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What Are DAOs and How Do They Work?

Organisation design is concerned with how to best match an organisation’s internal structure with the tasks it performs and the technical environment in which it functions. As a result, developing strategic answers to such universal challenges as task division, task allocation, reward provision, and information flows is an important goal of organisation design. Therefore, new organisational forms arise as tactics for enabling various forms of coordination, emphasizing the importance of organisational flexibility, learning, and change.

The field of organisational design is currently enjoying an exhilarating period of growth and change. New kinds of communication and collaboration have emerged as a result of technology advancements. When faced with technological advances, businesses must frequently adopt new forms in order to keep pace with the latest scene. To deal with inter- or intraorganisational learning, integration, and innovation, organisations undergoing technological transition may adopt modular forms, border structures, or autonomous units.

It is thought that technological advancements give rise to new organisational designs, which in turn give rise to unique forms. Thus, the DAOs were born.

What is a DAO?

A decentralised autonomous organisation (DAO) is a blockchain-based system that allows people to coordinate and self-govern themselves through a set of self-executing rules placed on a public blockchain. Its governance is decentralised, meaning it is not centralised. DAOs come in a variety of shapes and sizes, but they all function as democratic collectives. This means that no single person or entity exerts its rule.

DAOs, like most other Web3 technologies, are still in their early stages. Forms, structures, laws, and use cases are all still in the experimental stage. While the United States has seen tens of millions of corporations established over the previous two centuries, industry-tracking site DeepDAO estimates that there are fewer than 5,000 DAOs globally now, with fewer than 100 having assets of more than $1 million. DAOs are attracting attention not because of their current size, but because of the unusual activities they’re pursuing: investing, forming new sorts of communities, acquiring historical or culturally significant artifacts, and philanthropy.

DAOs are frequently formed by strangers who are physically separated but embrace a shared aim. It’s not uncommon for people to first express their ideas on social media platforms like Twitter or Discord; if there’s enough interest, others will join the online dialogues, just as they would on a traditional message board or chat room. DAOs have arisen to collect digital artwork, raise funding for the Ukrainian military, administer grants to finance biotech innovation, and even attempt to purchase an NBA team.

How to Build a DAO

To turn a conjecture into a functioning DAO, a team of developers must design a set of smart contracts that serve as the DAO’s basic operating system. Smart contracts are self-executing computer programs that create rules for making decisions, such as voting systems. These programs can also carry out transactions such as shifting bitcoin from one wallet to another without the need for human intervention.

Once specific criteria have been met, these contracts-as-code go into effect autonomously. They always do what is said, with no room for interpretation (albeit they don’t always accomplish what is intended due to human coding error). It’s critical to get these written regulations right from the start. Even minor errors or omissions might result in major hassles and operational failures in the future, such as security flaws that allow hackers to steal money. The DAO will need to raise funding once it has defined a baseline set of rules and implemented them into smart contracts. DAOs fundraise by releasing tokens, which are a type of digital currency linked to the smart contract. The money acquired is put into the DAO’s treasury through public or private offerings. The tokens are a type of ownership, but they are not the same as traditional equity or investment contracts; instead, they are contributions that grant governance rights but not ownership. In the traditional sense, the majority DAOs are not directly owned by anybody.

The DAO’s original creators have no more influence over the project than any other investor once the fundraising stage is completed and the project is running on the blockchain. Going forward, all members must establish a consensus on proposals, and there is no single authority in the way top management or directors operate a business. Token owners typically propose suggestions for DAO operations, which are then voted on by the community. On messaging services like Discord, a lot of conversation and brainstorming usually happens around these concepts. The smart contract will enforce the activity if the final vote is in favor of the proposal.

DAOs use several voting techniques, ranging from simple majority to quadratic voting (in which a person gets an allocation of votes and can place more than one vote for a proposal they strongly support). On blockchain, information about topics like money transactions and internal decisions is visible to everyone. This transparency is the foundation for member trust. A key element of this method is that voting processes are pre-defined and difficult to change. This is in contrast to what happens in traditional companies, when a CEO or CMO can make decisions without regard for agreement. The community votes on activities like spending money in a DAO. Although the breadth of decisions that can be made this way is more limited than in a typical organisation, there is no vagueness or fudge area in how the rules are applied once everyone agrees on them.

A DAO that adheres to smart contract–enforced decisions is less suited to ambiguous commercial situations or those where success is based on organisational fluidity — the ability to adapt to subtle changes in market conditions, such as the initial phases of markets forming for innovative products or services. Entrepreneurs must make snap decisions predicated on incomplete data and iterate quickly during this time; developing complex smart contracts to support this activity would be challenging, if not unattainable.

