Last year, ConstitutionDAO, made up of 17,000 people, put together more than $40 million to bid on an early copy of the U.S. Constitution. They were outbid by hedge fund billionaire Ken Griffin; however, the move showed the strength of what a DAO could do.
What is a DAO?
A DAO, or Decentralized Autonomous Organization, is a community-led entity with no central authority. It is fully autonomous and transparent: smart contracts lay the foundational rules, execute the agreed-upon decisions, and at any point, proposals, voting, and even the very code itself can be publicly audited.
A DAO is governed entirely by its individual members who collectively make critical decisions about the future of the project, such as technical upgrades and treasury allocations. It is a group of people who have entered a contract with one another to reach a coordinated goal, which can be anything from collecting rare NFTs to predicting stock market moves.
A DAO distinguishes itself from traditional business arrangements in two major ways. First, DAOs are exclusively online, with members rarely if ever interacting with one another in real life. They may not know each other, and each individual can remain strictly anonymous. The only thing revealed to other members is the wallet address (like an account number) but no other information on the identity of the individual is exposed.
In this regard, you can think about a DAO as a “faceless” governance mechanism. This feature is quite critical if one wishes to create a “true” unbiased, diversified community, allowing for every member to freely and un-biasedly express themselves and have equal rights.
Second, they operate with rules and targets informed by blockchain technology, a permanent and immutable record of digital information that is not run or managed by any central authority, and acts as a ledger of digital transactions online.
Members of a DAO have a shared mission but do not have a leader who directs the group. Instead, decisions are made collectively, informed by the community rather than a single figurehead, governed by the rules coded into the smart contract, which applies to all members, providing them all with the same rights and obligations in the community.
Community members create proposals about the future operations of the protocol and then come together to vote on each proposal. Proposals that achieve some predefined levels of consensus are then accepted and enforced by the rules instantiated within the smart contract.
One of the major qualities of this framework is the alignment of incentives. That is, it is in the individual’s best interest to be forthright in their voting and only to approve proposals that serve the best interest of the protocol itself. It is a collaborative endeavor, where each individual member of the DAO oversees the protocol at some level.
A healthy, robust protocol will garner more usage, and in turn, increase the value of the tokens of which each DAO member is in possession of. As the protocol succeeds, so do the token holders.
How Are DAOs Being Used Today?
DAOs have been used for many purposes such as investments, charities, fundraising, borrowing, or buying NFTs, all without intermediaries. For example, a DAO can accept donations from anyone around the world and the members can decide how to spend donations.
Imagine being a co-owner of an artist’s song by just using cryptocurrency on an internet-based organization. This actually happened: In May 2021, Jenny DAO acquired its first NFT, an original song by Steve Aoki and 3LAU.
This particular DAO is a metaverse organization that provides fractional ownership of NFTs. Its members will be able to oversee the purchase of the NFTs and uses Unicly protocol’s smart contracts, which controls the vault where these NFTs will be stored.
Bear in mind that a DAO is a governance mechanism, so in the case of Jenny DAO, where each member has fractional ownership of an NFT, the DAO only facilitates the governance of the NFT. Basically, this means that members will vote utilizing smart contracts, on issues such as how to secure the NFT or make a decision on if and when to sell the NFT and for what amount.
The DAO, however, does not distribute any dividend or shared revenues or gains. If the terms of the DAO allow for revenue or profit distribution, then such a DAO may fall under securities laws, and may no longer act as a mere governance mechanism.
Many DAOs exists to raise money for a specific purpose, such as in the case of ConstitutionDAO and allow for shared ownership. If you decide to engage in such a DAO, diligently inspect its terms and make sure it only applies to the governance of the purpose but does not include any profit sharing. If a DAO includes any profit or revenue sharing, then it violates securities laws.
Examples of DAOs
Oplis: This member-owned digital employment cooperative offers benefits and shared services for the independent worker. If you’re passionate about the future of work and want to have a say in what that looks like you can join this DAO.
BanklessDao: Interested in spreading the Web3 word and educating the masses through content? This media-centric DAO might be of interest to you.
MolochDAO: This OG DAO awards grants to advance the Ethereum ecosystem. If you would like to become a governing member and contribute to this group, you can fill an application on its website.
Raid Guild: This service-based DAO stemmed from a MetaCartel network and is deeply entrenched in the Web3 world. If you are looking to offer up your developer, marketing, or design skills to the guild, they are looking for quality talent to help with their product development.
DAOs envision a collective organization owned and managed by its members, with all of them having equal voice. Many analysts and industry insiders affirm that this type of organization is coming to prominence, even potentially replacing some traditional companies, especially when bias and diversity issues are of special interests.
Businesses and brands need to stay abreast of current trends that could impact how they engage with consumers and how consumers interact with them. While DAOs are not ubiquitous yet, they could represent a major innovation in the way people can collaborate collectively towards a single goal.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Merav Ozair, PhD
Dr. Merav Ozair is a global leading expert on Web3 technologies, with a background of a data scientist and a quant strategist. She has in-depth knowledge and experience in global financial markets and their market microstructure.
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