DAOs: Optimizing Collaboration Over the Blockchain

Decentralized Autonomous Organizations, or DAOs, are a new type of decentralized collaboration tool that allows potentially any number of people, each acting from anywhere in the world, to work together toward a shared vision.

Unlike traditional organizations that are owned and managed by their executives and shareholders, DAOs have a flat organizational structure and use pre-defined rules written into smart contacts to automatically enforce governance decisions. These DAOs share control of their treasury, allowing them to make investments, pay employees, donate, and more to maintain their operations without requiring a central authority.

Following the launch of the first true DAO in 2014 (known as BitShares), DAOs have grown in popularity as a way to coordinate a large number of individuals and avoid some of the common challenges that come with managing a company — such as endless bureaucracy, cost inefficiencies, and so-called “bullshit jobs”.

What Counts as a DAO?

Any organization that is completely based on a blockchain (or equivalent) and automatically executes decisions based on community votes can be considered a DAO. There are no specific requirements on the number of participants, treasury size, structure, or anything else — and DAOs can be incredibly diverse in the way that they operate.

Most DAOs operate on a so-called “flat hierarchy”, which essentially means that all participants are considered equal. The only metric that matters is the number of DAO tokens held since larger token holders have a larger say over how the DAO operations give that 1 token usually equals 1 vote. However, some DAOs use weighted voting, which sees certain votes ‘weigh’ more than others, such as those that were made earlier (time-weighted) or by specific individuals/entities (reputation-weighted).

Today, DAOs are being used for a wide array of purposes, such as collaborative research, collecting, investing, building, philanthropy, and more. Likewise, some of the world’s most influential individuals and organizations now have at least some exposure to DAOs — including the likes of Peter Thiel, Mark Cuban, and Tim Draper to name just a few.

Some examples of popular/interesting DAOs include:

  • BitDAO: The largest DAO by AUM, BitDAO is a community-directed treasury that makes strategic investments into Web3, DeFi, and decentralized technologies. Governed by BIT token holders, BitDAO also provides an array of grants with the aim of fostering the adoption of decentralized tech.
  • Uniswap DAO: One of the most popular protocol DAOs, the Uniswap DAO is tasked with governing the popular automated market maker (AMM) known as Uniswap. DAO participants recently voted to reduce trading fees for stablecoin swaps on the platform, which subsequently led to a dramatic increase in trading volume — and hence revenue for liquidity providers. It is now the largest DAO by the number of token holders, with over 311,000.
  • PleasrDAO: One of a rapidly growing number of so-called “collector DAOs”, PleasrDAO is an organization that purchases and collects rare digital goods, including works of art and popular culture. Some of its previous purchases include a one-of-a-kind unreleased Wu-Tang Clan album and an NFT sold by Edward Snowden.
  • Decentraland: This DAO is tasked with governing the virtual world of Decentraland, helping to shape the policies that affect those that build and play in the Decentraland metaverse. This might include organizing protocol upgrades, changing marketplace fees, and replacing members of its Security Council. With over 230,000 governance token holders and a whopping 930+ governance proposals, Decentraland is one of the most active DAOs today.
  • BankLess: Billed as a “movement for pioneers seeking liberation from the tyranny of the traditional financial system”, the BanklessDAO helps to promote the adoption and awareness of decentralized financial systems by producing content, promoting accessible on-ramps, and dispelling myths about DeFi.
  • MetaMask: The company behind the world’s most popular Web3 wallet recently announced plans to launch a DAO. Details regarding the exact purpose of the DAO remain scant, but it is known that it will be used to organize funding for new aspects of MetaMask and will feature its own governance token. Though it hasn’t launched yet, the MetaMask DAO will almost certainly become one of the largest DAOs of its time.

How do They Work?

Smart contracts sit at the heart of all DAOs. They establish the rules that determine how the DAO operates and both layout and enforce its governance framework — providing the template for tabling, voting on, and executing governance proposals

DAOs are autonomous in that they are completely independent of external entities and are able to automatically enforce the decisions of its community using smart contracts. As community-owned decentralized organizations, DAOs usually use a community voting system to assign tasks, plan actions, and determine remuneration.

