Decentralised autonomous organisations (DAOs) are a cornerstone of the Web3 ecosystem, and they come with a lot of supporters and opponents. DAOs give members a way to contribute actively to their development.
Decentralised Autonomous Organisations: An Overview (DAOs)
Blockchain-based communities known as decentralised autonomous organisations (DAOs) are intended to provide Web3 companies and other cooperative ventures with a new, more transparent and democratic management structure. DAOs have been established to manage a variety of entities, such as companies, non-profit organisations and investment schemes. DAOs are intended to function without centralised leadership, and the smart contracts that oversee the project frequently define the scope of their decision-making authority and procedures.
A governance token, a form of cryptocurrency asset that may grant the bearer DAO membership and a specific level of voting power on DAO decisions, is usually minted by the founders of a DAO. Generally speaking, the more tokens a person has, the more votes they have. Like any other cryptocurrency, DAO tokens can be purchased and sold on secondary markets after being initially issued to the project’s administration, users, funders and other stakeholders. Project proposals submitted by DAO holders are subsequently put to a vote by the group as a whole.
Although some claim that Bitcoin was the first DAO, the Ethereum blockchain is where DAOs as we know them today first appeared as smart contracts. These days, similar DAOs are also constructed on different open-source blockchains. They are made to function independently using smart contracts, which codify organisational policies and carry them out when certain conditions are satisfied.
What Are the Functions of DAOs?
DAOs use the creation and sale of governance tokens to generate funding for projects and initiatives. A person may become a member and have voting rights when they purchase the DAO’s governance token, but they can also assign their voting duties to another member. Although there are many other kinds of DAOs involved in initiatives that range from entertainment to grant-making to investment, the majority of DAOs have made it their mission to oversee DeFi protocols.
The success of DAO initiatives has varied. For example, one of the biggest DeFi protocols at the moment, AAVE, is one of the biggest DAO-governed initiatives in operation and enables communication between lenders and borrowers without the need for a centralised middleman. In contrast, a millionaire recently outbid ConstitutionDAO’s effort, which included raising over $40 million to bid for a rare copy of the U.S. Constitution at a Sotheby’s auction.
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Essential Features of DAOs
DAOs aim to be autonomous, democratic, transparent and virtual. Members hardly ever, if at all, meet in person because all procedures take place online. We can use AAVE as an example. A lot of the debate surrounding its choices happens in public, on sites like Discord or in governance forums where voting also occurs.
- Autonomous and Transparent – DAOs operate independently with rules enforced by smart contracts, ensuring transparency.
- Virtual Operations – Members rarely meet in person, as all discussions and voting take place online.
- Public Decision-Making – Platforms like Discord and governance forums facilitate open debates and voting (e.g., AAVE).
- Flat Organisational Structure – Every member has ownership and decision-making power.
- Token-Based Voting – Influence is proportional to the number of governance tokens owned.
- Governance Token Distribution – Studies show 90% of voting power is held by less than 1% of holders in major DAOs.
- Future Decentralisation Potential – While some DAOs lack true decentralisation today, their transparent processes provide room for improvement.
Even while SHIB hasn’t been as successful as it once was, the project still has a vibrant and devoted community. By market capitalisation, SHIB remains among the top 15 cryptocurrencies as of this writing.
Components of DAO
When a DAO is built on a blockchain, three fundamental elements are essential:
Smart contracts
Self-executing contracts stored on a blockchain are known as smart contracts. Smart contracts are unbreakable without the consent of all parties involved since they are encoded on a blockchain. By eliminating the need for an intermediary, smart contracts automate and simplify decision-making. The rules of a DAO are contained in smart contracts, which also outline operational parameters, including member interactions, fund distribution and decision-making procedures.
Tokens
Similar to owning stock in a business, tokens are digital assets that signify membership and ownership in a DAO. Tokens in a DAO environment typically take the shape of cryptocurrencies like Ethereum. Tokens can be stored in cryptocurrency wallets and traded on cryptocurrency exchanges. Members can take part in the administration process and get a cut of the DAO’s earnings by owning tokens of that specific DAO. To participate in a DAO, you only need one token, but having more will give you more influence over decisions. A member with 200 tokens may have twice the voting power of a member with 100 tokens, depending on the conditions of the smart contract that powers the DAO.
