In January 2009, Satoshi Nakamato flipped the script on the world’s financial systems by mining the first bitcoin, a peer-to-peer cryptocurrency. The goal? Take back powers from the big banks to let people own their financial future. With the same defiant attitude, a group of developers spearheaded by German engineer Christoph Jentzsch created in 2016 the first functioning decentralized autonomous organization (DAO) meant to create for-profit companies that belong to everyone.
Seven years later, is this model working? Better yet, beyond the acronym, are we clear on what a DAO actually is? Who decides what qualifies as a DAO? We’ll explore all these questions in this article.
A DAO is like a digital club where people come together with a common mission, such as sponsoring college athletes or organizing hackathons. Here, central authorities such CEOs or boards of directors are rejected altogether. Instead, DAOs aim to sustain “headless governance,” a common phrase used to describe a system in which decisions are forged collectively by the members who use digital tokens bought through a digital ledger called the blockchain. All the rules and decisions are encoded into a smart contract, which is securely stored on the blockchain. This way, the balance of power is shifted, granting everyone a voice in shaping how the DAO operates.
As said above, the concept of people-powered entities was pioneered in 2016 by Christoph Jentzsch, former co-founder of Slock.it, a smart locks (stocks) company operating on the Ethereum blockchain. Jentzsch authored The first DAO whitepaper, with the idea that DAOs are meant to guarantee the application and functioning of rules governing various forms of organizations while providing transparency and trust.
However, nailing clear definitions for peer-run enterprises like DAOs remains challenging and hotly debated at times. Section 204 of the Lummis-Gillibrand bill offers a fractional framework that leaves interpretation wide open. The bill specifies that “certain decentralized autonomous organizations (DAOs) are business entities for the purposes of the tax code” and that they should “be incorporated or organized under the laws for a jurisdiction as an LLC, corporation, partnership, foundation, cooperative or similar organization.”
That’s it. It’s still rather unclear which DAOs qualify as businesses and which ones do not. So far, only the states of Vermont, Wyoming, and Tennessee in the U.S. have jumped into the deep end in an attempt to come up with clear answers.
Wyoming (enacted July 2021) and Tennessee (enacted April 2022) permit DAOs to register as limited liability companies (LLCs), while Vermont (enacted in 2018) does not explicitly mention DAOs but allows them to register as blockchain-based LLCs. The legal landscape is evolving, but a standardized definition sorely needed if DAOs are to find recognition within their jurisdiction.
While exciting, such formal definitions of DAOs have pros and cons, which we will get into further when we compare expectations to reality.
Now that we know what a DAO is, we’ll look into active DAOs to see if all checks out.
A group of developers from the German blockchain venture Slock.it and Mobotiq (a French electric vehicle start-up) founded the first-ever decentralized autonomous organization in 2016, and called it, The DAO. The DAO’s purpose was to make crowdfunding easier for Web3 projects. It was created on the Ethereum blockchain with a smart contract that provided voting rights and ownership to 11,000 participants.The project is infamous for being hacked due to the vulnerability of the code at the time. Attackers drained around $3.6M of ETH from the $150M raised before white hat hackers, or ethical hackers, intervened. They stopped the attacks by getting DAO approval for a hard fork, which essentially makes a copy of the existing blockchain to fix the problem. This helped them move the recovered funds to a new Ethereum blockchain. Even though 70% of the money was recovered, The DAO’s initial coin offering (ICO) was delisted by popular crypto exchanges.
Take Up Space is a creative collective and media company with the core mission to empower BIPOC & LGBTQ individuals to embrace their true selves. They do so through media, storytelling, community engagement, and experiences. The community, acting as an editor-in-chief, votes on magazine content.
Members join the DAO by minting an NFT token, and during a recent X (Twitter) Space, Take Up Space’s co-founder Paff discussed the varying levels of decentralization at which DAOs can operate, emphasizing that it’s up to the organization to decide based on its goals.
Paff explains: “Decentralization is a spectrum. [A DAO] can be fully decentralized or it can be partially decentralized, but the exact amount and in the exact ways is really tailored to the specific organization.”
In addition to having a curated drop on Zora.co, a space for creators and collectors on the Ethereum blockchain, Paff has announced Take Up Space DAO is about to launch its first magazine soon.
Hailed as one of the most exciting experiments in decentralized intellectual property (IP) management, NounsDAO is on the leading edge of web3 and the entertainment industry.
