Introduction to DAOs

Let’s start with the basics: What exactly is a DAO?

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A Decentralized Autonomous Organization (DAO) is an online, community-led organization that runs entirely on blockchain technology. Unlike traditional companies, DAOs have no CEO or board of directors to turn to. Instead, they operate through smart contracts, self-executing code based on predefined rules. These automate many tedious processes and ensure that no single person or group can abuse their authority. 

DAOs come in all shapes and sizes. They can be built for just about any purpose, from fundraising to game development. 

One of the major selling points of DAOs are their voting mechanisms. DAO members can actively contribute to major decisions by voting with their cryptocurrencies. Think of DAO users as shareholders of a company, they hold influence over the direction of the organization. 

For example, an animal welfare fundraising DAO might vote on whether to donate funds to an organization in Europe or one in Africa. Members use their tokens to vote, while blockchain ensures the entire process is fair and transparent.

DAOs are essentially companies by the users, FOR the users!

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• Decentralized: No single entity holds control, governance is distributed among members.
• Autonomous: Blockchain and smart contracts automate operations, minimizing the need for intermediaries.
• Community-Driven: Members propose and vote on decisions, creating a transparent and democratic structure.

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Lets quickly compare tradtional organizations vs DAOs:

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The first major DAO, aptly named “The DAO”, was launched in 2016 on the Ethereum blockchain. It was designed to function as a decentralized venture fund, where token holders could pool their Ether (ETH) and vote on which projects to invest in. The DAO quickly gained traction, raising over $150 million in ETH, making it  the largest crowdfunded project at the time. 

However, a smart contract vulnerability led to a major hack, resulting in the loss of around $60 million worth of ETH. In response, the Ethereum community initiated a hard fork. This split the blockchain into two separate networks. The original chain continued as Ethereum Classic (ETC), while the new chain, which reversed the effects of the hack, became the Ethereum (ETH) we use today. 

This incident highlighted both the potential and risks of DAOs. While they offer a new way to build democratic organizations, they can also be exploited if not carefully designed. 

Fortunately, DAOs have been improved on since then. Today, DAOs have evolved to try and solve many problems in Web3. They’re used to manage major decentralized finance (DeFi) protocols, pool funds to acquire rare non-fungible tokens (NFTs), and secure many different Web3 projects through on-chain governance mechanisms.

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Smart Contracts

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At the core of every DAO is a smart contract: a self-executing program stored on a blockchain. These contracts define the DAO’s governance rules, voting processes, and how funds are managed, all without human intervention. 

Think of smart contracts as “automated rule enforcers”. Once a developer sets a rule, the contract will enforce it. For example, a smart contract could manage the swapping process of a decentralized app (dApp). When someone deposits a certain amount of BTC, the smart contract automatically releases the equivalent amount of ETH. Simple, right? 

Smart contracts are also immutable (they can’t be changed once deployed) and trustless (they operate automatically without needing a middleman). This reduces the risk of fraud, corruption, or bias in decision-making, keeping the DAO efficient and secure! 

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Governance Mechanisms

DAOs rely on different governance models to support collective decision-making. The two most common approaches are token-based voting and reputation-based voting. 

In token-based voting, a member’s influence is determined by the number of governance tokens they hold. The principle is simple: 1 token = 1 vote. The more tokens a person owns, the greater their impact on DAO decisions.

Reputation-based voting, on the other hand, assigns voting power based on a member’s contributions and reputation within the DAO. Members earn voting influence by actively participating, completing tasks, joining discussions, and engaging in governance activities. 

Some DAOs also use hybrid models that combine elements of both systems.

We’ll discuss more about governance mechanisms in the next module! 

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Fundraising and Treasury Management

DAOs need capital to operate, fund projects, and reward contributors. Common fundraising methods include:

• Token Sales: Selling governance or utility tokens to investors.
• Grants & Donations: Some DAOs receive funding from external sources, such as venture capitalists or on-chain donors who support the mission. 
• Treasury Investments: DAOs often invest in other tokens or DeFi protocols to generate yield and grow their reserves.

Once funds are raised, another important responsibility is managing the treasury. A DAO treasury is a pool of crypto assets collectively managed by the community. These funds are allocated for development, grants, operations, and ecosystem growth. Being on-chain, all DAO transactions are traceable and transparent. No need for traditional Chief Financial Officers (CFOs) or financial committees. The blockchain can be used to check where the money goes. 

However, we still aren’t out of the woods. Treasury funds stored in public blockchain wallets can still be vulnerable to hacks or mismanagement, especially if smart contracts are not properly secured. That’s why many DAOs now undergo security audits and implement multi-signature approvals to protect their assets. 

In short, both effective fundraising and responsible capital management are needed to ensure that DAOs work properly. 

