Decentralized Autonomous Organizations, or DAOs, are one of the most global initiatives of DeFi, which has brought together the principles of a decentralized, transparent, and autonomous community independent of traditional government and financial institutions.
It sounds rather abstract and utopian, but thanks to crypto enthusiasts’ commitment and blockchain developers’ persistence, we are seeing examples of successful DAOs that already have a pretty solid foundation and impressive potential for further development.
Today, you will get DAO governance explained. We will look back at the early history, the risks and challenges of DAOs, the painful but important lessons learned from this, and the great opportunities for the entire crypto industry. Then, we will define what is a DAO in crypto today and explore the future of DAOs in Web3.
History of Decentralized Autonomous Organizations
It is difficult to trace the exact history of the idea of decentralized autonomous organizations itself, but there is a long-standing desire to implement some opposition to the excess of power and secret pacts of privileged groups of people.
This can be traced back to many science fiction writers, who differ greatly in their perspectives because the prior technology for its realization was chosen by each based on their taste. However, instead of the most popular choice in the form of Artificial Intelligence, history has decided otherwise, and blockchain has become the technology of choice.
The first decentralized autonomous organization can be called Bitcoin and its community to some extent, as it opened up the use of blockchain technology to decentralize finance, making it transparent and independent from traditional and state institutions.
However, this is only partially true because Bitcoin lacked something very important, namely the functionality to make this decentralized organization autonomous in all the desired ways.
In 2016, the Ethereum blockchain was launched with a distributed network virtual machine (Ethereum Virtual Machine) that runs on top of it. And most importantly, it allowed writing programs (Smart Contracts) that would be stored and executed by it.
Now, there is not just a blockchain network with predefined features to exchange cryptocurrency but a decentralized platform on top of which you can build your own solutions, implementing any scenario that can be represented as self-executing code.
This was the true birth of DeFi in all its applications we know today – with cryptocurrency lending, staking, and much more, about which you can learn more about here.
Most importantly, it unleashed many crypto enthusiasts and blockchain developers. They started creating different types of Smart Contracts, and one of them was the implementation of the Decentralized Autonomous Organization.
The first such implementation was The DAO, a form of investor-directed venture capital fund founded by Stephan Tual, Simon Jentzsch, and Christoph Jentzsch in 2016. This organization developed very rapidly and received a lot of support from the community, including the creators of Ethereum.
Its participants and funds were impressive for those times, namely more than $150M from more than 11,000 investors, and on May 28, 2016, its tokens became tradable on various cryptocurrency exchanges.Â
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But, in the first year of its launch, the critical risks and challenges of DAOs became apparent, as it experienced a hack that resulted in the loss of a third of its funds, which eventually led to a hard fork of the Ethereum network.
Since then, we have ETH Classic, which still has some fans of the original solution, and the ETH we know and use today.
There has been a bit of a break in the further realizations of this concept and a rethinking of the mistakes and implications, the main aspects being:
- Strengthening the security of smart contracts
- Developing better voting mechanisms
- Creating modular frameworks to run DAOs
- Integration with DeFi protocols
And in 2020–2021 we saw new examples of successful DAOs, among them:
- MakerDAO – issuer of the DAI stablecoin
- Compound – a lending protocol with decentralized management
- Aave DAO – development and support of a credit protocol of the same name.
- Uniswap – decentralized exchange with management system via UNI tokens
- Next, let’s take a closer look at the state and distinctive features of DAOs today.
DAOs vs Traditional Organizations
Since everything is known in comparison, let’s highlight the features of DAOs against the background of traditional organizations.
Any organization is essentially a set of standards and processes, be it a small business that provides you with a service, a central bank issuing a loan, or an entire state implementing national interests and strategies.
However, in traditional organizations, most processes and standards are carried out by people who may violate them for various reasons, and the processes themselves may be completely unclear or closed to others.
This can take the form of something as minor as a deviation from a product standard to more significant consequences, such as a loan rejection for unexplained reasons, or even more dramatic, such as election fraud.
How Do DAOs Work?
Since you already know that Ethereum has made it possible to create Smart Contracts, you have already guessed that all the organization’s processes and standards can be explicitly written in the form of code that is automatically executed under certain conditions.