Communities are building DAOs around a variety of themes, including investing, producing content, and managing other blockchain-based projects. Most people who invest in DAOs are aware that they may never see their money again. Often, they’re frequently investing in a passion project with funds they can afford to lose, unlike financing a crowd-funding initiative. New entities are cropping up to help those interested in forming DAOs by simplifying technical processes, eliminating friction spots, and offering templates and tools. Upstream, for example, claims to provide a “no-code, full-stack platform,” with tools that allow anyone to build and administer a DAO.

Things to Remember

  • DAOs operate on a flattened hierarchy – everyone has a stake and no one person owns or controls the whole organisation, unlike a traditional CEO at a company.
  • They operate online and use blockchain technology as a ledger to record what goes on in the group, whether its currency changing hands or decision being made
  • When a DAO is first created, rules are written into its code in the form of smart contracts – they are programmed to run when certain actions take place. Essentially, everyone agrees to abide by a set of rules, but when these rules are violated then the funds are locked and nobody can use the DAO.
  • DAOs sell a token specific to DAO, to those who want to invest in the DAO. In return, they are given certain voting rights, usually proportional to their holdings. 

Three steps to creating a DAO:

  1. Creating smart contract – code smart contract(s) that dictate the rules of the group as well as decide on the purpose. This stage includes extensive testing of the code due to the fact that it can only be changed through group voting once the DAO is launched
  1. Raising funds – Individual members of the DAO buy tokens in exchange for a stake into it if they support their goal/mission
  1. Launch – the DAO code is deployed into the blockchain. From here on, the code can only be changed via collective voting of stakeholders. 

Why Are DAOs Useful?

  • DAOs can improve the way we organise.
  • DAOs, with their distinctive framework, hold the potential of placing an emphasis on community rather than profit and hence may provide a more socially-conscious organisation.
  • It takes a great deal of trust to start a business with someone. All you need to believe with DAOs is the DAOs code, which is completely transparent and verifiable by anyone.
  • Ameliorates a corporate organisation style that hasn’t evolved in over a century.
  • They provide a level of openness that traditional businesses do not.
  • For relatively simple activities, DAOs reduce human involvement. For these simple tasks, the objective is to end human input.
  • Without a central operator, it is feasible to create a rich, connected experience: empowering markets to decide pricing and quality, and letting players whose labour and decisions support the experience to earn directly.

Example of How That Would Work

A whimsical keychain business with ledger-based inventory can develop a smart contract that triggers at each item’s unique reorder point based on previous customer demand. The smart contract will generate, submit, and specify the delivery date for an invoice for the store’s relevant supplier. When the shipment comes, the smart contract will be notified through scanners or IoT beacons connected to the blockchain and release a cryptocurrency payout. When orders come in, it can gather client information from a CRM system, print labels automatically, and help expedite shipping.

DAOTraditional Organisation
Flat and democratic in most cases.Hierarchical in nature.
Any changes must be approved by a majority of members.Changes can be sought from a single party, or voting can be offered, depending on the arrangement.
Without a trustworthy middleman, votes are counted and the outcome is applied automatically.If voting is authorised, votes are counted internally, and the results of the vote must be handled manually.
The offered services are managed automatically and decentralised (for example distribution of charity funds).Manipulation-prone human handling or centrally controlled automation is required.
Every action is entirely transparent and open to the public.The majority of activity is private and not accessible to the public.

Advantages of a DAO

DAOs claim to encourage an emphasis on community, rather than simply profit, and may offer a more socially-progressive organisation; one meant to help individuals worldwide succeed rather than focusing exclusively on the wants of a few major shareholders, thanks to its unique structure. This could have repercussions not only for corporations, but also for how we address the issues that matter to us as a society today.

DAOs could change the way we work. Every technological advancement has altered how we operate. Hunter-gatherers became farmers thanks to the plow. The wheel granted us the ability to move around at scale.  Farmers became factory workers thanks to the spinning jenny and the power loom. Factory employees became office inhabitants thanks to industrial automation and computers, and the internet radically transformed how we did business. Now, a significant transformation is on the horizon that promises to alter the way we operate once more: Web3.

Things to Remember

  • Due to the lack of the human aspect, the system is transparent and has a low percentage of errors.
  • Accelerates decentralisation
  • The best interests of the community are served through voting by each individual.

What Are the Limitations of a DAO?

DAOs are a nascent form of business organisation that isn’t entirely legalized yet, and many are stretching customary restrictions. Most countries are concerned about how a DAO should file and pay taxes and execute legally enforceable contracts. The bulk of extant DAOs are unregistered and have an ambiguous legal position, therefore they may be considered “alegal” rather than “illegal.” This ambiguity may hinder the development of DAOs, but adhering to existing norms is also challenging. Officers and directors are unnecessary in a decentralised organisation due to their character, yet they play vital roles in enterprises, especially when things go wrong. DAOs’ legal complexity is exacerbated by their international membership base.

