DAO: a harbinger of algocracy

The concept

DAO (decentralized autonomous organization) is a concept of organization based on the interaction of smart contracts in a blockchain and without a single control center.

Traditional companies organize groups of people around specific goals. But such companies have a hierarchical structure and are run from the top down. DAOs have no hierarchy. They operate transparently, according to the rules spelled out in the code, and allow any participant to make suggestions.

Native DAO token holders vote on proposals designed to benefit the entire community.

A DAO usually has a treasury to implement the ideas voted on by the community. Most DAO activity focuses on coordinating treasury decisions.

Appearance

The concept of DAO (first name DAC - decentralized autonomous corporations) was born in 2013. The key principles of DAC were decentralization of companies, tokenization of their shares and openness of operations with publicly verifiable code. Over time, the community refined the idea and adapted it to any organization of people, the concept was called DAO.

Blockchain is the basic infrastructure for creating a DAO, as now any DAO is a system from smart contracts (Dapp). Some believe that Bitcoin is the first open source DAO where miners and developers maintain the integrity of the system.

In 2016, one of the first DAOs in history, called "The DAO," was launched. Investors invested more than 14% of all circulating ETH at the time.

The goal of The DAO was to create a community-driven venture capital fund that would invest in projects based on voting. However, just three months later, hackers hacked The DAO and stole $60 million worth of ETH.

Although this experiment with The DAO was unsuccessful, it opened the door for the development of this conduit in subsequent projects.

Principle of operation

DAO is a combination of people and algorithms. A set of rules attached to the governance structure and built into the code.

In order to decide on any proposal, a vote is held in the community, where the strength of a participant's vote depends on the number of project tokens.

The voting process itself can take place either on dedicated services or on third-party platforms like Tally or Snapshot.

DAO members work together based on the rules spelled out in the smart contract and a common goal. All rules are transparent.

DAO membership can be divided into two categories:

Token-based membership.

DAO tokens are freely traded on decentralized exchanges and are mostly used for governance. Each token gives the right to vote.

Users can receive tokens from the DAO in exchange for providing services to the organization itself. Uniswap's Airdrop for early users was an example of such a situation.

Equity-based membership.

Share-based DAOs are not necessarily open to all comers. Instead, they often screen potential participants before allowing them to join and require a certain monetary contribution. MolochDAO is one such organization.

Pros and cons

Pros

• There is no clear hierarchy. In DAO every interested party can participate in voting and decision making.
• Transparency. History of the decisions is available to all.
• Openness. Almost everyone with access to the Internet can become a DAO token holder and thereby obtain the right to make decisions.
• Trustless. The concept of DAO allows people to interact with each other to achieve a common goal without the need to trust all participants in the organization.

Cons

• Undefined legal status. At the moment there is no clear legal regulation for DAO.
• The risk of hacker attack. Such decentralized structures are vulnerable to risks of attacks.
• Low efficiency and friction. The lack of a clear hierarchy can cause a split community and slow down the decision-making process.

Perspectives

According to a recent Messari report, one of the trends in the crypto industry in 2022 will be DAOs. Over the course of the year, we may see the restructuring of such organizations, the emergence of subsidiary DAOs, and a new way of distributing roles among participants.

Better collaboration tools await DAOs, which will allow the community to shake off passivity and become more effective.

DAOs are moving toward formal recognition. In April 2021, Wyoming passed a law recognizing decentralized autonomous organizations as a new form of company. A few months later, the first official DAO was approved.

But in November 2021, the SEC suspended the token registration of the first legally recognized organization, saying it had provided "misleading information" to potential investors.