What Is a DAO (Decentralized Autonomous Organization)?

What if you could run a business without people? That’s one of the central ideas behind decentralized autonomous organizations (DAOs). DAOs are internet-based entities that are governed by a community organized around a specific set of rules enforced on a blockchain. As the concept has matured, DAOs have gained traction and may even be poised to change how traditional corporations operate.

Key Features of a DAO

As an evolving technology, DAOs have been described in many different ways. According to the Securities and Exchange Commission, a DAO “is a term used to describe a ‘virtual’ organization embodied in computer code and executed on a distributed ledger or blockchain.” Meanwhile, the New York Times has characterized  DAOs as “a kind of digital co-op that uses cryptocurrency tokens to coordinate access, make payments and vote on group decisions.”

While the descriptions may vary, most agree that DAOs have several key features. To start, they are internet-native organizations that operate using smart contracts, which are typically enforced using blockchain. These self-enforcing smart contracts establish the rules by which the DAO is governed. Another distinguishing feature is that DAOs are owned and managed by a collective of members. While all DAOs share similar structures, they are currently being used to pursue a wide range of initiatives, including investment, charity, fundraising, borrowing, or buying NFTs. 

DAOs vs Traditional Corporations

DAOs differ from traditional corporations in several key areas. Below are a few examples:

• Majority Rules: For a DAO to implement changes, all of its members must vote in favor of the changes. By comparison, a CEO or other executive may be the sole decision-maker for a corporation.
• Democratic Governance: DAOs are self-governed by their community of members. This differs significantly from the top-down hierarchy of a typical company where executives and a board of directors largely call the shots.
• Funding Is Digital: DAOs primarily raise funds via crowdfunding/issuing digital tokens. In contrast, corporations often issue securities, such as shares of stock.
• Transparency: The operations of a DAO are embedded in code for everyone to see and are, thus, completely transparent. Operations are usually global and not tethered to any centralized governing body. Conversely, corporations generally keep their affairs private and are more likely to be domestic enterprises.

Based on the above, DAOs can have several advantages over traditional companies. From an investor’s perspective, they allow members to pool their funds, are more transparent, and are controlled by the stakeholders themselves.

DAOs are not without disadvantages. One of the most notable is that the legal structure for DAOs is still evolving. Additionally, given that the organization’s operations take place completely via blockchain technology, security flaws can cause significant concerns. Finally, while members of a DAO share the rewards, they also assume all the risks.

Launching a DAO

As Coin Telegraph explains, launching a DAO is usually a three-step process. The first step is creating the smart contract that will form the backbone of the DAO and dictate the rules by which it operates. Once the DAO is launched, the rules may only be changed in accordance with the organization’s governance system.

Once the smart contracts have been created, the DAO must decide how to raise funds and how to implement its governance structure. In most cases, the DAO sells tokens to raise funds, and token purchasers are granted voting rights. The final step is to deploy the DAO on the blockchain. Once launched, the DAO’s stakeholders determine its future. The organization’s creators generally have the same voting rights as other stakeholders.

Key Takeaway

DAOs have become more common in the past few years. While not every entrepreneur will be willing to launch a completely digital enterprise, DAOs illustrate how technology can be used to streamline the operations of all types of companies.

If you have questions, please contact us

If you have questions or if you would like to discuss the matter further, please contact me, Dan Brecher, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.