Knowing who you’re working with is also essential for most commercial transactions. This foundation allows a company to sue or be sued, enter into contractual agreements, and acquire, possess, develop, and dispose of property rights, among other things. Traditional corporations meet these identifiability criteria and have long been regarded as “right-and-duty bearing units,” which means they are subject to the legal system’s rights and responsibilities. To get its own identity number and be enrolled into the formal business register, most governments throughout the world need a company to give an exclusive name, a physical office address, and the name of at least one director.

These standards are difficult for DAOs to meet, particularly because many participants operate anonymously. But the instance in Wyoming, on the other hand, could serve as inspiration for DAOs looking to formalize their relationships with legal institutions and interact with jurisdiction on a more firm footing. Wyoming has approved a bill that formally recognizes DAOs and grants them the same legal authority as limited liability companies for the first time in US history.

Things to Remember

  • Choosing a project for development can be a time-consuming procedure.
  • It’s difficult to keep everyone involved when decision-making speed is lowered.
  • The bikeshed effect (also known as Parkinson’s law of triviality) is the tendency to spend an excessive amount of time on trivial items while overlooking essential matters.
  • Concentration of Voting Power Individuals who own a larger share of the token also have more voting power, which could have a detrimental impact on the DAO if a small group of people decide to vote against what the majority of people want, but since they own a larger share, they get the final say.
  • Implications for regulation.

Types of DAOs

There are various varieties of DAOs, each focusing on a distinct topic:

  • Protocol DAOs are designed to regulate decentralised protocols like borrowing and lending.
  • DAOs for investment and venture capital to fund early-stage web 3 firms, protocols, and off-chain investments, among other things.
  • Grant DAOs are designed to let nonprofit organisations make donations or strategically deploy cash assets across the web 3.0 ecosystem.
  • DAOs for philanthropy aim to advance social responsibility by organising around a common goal.
  • The goal of a Collector DAO is to pool funds so that the community can invest in blue chip art or other collectibles.
  • Instead of a usual top-down approach, media DAOs use community-driven content.
  1. Uniswap is the world’s most popular decentralised exchange.
    1. The prime function is to provide users with a community-controlled deFi utility.
  2. Maker focuses on bringing real-world consent into the crypto sphere.
    1. Aspires to become the world’s largest DeFi central bank.
    2. The decentralised stablecoin is called DAI
  3. BitDAO with $2.5 billion in investments, is the largest DeFi treasury in the world.


While a defunct decentralised autonomous organisation the ConstitutionDAO which was founded in November 2021 with the goal of purchasing an authentic copy of the US Constitution, remains a testament to what single-purpose DAOs can do. The organisation raised $47 million in Ether cryptocurrency, but the Sotheby’s auction was won by a bid of $43.2 million. Around the same time, a collection of farmers in Wyoming created a legal vehicle to purchase 40 acres of Wyoming property. Of course, things like these happen all the time. However, the more we examine this particular real estate transaction, the odd it appears.

Approximately 6,000 people made up the purchasing group. They met through online chat forums like Discord and purchased the land using bitcoin rather than dollars, yen, or any other fiat currency. Individuals’ legal rights on the land and the money from its usage or sale have yet to be resolved, so it’s unclear exactly what they bought. The coolest element of this transaction is that the organisation that bought the land has no CEO, board of directors, management, or other decision-makers. There were no people involved at all. The group votes to make decisions, but this occurs automatically, activating essential operations such as the release of funds for the land purchase. And the vote is absolutely irreversible: no one has the power, let alone the authority, to reverse it. Human intervention is not necessary nor practicable. This is the world of DAOs, unlocking shared possibilities with strangers from all four corners of the earth.

DAOs are unlikely to supplant traditional organisations, at least not in the near future. However, their existing flaws should be considered in the context of early-stage innovation: It’s unclear what they’ll become or where they’ll be most useful, but DAOs have sparked a lot of curiosity and excitement among the Web3 community. Will decentralised autonomous organisations (DAOs) supersede traditional organisations in some sorts of group-level activity? Will hybrids emerge, in which “regular” firms, for example, employ smart contracts to make firm, irreversible pledges to a constituency? Consider utilizing a DAO to allow your staff to vote on which charities to support or users to pick which features to include in the next edition of a product. There’s a lot left to the imagination in the world of crypto.

Raul Gavira
Raul Gavira

He is a 29-year-old content writer and digital marketer with a passion for Crypto, NFTs and anything else of the digital realm. Born and raised internationally, he speaks three languages fluently: Spanish, English & Dutch. His first interaction with crypto was around 2013, but he was not a firm believer of it at first. Half a decade later he found himself entering the crypto-sphere and since then he has been mesmerized by it. His goal is to continue to learn more about this fascinating world and contribute positively to its growth.