What is a DAO?

Original photo by Rodion Kutsaev on Unsplash

The Spring of the DAOs

Since the fall of The DAO in 2016, decentralized autonomous organizations have strayed from the spotlight. However, developments and experiments in this area never stopped. In 2019, support for DAOs has been gaining momentum, as illustrated by:

• Availability of the three main systems for creating DAOs on mainnet: Aragon, DAOstack, Colony
• New initiatives for governing crypto protocols with DAOs, following that of Maker: KyberDAO (Kyber Networks), PolkaDAO (Polkadot), dxDAO (Gnosis)
• The creation of jurisdictions for DAOs, either as decentralized jurisdictions (Kleros, Aragon Court) or as traditional territory based ones offering legal vehicles for DAOs (Vermont, Malta, United Kingdom, etc.).

But perhaps the strongest signal that the advent of DAOs is now, is the fact that we’re seeing enter into the “non-crypto” world. UK-based Nexus Mutual, for instance, is the first decentralized mutual insurance incorporated as a cooperative and driven by a DAO. Admittedly, the policies they issue now only insure smart contracts, but the project aims to insure other types of risks which are normally covered by traditional insurance companies.

In France, La Suite du Monde also plans to use DAOs to manage its funds and initiatives. This project seems as distant from the urban and virtual character of the crypto universe as one can be. Its purpose is to provide land as well as financial and legal support to “Imagined Communes”, local, resilient, independent, self-organized cooperatives in the context of a possible collapse of our industrial civilization.

From Prague to Curacao, Athens and New York, new DAOs pop up everywhere. All these projects share the same spirit of discovery and experimentation, the same hope of creating fairer systems, the same ethos of decentralization that is the foundation of Ethereum and permissionless public blockchains. Nevertheless, their goals and their modes of operation are very diverse. That is why it may prove useful to clarify what DAO actually means.

What is a DAO?

DAO stands for “Decentralized Autonomous Organization”. Each of these words can be interpreted in many ways, spawning different definitions of DAOs with emphasis on one aspect or another. In order to clarify the concept, let’s analyze each term.

“Autonomous”

The essential feature of DAOs is that their operating rules are programmed, meaning that they are automatically applied and enforced when the conditions specified in the software are met. This differentiates them from traditional organizations, whose rules form guidelines that someone must interpret and apply.

For example, imagine the case of an organization whose members wish to allocate funds to various projects through a commission of experts. In the case of a traditional organization, once the experts have given their opinion, employees must carry out many steps in order to release the funding, from drafting the minutes of the commission to sending the money transfer instructions to the bank.

In the case of a DAO, funds are instantly transferred as a result of the commission’s approval. Nothing can stop it, neither internal stakeholders nor third parties such as banks or even a public authority.

For the automated and secure execution of operating rules to be effective, they must be running on a public, permissionless blockchain such as Ethereum. There are two main reasons for this:

• Traditional software cannot directly handle funds. It can only transmit orders to the financial intermediaries in charge of moving money around. Using a public blockchain makes it possible to place (crypto-) currency or other (crypto-) assets under the direct and unique control of the DAO, which acts a software representation of the organization and of its rules of operation.
• Traditional software relies on an infrastructure operated by a third-party. If the rules are programmed in an application running on a cloud like AWS or on one of the company’s servers, then their execution depends on the cloud operator or the IT department, which are vulnerable to outages, errors, and outside influence.

A DAO is autonomous in the sense that its rules are self-enforced. No one can stop it nor change it from the outside.

“Decentralized”

The decentralized aspect can be understood in two different ways which shed a light on the conflicting definitions of a DAO:

1. The DAO is decentralized because it runs on a decentralized infrastructure, i.e. a public, permissionless blockchain that cannot be taken over by a State or another party.

This definition echoes the concept of autonomy described above. Yalda Mousavinia, for example, defines a DAO as “a corporation running on the digital jurisdiction”. Nothing is said about how the corporation is governed.

Similarly, Tim Bansemer states that a “DAO is a composition of smart contracts running on the underlying permissionless blockchain (e.g. Ethereum) to form an organization infrastructure.” Again, nothing is said about how power is distributed within the organization.

2. The DAO is decentralized because it’s not organized hierarchically around executives or shareholders, and it does not concentrate the power around them.

Conversely, Matan Field argues that a DAO necessarily relies on a distributed governance system, meaning that the exercise of power within the organization is collective. The COALA think-tank describes the power structure of DAOs as “heterarchical”, that is to say, based on mechanisms of cooperation without subordination.

According to this perspective, the novelty of DAOs lies precisely in their ability to coordinate a very large number of people while avoiding the ponderousness of hierarchical structures. This characteristic differentiates them from traditional organizations on a fundamental level.

