DAOs or Decentralized Autonomous Organizations are a new form of organization that can potentially revolutionize the way institutions function. DAOs are built on blockchains and executed via smart contracts with pre-defined rules.
If you're starting in the space, read this article to learn the basics of DAOs.
What are DAOs?
Decentralized Autonomous Organizations are organizations built using blockchain technology. They typically work towards a common objective, like investing in a new venture, managing NFTs, buying art, or managing finances. DAO functions are distributed evenly amongst its members. Within each DAO, the tokens impart certain rights to their holders, such as voting rights to make crucial decisions.
Basic Structure of DAOs
Blockchain and smart contracts encoded on the blockchain are the building blocks of DAOs. Let's take a look at these first:
Blockchain: is the digital ledger used to record the basic structure of a DAO. These details are stored cryptographically, and all members can view the transactions. Besides, any edit requires the majority of the DAO participants to give consent through voting.
Smart contracts: this is a program or agreement cryptographically coded onto a blockchain. Its best feature is that it is self-executing. On meeting these pre-determined conditions, they automatically execute specific actions, removing the need for constant monitoring and making the activities more efficient.
How does a DAO work?
DAOs are decentralized and democratic in their functioning. Let's take a look at how its power distribution and decision-making work.
Membership and Voting power
DAOs give their members equal voting rights. To become a DAO member, you have to own its governance tokens. These are cryptocurrency tokens or native tokens related to each DAO.
In certain DAOs, you can get the tokens during the funding phases. Owning tokens means owning equity in the DAO. Besides, the holders can participate in the DAO's decision-making process.
Each DAO is unique. Some may not use native tokens but cryptocurrency tokens like Ether of the Ethereum blockchain.
Smart contracts require the creation and distribution of native tokens, which can be used for voting, governance or incentivizing certain activities on the DAO. Individuals or entities interested in participating in the DAO’s growth can purchase the DAO’s native token which are cryptocurrencies tied to certain projects. Token holders are given voting rights proportional to their holdings and are able to own equity in the DAO to help shape the DAO’s future.
For example, Aave is a decentralized finance lending platform that lets users borrow or lend cryptocurrency. Its native coin is AAVE used to participate in the DAO's governance.
Depending on what the DAO does, there could be multiple uses for a DAO token. Some of the critical use cases are as follows:
- Ownership: DAO tokens primarily represent ownership. For example, if you own a certain number of FWB coins, you get access to voting in the Friends with Benefits DAO.
- Value Transfer: holders can sell and buy DAO tokens in exchange for other cryptocurrencies or an equivalent amount of fiat currency. For instance, the FWB token is trading at $11.89 currently.
- Reward mechanism: Some DAOs use their tokens to reward their members. An example is GALA tokens by Gala games.
Major types of DAOs and Examples
DAOs serve multiple purposes in a variety of sectors. Here are some of the essential types of DAOs:
1. Protocol DAOs
Protocol DAOs are DAOs made to serve decentralized protocols, and these are carefully planned instructions coded on a blockchain to serve a purpose. For example, Uniswap is a cryptocurrency exchange which uses a decentralized network protocol. Holders of UNI tokens control the Uniswap governance, UNI community treasury funds, the protocol fee switch, and more.
2. Grant DAOs
In a Grant DAO, the community contributes capital to the grant pool and votes on funds allocation and distribution decisions. Innovative DeFi projects are funded using these DAOs, showing how decentralized communities are more flexible with funding than traditional organizations. Aave Grants DAO is one of the most well-known Grant DAOs. It uses the Grants infrastructure to nurture and grow its community of DeFi initiatives. Using this protocol, those with excess funds can lend, and those in need can borrow from the protocol’s members.
3. Philanthropy DAOs
As the name suggests, philanthropy DAOs aim at using the power of DAOs to support those in need through financial help. A recent example is the UkraineDAO which raised $3 million to support the Ukrainian army during Ukraine's war with Russia.
4. Social DAOs
Social DAOs bring like-minded people together and work on projects critical to the community. Membership in such DAOs usually depends on whether you own its native tokens. The Bored Ape Yacht Club DAO is one such social DAO that is made up of people who hold one of the 10,000 Bored Ape NFTs. Bored Apes NFTs are probably the most well-known NFT collection to date, and have an average sale price of over $200,000. This NFT acts as a yacht club membership card, giving you access to a shared digital canvas as well as the DAOs private discord channel, where you can socialise and network with other successful Ape holders. Like the FWB DAO, Bored Ape DAO also hosts some incredible real-world events, one of which was a IRL yacht party, featuring a show headlined by comedians Chris Rock and Aziz Ansari, followed by a music performance from the Strokes.
5. Venture DAOs
Venture DAOs are a community governed group that seeks to invest combined capital of the community to raise capital for promising crypto projects, blockchain startups, protocols, investments, and more. Metacartel Ventures was the first Venture DAO founded in 2018. Metacartel is composed of a large group of crypto-native founders, builders, engineers, thought leaders, and investors. Not only do they provide a huge amount of value to investments, but they have also provided open-source tooling and apps to help support the DAO ecosystem.
How to become a member of a DAO?
One of the most common ways to become a part of a DAO is to buy its native crypto token or receive a personal invite. Doing so allows you to be a part of the DAO's chat, usually on the Discord platform, and participate in its voting.
But first, define your goals
Before you go ahead and join a DAO, it is essential to understand how you can make the most of it and what your personal goals for doing so are. Spend time in researching the types of DAOs out there and learn how people are growing with them. Once you’ve done that and your goals are defined, you can get started with joining a DAO and buying its tokens:
Find a trusted platform.
Find a trusted platform like Bit.com to buy the DAO tokens via wallet purchase. You can also do this using a credit or debit card. Using a trusted platform will enable you to buy and sell in a safe space while getting all the insights you need to make an informed investment decision.
How do DAOs make money?
Like any other undertaking, DAOs need money to run their operations. DAOs raise money through multiple sources:
1. From DAO tokens
DAO tokens are one of the critical sources of DAOs funds. The DAO issues tokens and allows trade on major exchanges, and people who own a certain number of tokens also get governance rights.
2. From funds granted by Venture Capitalists
DAOs approach venture capitalists with their native whitepaper that explains their project. If the VC find it sufficient, they agree to grant the required funds.
DAOs are mushrooming all over the world in multiple domains. How they will ultimately change the world, remains to be seen. What is for certain, is that they’re here to stay and will continue to challenge existing notions or organization and investment. Let’s keep learning exploring as this landscape evolves and find the best opportunities to invest in.