Making Sense of DAOism
A group of people came together over the internet, raised USD 47 M, and decided to bid for a copy of the US Constitution at Sotheby’s auction. There was no company, no hierarchy involved.
So, how did they do it?
There was a discord channel and a DAO! This begs the question — What is a DAO?
DAO stands for Decentralised Autonomous Organization. DAO is a way through which people spread across the world can come together for certain shared ideas, coordinate and work towards achieving those ideas.
DAOs are internet communities with a shared cap table and bank account. — Cooper Turley
Let us try to understand what each word in the name — ‘DAO’ really means.
Decentralized — Decentralized means without a central authority. DAOs run over the blockchain. Blockchain is a decentralized, distributed, immutable database. Hence, DAOs function on a decentralized architecture.
Also, DAOs do not have a central hierarchy like a traditional organization has — CxOs, Middle-Level Leadership, Entry-Level Workers, etc. DAOs issue tokens. People who hold the tokens get the right to vote on proposals and make decisions. They become members of that DAO.
Autonomous — Autonomous means something which is self-governing. DAO governs itself with the help of Smart Contracts.
Smart Contract is a contract over the blockchain which has all the rules coded. Hence, when applicable conditions are met, smart contact will initiate the necessary action (ie, transferring funds). Smart contracts interact with digital assets (shared wallet in case of DAO) and the parties involved. Smart Contracts execute the rules related to governance like resource allocation, voting, etc.
& Organization means people coming together to achieve certain goals or ideas.
This is what gives birth to a DAO!
But, why do we need DAO? Why can’t we use the traditional ways of coordination like a Company?
One big advantage DAOs have over a Corporation is that DAOs allow for coordination at a global scale.
Let’s say you want to work on a collective project with your friends who are located in Singapore, Dubai, Malta, and London; you being in India. You can communicate over the internet with each other, but can you really coordinate?
Real coordination will require the pooling of resources and taking decisions on how to effectively use those resources. You can not pull off a global entity with members spread across the world with cross-border pooling of resources from your bedroom.
The success of the human species is due to our ability to coordinate. For that, we created shared ideals, myths, and stories. Over the years, ways of coordination have kept evolving, it became more formal and robust with the help of shared legal ideals. Yet, we can not coordinate effectively with the current set of legal ideals across the world.
Hence, the DAOs!
The use cases for DAOs are increasing day by day. DAOs are used to collectively buy Art, invest in Crypto Projects, governance for DeFi projects, etc.
One view is that Bitcoin Protocol is also a DAO. There are set rules based on which mining will happen and miners are rewarded. Users interact with the protocol to buy and sell BTC. The parties which interact with Bitcoin get BTC as a reward for the value they provide. There is no firm involved in the governance of Bitcoin. This makes Bitcoin Protocol a very likely candidate for being the first DAO.
DAOs have advantages but a certain level of centralization also has its value, especially during the early stages of a project.
At the start of a project, it requires a lot of iteration and quick decision-making. With DAO this can be challenging, also due to the fact that we are not very used to governance in a decentralized way, it is still at a very nascent stage.
Another challenge is from the regulatory standpoint. Today, DAOs are not regulated, they do not have legal status in most jurisdictions. But, good thing is that, there are developments in positive directions. Recently, the state of Wyoming passed a bill to recognize DAOs as Limited Liability Corporations.
The ConstitutionDAO that we talked about at the beginning of this article lost the bid. Ikr, how legendary it would have been, had they were able to buy the copy of US Constitution. But, I would say, they achieved one really great thing — they made DAOs mainstream! This will help in taking the conversation forward.
DAOism — FTW!
(Ps. the wagbtc stands for ‘we’re all gonna buy the Constitution!’)