory, smart contracts guarantee integrity among a large group of strangers.
The appeal of a DAO for most people is that they can contribute to a cause they care about regardless of their wealth status, though in most cases, some wealth is required to join in. Users can purchase a DAO specific cryptocurrency or NFT to become a stakeholder.
While ConstitutionDAO had a very specific purpose, others are more general. Some DAOs are groups of crypto investors who team up to purchase rare and expensive NFTs. Others finance projects specific to certain marginalized groups like women or members of the LGBT community. Some also act essentially as social clubs that share different kinds of media.
How can people start one?
If you’re interested in starting a DAO, there are a few things to consider before taking any further actions. These are all things your DAO will need, so plan ahead.
- A purpose – Without a defined purpose, you’ll struggle to get anyone interested in joining, and the DAO will lack a mission statement.
- A way to vote – Before forming smart contracts, your new community will need a way to pitch ideas to one another and vote between competing ideas. Tech savvy users can create their own, but third-party voting systems are also an option. Some popular choices include Aragon and Snapshot. Depending on what platform you use to deploy your DAO, a voting system might be built in.
- A token of membership – Much of the time, crypto coins act as membership tokens, but they aren’t the only option. You just need something that proves people are members and have stakes in its success. This way, members can be authorized to vote and discuss.
- A way to manage funding – Because DAOs are decentralized and feature flat hierarchies, it doesn’t make much sense to have a treasurer, but you’ll still need a treasury. Most DAOs use multi-signature wallets that all members sign off on.
Once you have a plan in place for these key components, you can create your DAO. If you are particularly tech savvy and have a deep knowledge of programming, you can do so entirely on your own, but there are also several solutions for people with no coding skills at all. Most people who create DAOs do so through a third-party service. Many of these exist, but here are some important aspects of a few popular ones to help you make a decision:
- Aragon – Aragon is the most popular DAO platform and is often the first choice for those looking to create a DAO. They’re best known for their groundbreaking permissioning and transaction systems, which allow an enormous range of modules to connect securely. The permissioning system is capable of allowing access only up to a specific block number or condition access as a response to an oracle, which allows for a great deal of security. Lots of other DAO projects have been built around a specific decision-making mechanism, but Aragon instead takes the route of developing a general backbone for creating new organizations. This makes it very easy to create DAOs, but it isn’t quite as hands-on post-creation as other platforms.
- DAOstack – As opposed to Aragon, DAOstacks’s stated highest value is in decentralized decision making. Therefore, they focus on solving the problems inherent to decision making in decentralized communities. The DAOstack team believes that these organizations are more resilient than centralized groups, but the pass/fail proposals commonly used are difficult to scale and keep organized. When groups get too big, it’s hard for voters to know where to devote their attention. Aragon doesn’t focus on solving this problem, but DAOstack does using a “holographic consensus” mechanism which approximates group decisions based on small numbers of participants. Some believe this is a far more efficient decision-making method than Aragon’s.
- Colony – Colony all but abandons the focus on decision making inherent to other platforms. Their motto is “permissionless by default,” by which they try to eliminate the need for voting in day-to-day operations. While this can create some disputes among users, in many cases it eases the burdens that slow these operations on other platforms. Users earn reputation that decays over time, and better reputations allow for faster funding of proposals. Many believe that it incorporates the efficiency of a top-down hierarchy while still keeping things flat overall.
- Moloch – Moloch’s goals are based around “minimum viable processes” which let users put shared resources toward their goal while minimizing threats of attack or abuse, be it technical or social. It does this by creating “rails” which guide users toward one collective decision at a time. Proposals work in sequence on a timer, expediting the voting process so thoroughly that abusers can’t derail the debates. Each decision is constrained too. Essentially, Moloch takes an extremely pragmatic approach that helps ensure things get done quickly and efficiently. Because things happen so quickly, users are also allowed to exit with their contributed resources if they are unhappy with how things are going. This also disincentives malicious behavior because of how much easier it is to abandon a project.
Ultimately, the best platform for your DAO is dependent on the needs and goals of your group. It’s best to discuss potential options with others interested in the same goals. Choosing the right platform can make or break a DAO.
How can DAOs be used in the NFT space?
As we’ve discussed, many DAOs have been created to crowdfund new NFT projects or purchase expensive NFTs. But that isn’t the only way they can be used in the NFT space. Instead of using crypto coins as membership tokens, NFTs can be used. This can have a few advantages. For one, if only one NFT is allowed per user, everyone is on equal footing, maintaining the flattest possible hierarchy. If multiple NFTs are allowed per user, it can create a simple way to see decision-making power. NFTs, especially visual NFTs, can also create a sense of camaraderie around the purpose or cause for that specific DAO.
DAOs also give a platform for NFT creators to come together. Already-famous NFT creators like famous musicians don’t need to organize to sell their NFTs, but that isn’t the case for up-and-coming creators that don’t already have an existing following. By creating a DAO around a shared goal of creating and promoting NFTs, the sum of the output and marketing for those projects can far exceed the parts. The NFTs themselves can act as membership tokens in this case, or they can act as rewards for members who choose to join. Terms are easy to delegate via smart contracts.
DAOs can also purchase an NFT by using its crowdfunded currency. That NFT can act as a backing collateral for tokens issued. Then the token of a DAO is tied to the value of that NFT. In case liquidity is needed, the DAO can sell that NFT to pay its shareholders. This system helps ensure the DAO’s tokens continue to keep their value over time.
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