These two views became the dominant narratives around DAOs. The first one could be called “The Fight for Freedom” and is perfectly captured by Aragon’s promotional video of the same name. DAOstack’s own video beautifully conveys the second narrative which could be called “The Future of Collaboration”.

In the end, these two views can be seen as complementary when considering that the essential feature of a DAO is its ability to escape seizure by a third party, be it external (autonomy) or internal (decentralization).

“Organization”

The first DAO which claimed itself as such is “The DAO”, created in 2016 to finance projects contributing to Ethereum development. The idea of ​​using a DAO rather than a foundation or venture capital was in keeping with the ethos of decentralization dear to the Ethereum community. Indeed, The DAO was an investment fund whose decisions were directly made by investors, instead of being delegated to specialized managers.

The concept of DAO was introduced earlier by Dan Larimer who, in 2013, coined the term “DAC” — Decentralized Autonomous Corporation. Dan Larimer was comparing Bitcoin to a firm whose shareholders would be the bitcoin holders and whose employees would be the miners.

The same year, Vitalik Buterin generalized the idea by imagining how a company could do without its managers. Business automation is often seen as the process of replacing low-skilled people with robots or computers, keeping more qualified staff at the controls. However, Vitalik suggested the opposite, that is to say, the replacement of management by a software technology capable of recruiting and paying people to perform the tasks that contribute to the company’s mission.

Such software technology could even pay cloud service providers to have computers on which to operate, and thus become independent of any particular infrastructure. Of course, it would be vital to ensure that this technology is protected from theft of its resources or destruction by a third party, hence the rationale for making it autonomous and decentralized.

From Organizations to Organisms

“DAO” clearly designates something broader than the typical definition of “organization” — a social group which brings people together and works toward a common purpose. Vitalik thus defines a DAO as “an entity that lives on the internet and exists autonomously, but also heavily relies on hiring individuals to perform certain tasks that the automaton itself cannot do.” Richard Burton is even more explicit: “DAO is a fancy way of saying a digital system living on Ethereum.”

Essentially, we’re talking about an entity that performs the functions of an organization and that takes on an appearance rarely associated with the term:

A blockchain

• Tezos is a public blockchain which integrates the operations necessary for its own modification within its protocol, thus making it self-adaptive. The modifications are proposed and voted on by the holders of the blockchain native tokens, according to a procedure controlled by Tezos’s code, and itself modifiable according to the same process.
• Dash is a public blockchain whose code allocates part of the block rewards (financial incentives generally used to remunerate the work of validating transactions) to a budget managed by members of the network in order to fund technical developments and promotional actions useful to the project.

An ecosystem

• Aragon Network supports the creation of hundreds of DAOs by delivering a platform for running them, applications (tokenized budget management, voting, fundraising, etc.) they can be equipped with, and a decentralized jurisdiction (Aragon Court) for resolving conflicts between them.
• La Suite du Monde is a communalist movement which supports the creation of local, self-organizing communities through the purchase of agricultural land, the provision of legal, governance, technological, and accounting resources, and the generation of a federative network.

A work of art

• The Plantoid is an electro-mechanical contraption that simulates the appearance of a plant. It is self-sustainable and can even reproduce itself through cooperation with humans that interact with it as patrons and artists.

A mutual insurance

• Nexus Mutual is a cooperative offering the services of a mutual insurance to its members, without needing a firm to handle administrative tasks. Premium management and claims processing is automated through smart contracts which directly coordinate interactions with and between policyholders.

Natural resources

• Terra0 aims to empower a forest whose economic production (sale of timber) allows it to pay its debt to those who financed the initial land acquisition. Once this debt is liquidated, the forest can use its resources to expand by buying more land.

Software

• Pocket Network is an application program interface (API) allowing access to public blockchains through a decentralized network. Its DAO will make it possible to transfer the decision-making power regarding the evolution of the code and the program’s financing to the community (developers and network node operators).
• Pando Network is a version control system (VCS) that will be used to transform each code repository (including Pando’s repository itself) into a DAO through the provision of services for contribution tracking, reputation management, and governance.

A protocol

• MakerDAO is a protocol for the creation of a synthetic stablecoin (the DAI), whose parameters are controlled by the holders of a network governance token (the MKR).
• dxDAO is a DAO for governing DutchX, a decentralized trading protocol on Ethereum. As in MakerDAO, the community can decide how the DutchX protocol evolves. In addition, the community can also introduce brand new mechanisms in order to create the protocol infrastructure that will support decentralized finance in general.

Let’s forget for a moment the image of a private company or a public administration that the term “organization” ordinarily brings to mind. Like any organization, DAOs are tools for coordinating human activity.

Beyond their sheer diversity, they display a key similar feature: the ability to facilitate the collective management of common goods, including cultural and intangible works, natural resources, economic and industrial production, and social systems.

Thanks to Kirstin Maulding.