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Proposal & Decision-Making Process

DAOs follow a structured process for proposal creation and decision-making to ensure fair and transparent governance. Any community member can submit, discuss, and vote on proposals that affect the organization. The process generally goes like:

1. Proposal Submission: A member submits a proposal (e.g., funding a new project, changing governance rules, allocating treasury funds). Many DAOs use standardized templates and platforms like Snapshot, Tally, or Discourse to submit and track proposals.
2. Discussion: Once submitted, the proposal enters a discussion phase. This allows the community to debate the pros and cons, suggest improvements, and assess alignment with the DAO’s mission. Discussions typically take place on platforms like Discord, Discourse forums, or X (Twitter) Spaces. Some DAOs require a minimum discussion period (e.g. 7 days) before proposals proceed to a vote
3. Voting: Members vote to approve or reject the proposal. The voting mechanism depends on the DAO’s governance model (token-based, reputation-based, etc.) Voting typically takes place on Snapshot, Tally, or Boardroom, with results recorded transparently on-chain.
4. Execution: If the proposal passes, the smart contract enforces the decision automatically. This ensures that no single individual can override the community's decision. If the proposal is rejected, it may be revised and resubmitted at a later time. 

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Not all DAOs are the same! Let’s explore some popular categories:

• Protocol DAOs - These DAOs govern decentralized finance (DeFi) protocols, enabling community-driven upgrades and policy changes.
  
  • Examples: MakerDAO (manages the DAI stablecoin), Uniswap DAO (controls Uniswap’s development), Apecoin DAO (governs the Apecoin ecosystem).
• Investment DAOs - Members pool funds to invest in crypto projects, startups, or NFTs, democratizing venture capital.
  
  • Examples: The LAO (invests in early-stage blockchain startups), FlamingoDAO (specializes in digital art investments).
• Social DAOs - These DAOs form exclusive communities centered around shared interests, from networking to content creation.
  
  • Examples: Friends with Benefits (FWB) (a culture and media-focused community), Krause House (a DAO attempting to buy an NBA team).
• Service DAOs - Collectives of freelancers and professionals who provide Web3-related services, ranging from development, marketing, to legal support.
  
  • Examples: Raid Guild (a collective of Web3 developers and designers), LexDAO (a decentralized group of legal experts).
• Collector DAOs - These DAOs focus on acquiring, managing, and trading high-value NFTs and other digital assets.
  
  • Examples: PleasrDAO (specializes in acquiring culturally significant NFTs).
• SubDAOs - These are specialized subdivisions within a larger DAO, created to handle specific operations or initiatives.‍
  
  • Examples: Olympus DAO’s subDAOs focus on different aspects of treasury management and governance.

Here are the various benefits as well as the risks and challenges of dealing with DAOs:

Benefits of DAOs

• Decentralization - Power is distributed among members rather than concentrated in a single leader. This helps reduce risks of corruption, bias, and unilateral decision-making.
• Transparency - All transactions, votes, and decisions are recorded on the blockchain, fostering trust and accountability. Anyone can check anything at any time. Record-keeping becomes more accurate and it becomes increasingly difficult to alter or manipulate data. 
• Global Accessibility - DAOs allow anyone, anywhere in the world, to participate. This opens up financial and governance opportunities to a global audience, including those new to these systems. 
• Automation & Efficiency - Smart contracts automatically execute decisions once approved. This reduces the need for manual processes and minimizes operational costs.
• Community-Driven Growth - Since members have voting power, DAOs encourage active participation and innovation. Users are incentivized to care more about these organizations since they can actually influence where they want to take it. 

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Risks & Challenges of DAOs

Governance Issues

• Voter Apathy: Not all members are equally engaged. When participation is low, decision-making can be slow or ineffective.
• Centralization Risks: Large token holders can disproportionately influence governance. Whales can dominate decisions (in token-based voting) which can undermine decentralization.
• Complexity – Understanding proposals and their implications requires technical or domain-specific knowledge, making governance less accessible to newcomers.

To help address these challenges, some DAOs adopt delegate voting (where members assign their voting to trusted representatives) and incentivized participation (rewarding members for active involvement in the decision-making process).

Smart Contract Vulnerabilities

• Exploits: Bugs in smart contracts can be exploited by attackers to drain funds or manipulate governance mechanisms.
• Code Immutability: Once deployed, smart contracts are difficult to modify, errors often require forking the blockchain to resolve.

Legal & Regulatory Uncertainty

• DAOs currently operate in a legal gray area, with many governments yet to define clear regulatory frameworks.
• Governance tokens may be classified as securities, potentially subjecting DAOs to complex financial regulations.

Funding & Treasury Risks

• Poor Fund Management: Without proper oversight, treasury funds can be misallocated, misused or lost.
• Treasury Attacks: Malicious actors may attempt governance takeovers to gain control over the treasury.

Coordination Challenges

• Consensus Difficulty: Large communities often struggle to reach agreements on important decisions.
• Proposal Overload: An excess of proposals can stall progress and make governance inefficient.

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Amazing, right? DAOs present a groundbreaking new way for organizations to function and that’s not the end of it. 

Up next, we’ll explore how DAOs actually work! Let's dive into governance models, tokenomics, and the evolving legal landscape surrounding DAOs. 

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