First popularized by the ill-fated Ethereum project which resulted in the split to Ethereum Classic, the DAO is a bit of a blockchain buzzword. This innovation extends far beyond simple hype, however, and could revolutionize the way we structure organizations. Here’s a breakdown of what makes a DAO, as well as an explanation of why we should care.
What is a DAO?
“DAO” is an acronym for “decentralized autonomous organization.” In order to qualify as a DAO, an entity must complete all three requirements: decentralization, autonomy, and organization.
The first, and possibly most important, aspect of a DAO is decentralization. This means that no single person or group of people has control over the organization or can dictate its membership. In order to function properly, a DAO must have hard-coded rules for participation that theoretically could allow anyone to participate and have a say in how the organization is run without permission from existing members or founders. In order to test this theory in practice, an individual or group would have to participate in, and have some control over, parts of the DAO in a situation where founders and key members did not wish this to happen. A DAO has open participation and influence: just plug in members and it runs.
Another aspect that is as crucial as the first is autonomy. A theoretically decentralized organization that is not a self-contained ecosystem will have to submit itself to outside influences for funding and other support. This means that outside groups can control a decentralized organization simply by providing funding or other important functions, thereby rendering the organization centralized in practice. A true DAO, therefore, needs a self-funding model. For a currency-based DAO this simply means having a portion of funds set aside to self-fund the group. For others the model may vary, and may include token sales or group ownership over income-producing assets.
Finally, a DAO must be organized. An open-source project may be decentralized in that anyone can use or build on its services, and some decentralized projects may even provide internal funding for participants. However, in order to qualify as a DAO a project must have some sort of organizational structure that allows the entire group to come together and make unified decisions about the direction of the network.
A true DAO, therefore, has to be completely decentralized and open to participation from anyone who qualifies under its uniform rules, has to have completely independent funding and support, and must be able to come together as a unified network to make decisions.
Why does the DAO matter?
That’s all well and good, and certainly exciting, but why does a DAO even matter? What problems does this innovation actually solve?
Trustless governance solves corruption
The main attraction of a DAO is how it enables trustless governance. This means that a true DAO will run itself automatically, without having to trust any individuals or entity to function. Historically, many theoretically decentralized governance structures have come to be, but with rules and laws written on paper. These systems inherently trust participants to follow the rules, or at best provide incentives to behave honorably, but can never ensure that the rules are followed. With a DAO, participants are limited to the rules of the system, with no room for corruption. A well-designed DAO can theoretically make decisions that are not optimal, but are technologically incapable of corruption.
Decentralized structure minimizes external threats
A true DAO also minimizes external threats, a concept commonly known as “censorship resistance.” A traditional organization that has somehow managed to remain true to its mission can nonetheless be conquered and compromised by force. A perfectly democratically-elected government or board of directors of a company can nonetheless be intimidated and taken over by a hostile group, and be forced to dismantle or centralize. With a DAO the rules of the organization cannot be modified through force, and the loss of a few key members does not jeopardize the rest of the group. Even if the majority of the DAO’s membership is destroyed or forced to exit, new members can simply join in and continue to run the group without issue. The implications of a truly censorship resistant organization on today’s global stage are huge.
Self-funding gives strength and autonomy
The final crucial piece of the DAO is self-funding. By functioning without any outside help, the organization remains immune to major conflicts of interest, or de facto control by powerful entities. A fully decentralized organization that doesn’t pay its own bills has to rely on donations, corporate sponsors, and other methods in order to continue to function, and those funding sources can completely control the output and actions of the group indirectly. Self-funding takes care of this problem and ensures the integrity of the DAO.