The smart contracts that underlie the DAO can only be changed through a successful community vote. The threshold for executing changes or actions can vary from DAO to DAO, but will almost always require that a proposal must receive more than 50% of the votes to be executed. That said, other conditions might also need to be met, including:

  • More than a fixed percentage of DAO participants must take part in the vote
  • For DAOs without a flat management structure, a vote must include certain participants to be considered valid
  • Multiple rounds of voting may be required.

During the setup process, many DAOs will have a fundraising stage, which sees it bootstrap the funds for its treasury. The way these treasury funds are spent will then be determined by the DAO. In most cases, contributors are provided DAO tokens, which entitle them to vote, with 1 token usually equal to 1 vote.

Why Are DAOs Growing in Popularity?

Since the launch of the first Ethereum DAO in 2016, the DAO landscape has exploded in both variety and interest, and there are now over 4,800 DAOs in operation — with over $9.1 billion in assets under management (AUM).

There’s a good reason for this growth. DAOs provide a variety of quite significant advantages over traditional organizations, given that they’re far more efficient, transparent, and inclusive, and offer a much higher degree of automaticity. Let’s break it down:

Since DAOs use smart contracts to automatically carry out the will of their participants, they can also be considered trustless. You don’t need to trust that a vote will be genuinely actioned, because the logic for the action has already been set to execute based on the results of a vote. Being based on blockchain technology, all stakeholder votes are visible on-chain while all actions carried out by the DAO are free to audit at any time.

These properties have seen DAOs rapidly expand in scope and spread out across dozens of industries, where they are being used as powerful tools for collaboration.

DAOs in the Future

Some of today’s largest DAOs, including Uniswap, Kusama, Decentraland, and Compound, each have upwards of 100,000 governance token holders, but most still suffer from relatively low participation, with just a small fraction of token holders actually taking part in governance.

Part of this is down to the speculative nature of many DAOs, which are more often seen as an opportunity for profit rather than participation. But with improvements in incentives and the potential for vote delegation, this may become less of a concern in future DAOs.

Future DAOs are also likely to include some sort of meritocracy and tiered membership structure, allowing participants to climb the ranks within their DAO through their accomplishments — regardless of whether their identity is publicly known or they remain pseudonymous. This will help to balance merit-based and token-weighted voting to improve performance.

Major businesses and international corporations will likely begin to leverage DAOs to improve efficiency in their decision-making, forming the first wave of permission DAOs. With these, holders of tokenized shares will be able to participate in the governance of real-world companies, while also allowing dividends and rewards to be distributed to shareholders over the blockchain — dramatically improving cost-efficiency.

The beginning stages of these have already been seen, with major blockchain firms already offering tokenized shares — including Exodus Wallet.

This stands to usher in an era of legally enforceable DAOs, that are both backed by current legislation, and directly connected to legacy business and financial infrastructure. With this, the will of DAO participants will begin to have real-world applicability, which when coupled with innovations in IoT and augmented reality, could lead to some truly transformative results.

Long-term, decentralized city DAOs and even entire DAO-based governments are within the realm of possibility and could usher in an era of transparency, efficiency, and trust between legislators, regulators, governments, and individuals.

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About Master Ventures

Master Ventures is a blockchain-focused venture studio helping to build the next generation of blockchain-based Web 3.0 system innovations within the crypto industry. Launched in 2018 by Founder and CEO Kyle Chassé, the company’s ethos can best be summarized in the acronym #BeBOLD: Benevolent, Open, Love, Decentralized.

Master Ventures co-creates with entrepreneurs and businesses worldwide to turn the best ideas into innovative and disruptive products. They do this by investing as strategic partners through offering advisory services to the projects they believe in. To date, Master Ventures has invested in over 40 crypto projects, including the likes of Kraken, Coinbase, Bitfinex, Reef, DAO Maker, Mantra DAO, Thorchain, and Elrond.

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Website: master.ventures

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