A group of crypto enthusiasts last November shocked the world by raising tens of millions of dollars to buy a rare version of the U.S. Constitution, which was auctioned off by the venerable auction house Sotheby's.
If ConstitutionDao lost on the wire against the billionaire hedge-fund manager Ken Griffin of Citadel, it won a symbolic victory, engraving in the collective memory the arrival and power of DAOs and a new form of investing.
The peculiarity of ConstitutionDao, which surprised a lot of people and set it apart, is that it is a decentralized autonomous organization, or DAO, which runs on blockchain technology.
After digital currencies and tokens, blockchain networks, decentralized finance, or DeFi, and nonfungible tokens, or NFTs, DAOs are the new kid on the crypto block.
So what exactly are DAOs? How do they operate? And will they make corporate-governance structures obsolete?
What Is a DAO?
Cryptocurrency enthusiasts organize into a decentralized autonomous organization, or DAO, which is an online group with collective bank accounts and mission statements.
A Dao registers its members on the digital ledger system known as blockchain, and those members do things like vote to govern the group's decisions.
They meet not in person but rather through chat apps like Discord and other messaging platforms. Joining one of them often requires a purchase of money. To do so requires using cryptocurrencies to buy blockchain-based assets called tokens. Digital tokens give their owners the right to vote on the operation and organization of the group.
The more tokens you have, the more voting rights you have. Each group gives a specific name to its tokens. ConstitutionDao called theirs People.
To summarize, a DAO is a frenzied mix of elements that have recently intertwined traditional finance and the internet via the r/Wallstreetbets forums on Reddit. For example, a group of strangers, often millennials and Gen-Zers, is now able to raise millions of dollars overnight, a task that once would have fallen to seasoned financiers.
Investors worldwide can participate. DAOs are not limited to any border or nationality.
How Does a DAO Operate?
In a traditional corporate structure, there is a hierarchy: a board of directors and executives who have the power to effect change. Everything is centralized.
This is the opposite of DAOs, which are decentralized. No one person or entity governs them. The rules of governance and operations are codified in smart contracts saved in the blockchain -- which means they cannot be changed without a vote of all a DAO's members.
Each member of the DAO has a say. All decisions are subject to the vote of each member. This is unlike a traditional structure, in which a small group or a majority decides for the rest.
To participate in a DAO, Internet users buy voting rights by paying cryptocurrencies. These voting rights give them the ability to indicate what the DAO should invest in. The risk is that a participant with a large number of voting rights could divert the project from its original objective.
Some DAOs are not limited by tokens. which means that someone joining Discord for the community does not need to have invested in the organization.
This is different from a Bored Apes Yacht Club, for example, where users have to afford one of the expensive NFTs to get members-only access to the community.
Involving people in the cryptosphere is an important goal. People feel they are taking part in something unique, they belong to a community, and they are in some way changing the world.
DAOs are a bet made by individuals who want to make money while also gaining a sense of belonging and transparency within a community.
Disrupting Traditional Corporate Structures
DAOs in equal measure are both a revolutionary force -- rewriting some of the oldest rules of business by deprioritizing age, security and experience -- and a disruptive hazard.
DAOs give their owners decision-making power proportional to the number of tokens they own. DAOs can therefore be compared to investment funds. Each person who buys a token will thus both increase the DAO's cash flow and take part in the direction taken by the community.
Many startups have entered the battle to accelerate the development of DAOs. For example, Upstream has created a platform to offer DAO-in-a-Box. That's a world in which collective members can deposit money in a shared ethereum wallet, write proposals for the use of the money, vote on decisions, and choose delegates to more widely distribute voting rights and avoid plutocracy.
If comprehensive locations for configuring DAOs are created, governance and compliance will be clearer.
There are also DAO Builder and Utopia Labs, which offer operating systems.
Types of DAOs
In addition to organizing auctions on rare historical documents, DAOs have a wide range of potential use cases. Creator DAOs like Mirror enable people to monetize their work in fractional ways, and projects like PieDAO use the structure to make business decisions much like a business. The best-known DeFi -- decentralized finance -- credit platforms like Uniswap and AAVE are managed by DAOs.
Some in the cryptosphere envision potential long-term uses for DAOs that could serve the public interest -- for example, in local government, where city residents could vote directly on the use of treasury funds.
DAOs for now will likely focus on social groups and niche communities like ConstitutionDAO, rather than materially threatening entrenched corporate and social structures.
But once the infrastructure is in place, DAOs could evolve from groups of cryptocurious users who buy niche items and have fun online, to serious collective entities that act like businesses but can be more nimble and inclusive in their decision-making.
Some established DAOs that were formed with the goal of making a one-time purchase have since expanded their reach. PleasrDAO, for example, was originally founded to buy Uniswap NFT artwork, but has since ventured into DeFi and launched an incubator.
Dangers and Risks
Experts say that DAOs still have a long way to go, due to their novelty and connection to a male-dominated web3 community although their Discord chats are open to almost everyone.
So while DAOs propose transparency and ownership, it's hard to call them democratic because those who can't afford higher stakes don't have as much of a say in the groups' decisions.
And as with other emerging web3 technologies, DAOs enable huge transfers of capital with little oversight or formal regulation. Those who are drawn to the vision of community that DAOs offer may still fear losing their money or becoming victims of fraud.
Joining a DAO can indeed be fraught with risk, given the regulatory gray area in which they exist today. In most U.S. states DAOs are not subject to a specific legal structure, so protocol developers and participants have increased liability compared with shareholders of regulated companies.
Some DAOs have gone up in smoke. In 2016, one of the first DAOs was hacked. Hackers stole $50 million as reported at the time.
Furthermore, DAO members don't even have the limited protections carried by other common high-risk investments like hedge funds.