Decentralisation, or the absence of a centralised legal entity
A DAO is managed without the involvement of any human organisation or authority. Since a DAO functions independently, no member may sway the decision-making process. Only the smart contracts’ contents, which are decided by a vote of all members, allow DAOs to function. Compared to a traditional, centralised organization, a DAO is, therefore, more democratic and, theoretically, less susceptible to corruption.
How Are DAOs Governed?
Most of the time, DAO members who own governance tokens cast votes on important choices that are then carried out by smart contracts. Let’s examine Lido DAO as an illustration. Lido Finance, a DeFi platform that provides liquid staking for Ethereum and other tokens, is governed by Lido DAO. Voting on important issues impacting the protocol’s functioning and resource distribution is possible for holders of Lido’s governance token, LDO. For example, a recent vote to amend the Lido Finance Node Operator’s Registry was approved and put into effect, limiting the maximum number of validators that a specific node operator might have while still participating in the Lido Finance network. Additionally, the DAO receives service fees from Lido, which it uses for protocol improvements, liquidity mining incentives and research and development.
Regarding its proposal procedure, members post all of their ideas on Lido DAO’s research forum and ask the public for input in order to refine plans or address concerns. A proposal will move forward seven days after its initial posting on the research forum, provided it receives positive feedback and incorporates relevant comments promptly. Next, using Snapshot, a decentralised voting platform, the proposition is placed to a consensus vote. The more LDO tokens a voter owns, the more decision-making authority they have, just like with DAOs. Voting must be finished at least 24 hours before on-chain execution, members have seven days to cast their ballots and voting cannot conclude on a weekend. Any proposal must receive the support of at least 5% of the total token supply in order to pass.
Advantages of DAOs
An entity or collective may choose to pursue a DAO structure for a number of reasons. The following are some advantages of this management style:
- Decentralisation: Rather than a central authority that is frequently greatly outnumbered by its peers, decisions that affect the organisation are made by a group of people. A DAO can distribute authority across a far wider variety of users rather than depending on the decisions of a single person (CEO) or a small group of people (Board of Directors).
- Participation: When members of an organisation have a direct voice and the ability to vote on all issues, they may feel more connected to and empowered by the organisation. A DAO enables token holders to vote, burn or spend their tokens in ways that they believe are best for the entity, even if these people might not have a lot of voting power.
- Publicity: Votes are cast using blockchain technology within a DAO and are visible to the general public. This deters activities against the community and encourages behavior that will enhance voters’ reputations.
- Community: People from all over the world can easily unite to achieve a common goal by embracing the DAO concept. No matter where they live, token holders can communicate with other owners using only an internet connection.
Limitations of DAOs
With reference to DAOs, not everything is flawless. Setting up or running a DAO incorrectly might have serious repercussions. Here are some of the restrictions DAOs must deal with:
- Speed: Every user has the chance to cast a vote in a DAO. Given time zones and responsibilities outside of the DAO, this might necessitate a considerably longer voting session.
- Education: A DAO is in charge of informing members about impending actions. Since DAO token holders may have different educational backgrounds and levels of awareness regarding initiatives, incentives or resource accessibility, DAOs frequently face the issue of bringing together a diverse group of individuals who must learn how to develop, plan and communicate.
- Inefficiency: DAOs are at serious risk of becoming inefficient. It is easy for a DAO to spend a lot more time talking about change than actually putting it into action because of the time required to inform voters, convey objectives, explain methods and enroll new members. Because a DAO must coordinate many people, it may become mired in administrative and mundane chores.
- Security: Security is a problem that affects all digital services that use blockchain resources. Implementing a DAO involves a great deal of technological know-how; otherwise, voting and decision-making could be jeopardized. If users are unable to trust the entity’s structure, trust may be betrayed, and they could decide to quit. Treasury deposits can be taken, vaults can be emptied and DAOs can be exploited even when cold wallets are employed.
Top DAOs by Governance Token Market Capitalisation
Decentralised autonomous organisations (DAOs) play a crucial role in the Web3 ecosystem, enabling decentralised governance of blockchain projects. These DAOs oversee protocols, manage funding, and shape decision-making through community-driven initiatives. Below are some of the most prominent DAOs based on their governance token market capitalisation.
Leading DAOs in the Blockchain Space
As of recent market data, the largest DAOs by governance token market capitalisation include Uniswap Foundation, Lido DAO and Ape Foundation. Each of these organizations governs major blockchain protocols, from decentralised exchanges to liquid staking and NFT ecosystems.
