What is a DAO? (Decentralized Autonomous Organization)

A decentralized autonomous organization (DAO) is a software running on a blockchain that offers users a built-in model for the collective management of its code.

DAOs differ from traditional organizations managed by boards, committees and executives. Rather than being governed by a limited group, DAOs use a set of rules written down in code and enforced by the network of computers running a shared software.

To become a member of a DAO, users need to first join the DAO by buying its cryptocurrency. Holding the asset then generally gives users the power to vote on proposals and updates, proportional to the amount they hold. 

The first successful example of a DAO was BitShares, a virtual e-commerce platform linking merchants and customers without a central authority. At the time, Bitshares was labeled as a decentralized autonomous company (DAC), a term coined by its founder, Dan Larimer. 

Of note, the first DAO created on Ethereum, named The DAO, was marred by controversy, as hackers found a loophole in the code.

While DAOs are still in a nascent stage, many DAOs exist today.

Examples of operational DAOs include DASH, a cryptocurrency managed by its users,  MakerDAO, a software that maintains a stablecoin, and Augur, a prediction market platform.

Other use cases include incentivizing users to operate social media platforms, such as Steemit, or shared virtual worlds, such as Decentraland.

DAOs are intended to mimic a company structure where rules and regulations are built using open-source code and enforced via the use of smart contracts. 

If you’re unfamiliar, smart contracts are agreements programmed to execute if and when certain conditions are met. These rules are generally decided by the DAO stakeholders. 

Unlike traditional organizations, there is no hierarchy in DAOs. Rather, to align interests of the organization with that of its members, DAOs incentivizes a distributed network of users to achieve their goal.

One of the key features of a DAO is the internal capital that is used to incentivize these actors and ensure that the organization runs smoothly. 

Once the original set of rules have been established and programmed into smart contracts, DAOs generally enter a funding phase that anyone wishing to access it can participate in.

At the end of the funding phase, the DAO is considered live and operational, and all key decisions surrounding the organization are made by users reaching a consensus on proposals. 

By owning and locking cryptocurrencies into a voting contract, users gain the ability to vote on proposals, with the voting weight being proportional to the amount of cryptocurrency locked. 

The proposal is subsequently instated based on the predetermined network consensus rules, and voters are rewarded with additional cryptocurrency for participating.
 

Looking to learn what makes Ethereum the top option for building DAOs? Head on over to the “What is Ethereum?” page located in Kraken’s Learn Center for a deeper dive. 

If you are interested in learning more about the consensus mechanisms that power most blockchains today, you can visit Kraken’s “Proof of Work vs Proof of Stake” page.