In fact, DAO is one of the options for how Smart Contracts can be used on Ethereum, although today it’s not the only option, but also Solana and other blockchains.
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How to Participate in a DAO
DAOs provide their participants with various financial services such as lending, staking, swapping, and other financial products such as native tokens, and other crypto and NFT features.
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Also, DAOs allow their participants, using native tokens, to vote for the approaches and directions of platform developments. This is a lot like owning shares in a large company, but in the usual case, you would have to own a controlling stake or be on the board of directors to have a voice at all. As you might have guessed, in DAOs you are already a voting member, and it’s all completely transparent and decentralized, with the final decisions being made by consensus.
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What Are Benefits of DAOs in Blockchain?
The benefits of DAOs in blockchain can be categorized on several levels, from the end user to the whole industry.
For the user, this is quite obvious because it gives transparency and a certain degree of control over the project. More specifically:
- Elimination of possible bias or evasion of decisions
- Eliminating the human factor in the implementation of standards and processes
- Transparency of decision-making mechanisms and automation of their execution
But it is more interesting to consider here the benefits of DAOs in blockchain in a broad sense and what is a DAO in crypto? Since the participants of DAOs directly shape the direction of the project development, and these projects shape the development of the whole Web3 – we get a situation where the community shapes the industry, and not vice versa.
Of course, it’s much more complicated and less clear-cut. There are big players contributing huge capital to crypto, and 2024 has shown this like no other. Even with an inherently decentralized approach, such numbers make a difference. Still, it is worth noting that this is one of the few, if not the only, industries where such a trend of community management exists and persists.
Risks and Challenges of DAOs Today
Of course, no system is perfect, and all DeFi and DAOs, in particular, still have a lot of things to do. It remains subject to several risks, and there are still challenges ahead. Among these, the key ones include:
- Legal uncertainty. The status of DAOs in many countries remains unclear, and integration with traditional legal systems remains a big challenge.
- Smart contract vulnerability. Despite improvements in security practices, vulnerabilities in code still occur, and huge losses from its discovery by bad actors.
- Governance issues. The scalability of voting is also a challenge, and low participant activity can slow down DAO development.
- Efficiency of decision enforcement. With much greater transparency and decentralization, the possibility of manipulation remains if the concentration of power is in the hands of large token holders.
Future of DAOs in Web3
Predicting the future of a very young industry, especially in the most dynamic year for the entire crypto industry for many economic and political reasons – is a very difficult task.
However, looking at some trends, we can make some potential assumptions:
Favorable Regulations
At the moment, we see a global trend of acceptance of the crypto industry, attention not only from the big players from the economy but also from politics. If this trend continues, it will probably affect the entire crypto industry, and DAOs will not be left out. Whether they are expected to be favorably regulated or treated oppositely is still a question, but regulatory changes are very likely.
More Liquidity
Big capital is entering the crypto industry in record numbers, trying to unlock the potential of more and more financial instruments. We see this in the case of Bitcoin and Ethereum accumulation, then the launch of crypto ETFs, and since Web3 still has a lot to offer – DAOs could be next in line. Of course, this will also be a kind of test for each DAO, whether it can withstand the large influx of liquidity, whether it can maintain its efficiency and security, and so on.
Combining Technologies
The second key technology of recent years has been AI, which has already made several qualitative leaps recently. Though it is not yet at the level to be a central player in autonomous organizations, it can be a good complement to decentralized ones. Speaking more globally about AI enthusiasts and their latest trend as autonomous AI agents – there is a problem with seamless automated data exchange between them. Blockchain and Smart Contracts could be the missing puzzle piece to fix it.
Conclusion
DAOs still have a lot of work to do to realize all their purposes and perhaps even more to hold them together.
This combined work of an active community, professional engineers, and legal institutions must still pass and endure many tests because it is a very young phenomenon.
However, it is undoubtedly one of the most ambitious initiatives of crypto enthusiasts, and it has already passed the initial challenges, improved its approaches, and shown good results and very impressive numbers.
Disclaimer: The information provided in this article is for informational and educational purposes only and does not constitute financial, investment, or trading advice. Any actions you take based on the information provided are solely at your own risk. We are not responsible for any financial losses, damages, or consequences resulting from your use of this content. Always conduct your own research and consult a qualified financial advisor before making any investment decisions. Read more