Top 10 DAOs by Market Capitalisation
DAO | Project | Token | Market Capitalisation | Project Focus |
Uniswap Foundation | Uniswap | UNI | $3.4 billion | Decentralised Exchange (DEX) |
Lido DAO | Lido | LDO | $2.1 billion | Liquid Staking Protocol |
Ape Foundation | ApeCoin | APE | $1.5 billion | NFTs, Metaverse and Web3 Entertainment |
Arbitrum Foundation | Arbitrum | ARB | $1.5 billion | Layer 2 Blockchain on Ethereum |
Internet Computer | Service Nervous System | ICP | $1.4 billion | Web3 Infrastructure Blockchain |
Aave | Aave Liquidity Protocol | AAVE | $1 billion | Decentralised Lending Protocol |
BitDAO | BitDAO | BIT | $1 billion | Web3 Project Funding |
Curve.fi DAO | Curve | CRV | $778 million | Decentralised Exchange (DEX) |
Synthetix | Synthetix | SNX | $691 million | Derivatives Liquidity Protocol |
MakerDAO | Dai Stablecoin | MKR | $677 million | Smart Contract Platform |
DAOs continue to reshape blockchain governance by ensuring community participation in decision-making. As the adoption of Web3 coins grows, these decentralised organisations will play a vital role in the evolution of decentralised finance (DeFi), NFTs and broader blockchain applications.
Launching a DAO: The Steps
Creating a digital DAO is far more difficult than creating a paper contract. Building, funding and deploying a whole digital infrastructure on a blockchain is necessary to automate and enforce smart contracts globally. The three necessary actions to start a DAO online are listed below:
Creation of Smart Contracts
A DAO is governed by one or more smart contracts that are created by a developer (or team of developers). The guidelines that specify how the DAO will function in terms of voting, decision-making and token distribution are contained in the smart contract.
Finances
The DAO must raise money after the smart contract is developed. Tokens, which stand for ownership or participation in the DAO, are usually sold to accomplish this. Members can vote on proposals and decisions within the DAO using these tokens, which they can purchase and sell on cryptocurrency exchanges.
Implementation
The DAO is implemented on the blockchain following the completion of the smart contract and the acquisition of financing. The DAO goes “live” at this point. Now, stakeholders have the ability to vote on proposals, take part in the DAO and decide how the organization will develop.
Conclusion
Decentralised autonomous organisations (DAOs) are revolutionising governance in the blockchain ecosystem, offering a transparent and community-driven approach to decision-making. By leveraging smart contracts, DAOs enable participants to have a direct say in the management of decentralised projects, ranging from DeFi protocols to NFT platforms. While DAOs present numerous advantages, such as automation and decentralisation, challenges like governance inefficiencies and security risks still exist.
For investors and crypto enthusiasts, understanding DAOs is crucial to navigating the evolving digital economy. Platforms like KoinX simplify crypto taxation and portfolio management, helping DAO participants track their investments and ensure compliance with regulatory requirements. As DAOs continue to evolve, their impact on Web3, finance and governance will expand, making them a fundamental pillar of the decentralised future.
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Frequently Asked Questions
How does a DAO function?
A DAO is set up using a managerial procedure that gives all of its members voting power and decision-making ability. A DAO’s members have the ability to vote on and propose decisions, which eventually result in smart contracts that are viewable on the blockchain. The DAO’s regulations are contained in these contracts. You need to possess the DAO’s unique token in order to be a member and, consequently, a co-manager.
What does a DAO look like?
Decentraland, a 3D virtual environment managed only by its members, is a true example of a DAO. Users can purchase real estate, create avatars and even launch their own company. There is no centralised authority; everyone who has MANA, the DAO’s cryptocurrency token, can participate in platform management. Even big companies like Adidas and Coca-Cola take part in this DAO.
Who owns DAOs?
DAOs are, broadly speaking, member-owned communities with decentralised governance. It’s unclear what exactly this kind of corporate organisation’s legal status is.
What makes DAOs different from traditional organisations?
Decentralised autonomous organisations (DAOs) operate without a central authority, relying on smart contracts and blockchain technology to enforce rules. Unlike traditional organisations, where executives and boards make key decisions, DAOs use token-based governance, allowing members to vote on proposals. This ensures transparency, reduces bureaucracy and enables global participation. Since all transactions and decisions are recorded on the blockchain, DAOs promote trust and accountability, making them a revolutionary model for decentralised governance.
