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What is a DAO?

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​by Naman Rastogi

13 / 04 / 2022

 

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A Decentralised Autonomous Organisation (‘DAO’) is an internet native company self-governed by its members through smart contracts deployed on a public blockchain. Think of DAOs as a companies whose Board is its members, and the CEO is self-executable smart contracts.

It is still pretty hard to understand DAOs given with the crypto jargons I have used above. So, let’s try and break it down into smaller parts.

‘Internet native’ means that DAOs exist entirely online with no physical presence.

‘Members’ are a group of people who created the DAO and are on a shared mission. This mission can be to invest into NFTs, or to donate a corpus to charity foundations, or to invest in crypto tokens, or to make a stable coin, etc. DAOs have their own native token and whoever owns these tokens is a member of the DAO. Each DAO token would represent a governance right on the DAO and an economical right over the value generated by the DAO. Think of this akin to holding equity shares of a public company.

‘Self-governed by its members through smart contracts’ means that DAOs are governed by a set of enforceable rules which are decided by its members and are coded into smart contracts. There’s no requirement of a CEO to enforce these rules as they are self-executed if the conditions are fulfilled.

‘Deployed on a public blockchain’ means that rules coded as smart contracts are ported on a public blockchain in order to ensure that these rules are immutable.

Let’s try and understand this using an example:

Let’s say a group of 100 investors came together contributing $1 each to invest into public markets. They decided to peg each DAO token to $1, then each member would hold 1 DAO token representing 1% ownership of the DAO. These members together would decide on a set of enforceable rules such as:

How can someone propose an investment opportunity?

What would be the minimum majority required to approve an investment?

What would be the maximum concentration limit in the portfolio? So on and so forth…

 

All these rules would be coded as smart contracts and will be ported on a public blockchain say Ethereum. Like a non-DAO company has a Board which appoints a CEO to execute its business plan, a DAO has its members setting the rules, and instead of having a CEOs to execute its rules, it has smart contracts on a blockchain that are self-executable in nature. These contracts are in ‘If and Then’ format, and are executed automatically, if the pre-conditions are fulfilled. For example, in the above example an investment would be executed if it is in line with the above set rules.

There are currently 4,000 DAOs in existence. Here are two real-life examples of popular DAOs

Flamingo DAO – An NFT focused DAO aiming to explore emerging investment opportunities in blockchain-based assets; it pooled in $10 Mn. from its members and converted it to about to $1 Bn. with its major NFT investment being crypto punks

Uniswap DAO – The protocol allows to transact among cryptocurrency tokens on the Ethereum blockchain; Currently, Uniswap DAO has a market cap of c.$6 Bn.!

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