NounsDAO broadens its horizons with Legacy Entertainment partnerships, funding groundbreaking projects:
During a recent X (Twitter) Space, Gami, a key figure in the Nouns DAO and the founder of the Gnars DAO, highlighted the DAO’s innovative tools like the Nouns Builder, empowering token holders to craft their own Noun tokens. This crypto-native collective, blending developers and artists, conducts daily NFT auctions, channeling proceeds into their treasury. Governance relies on digital signatures from 10 designated Nounders.
On a contrasting note, a historic shakeup hit Nouns DAO in September 2023, as around 40% of Noun holders departed, seeking refunds. Controversies revolved around treasury spending, including disagreements on proposals, token devaluation (around 32.9 ETH), and profit concerns.
Founded in February 2022, Blu3 Global is an inclusive community striving to foster the future builders and founders of the Web3 era. It achieves this through hackathons, workshops, and in-person meetups, even extending their reach to Latin America with Blu3 Latam and the African continent. Blu3 Africa aims specifically to empower women and non-binary individuals to enter Web3.
The community operates as a DAO, with elected governors facilitating governance. Head of Marketing and founder of Blu3 Africa Julie O shared in a recent interview with BFF that she started the African chapter to ensure women on the continent who wanted to become developers in Solidity, an advanced programming language to create smart contracts on the Ethereum blockchain, had that opportunity.
Recently, Blu3 Africa elected and sent speakers to participate in EthSafari 2023 (where, coincidentally, The DAO also hosted workshops). The in-person event went was held in Kenya from Sept. 18 to Sept. 24.
Established in 2022 in Negril, Jamaica, Carib DAO’s mission is to ensure the Caribbean as a region doesn't miss out on Web3 as it did on Web2.
In a recent interview with BFF, founder and Chief Technical Officer Donald P. revealed the idea to create Carib DAO came when he realized a foreigner had gone on a domain acquisition spree and bought all major Internet domains in Jamaica. Since then, through educational workshops, project incubation, and crowdfunding, the DAO aims to provide financial freedom for the Caribbean people. It operates in a fully decentralized manner, with decisions voted on by the community through the Carib Token.
The initial vision of DAOs was to embrace complete decentralization with open arms. Unfortunately, this reality is harder to walk out, if only for the time it can take to reach a single decision. Sometimes, the voting process will drag over multiple meetings. such as slow decision-making.
During a July X (Twitter) space with BFF, Julie O, shared that unexpected challenges can come with embracing decentralization.
She explains, “We wanted to ensure that all the people that brought us together and given us that success were able to be a significant part of the journey. One of our challenges has been the realization that with having so many people involved in decision-making, it can take a long time to have decisions made.”
Gami also shared that each DAO member comes with different ideologies and beliefs that might align at the beginning, but will evolve and move away from the initial vision, making it hard to keep everyone moving in the same direction. Yet, for him complete decentralization is best because the “autonomous” part doesn’t only refer to automating governance on the blockchain. The point is to have a community that is self directed.
DP holds a similar view. According to him, a DAO should be led by its community. Hard stop. Success means the community will no longer need his help. He adds that has observed bad actors exploit DAOs' positive image and promise of utility for token pumping instead of community-centric projects.
So, do DAOs deliver on their promise on community-led enterprises? In 2023, it seems they're gaining traction, with the professional services firm British Partnership Ernst and Young listing a whopping 13,000 active DAOs as of May 2023.
However, it's essential to remember that DAOs are still relatively young, and assessing their long-term success — which often even takes several years for traditional businesses — requires patience.
This time could also be an opportunity for DAOs to refine their tools for more efficient decision-making. Just an anecdotal look at the five DAOs listed in this article, for instance, demonstrates how consistent progress can lead to a community-wide impact:
It’s clear these five DAOs are effectively empowering their members to shape the Web3 culture, expand diversity, and create change makers. However, some critical challenges persist. In the wider Web3 landscape, most attention gravitates towards the hottest coins. Externally, the lack of a legal framework hinders them from obtaining vital privileges like funding access and tax breaks. This legal void also exposes token holders to personal liability risks in cases of fund loss, treasury issues, and hacks.
Nevertheless, many in the Web3 community believe a bright future for DAOs, especially for those building resilient communities during downturns.
Émilie Boivin is a crypto and AI enthusiast who covers immersive technologies, ethics, financial innovation and the Metaverse. Connect with her on Twitter.
This article and all the information in it does not constitute financial advice. If you don’t want to invest money or time in Web3, you don’t have to. As always: Do your own research.
