Decentralised Autonomous Organisation (DAO)

Basics

• "In short, DAOs aim to hard-code certain rules that a company would from the get-go. This could be setting aside a certain percentage of earnings for a cause or determining a process by which such a rule could be changed. In the abstract, this is similar to how a normal company works. The big difference is that the rules of normal companies are not enforced digitally."

• Not to be confused with the failed project The DAO on the Ethereum network. This project was supposed to be a DAO but not all DAO's are this project.
• "As it currently stands (11-12-2019), virtually all DAOs are being built on Ethereum - largely due to the decentralized nature of the underlying protocol."
• From Token Tuesdays (11-12-2019):

"You can think of DAOs as a collective of like-minded individuals focused on solving a common goal. These communities leverage smart contracts to pool funds and issue new shares with a lack of hierarchy (i.e. no leaders). This system ensures no funds are being spent without the group’s consensus, presenting a new paradigm for social coordination, unlike anything we’ve seen to date.

DAOs also open the doors for users to capture value outside of tangible USD profit. In the case of Moloch and MetaCartel, share value is aggregated in terms of insights and feedback. Capital becomes social, and unique members all have an equal say in what they believe should be funded.

We’ve begun to see companies such as Stake Capital play around with a DAO model for profit-sharing and the creation of communities like Marketing DAO focused on larger marketing efforts for Ethereum."

• For a good beginners guide to DAOs, read this blog by Linda Xie (13-3-2021).

How they work

• From Token Tuesdays (11-12-2019):

"Generally speaking, they work as follows:

1. Conceive - Establish the DAO’s mission & parameters
2. Create - Deploy a contract account responsible for the creation of shares
3. Contribute - Contribute funds (commonly WETH or DAI) to mint new shares
4. Propose - Make an offering to the DAO in exchange for funding
5. Vote - Use shares to vote on new proposals. Majority generally rules
6. Distribute - Use shares and/or bank funds to fund passed proposals
7. Review - Stay in contact with fund recipients for progress & feedback 

When it comes to differentiation, there are DAOs such as Maker which don’t “fund” proposals, but rather use shares (MKR tokens) to dictate proposals through governance polls. This is different from a DAO like MetaCartel in which proposals directly request funding in the form of shares." 

• From Vitalik’s terminology guide:

"Here, we get into what is perhaps the holy grail, the thing that has the murkiest definition of all: decentralized autonomous organizations, and their corporate subclass, decentralized autonomous corporations (or, more recently, “companies”). The ideal of a decentralized autonomous organization is easy to describe: it is 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.

Given the above, the important part of the definition is actually to focus on what a DAO is not, and what is not a DAO and is instead either a DO, a DA or an automated agent/AI. First of all, let’s consider DAs. The main difference between a DA and a DAO is that a DAO has internal capital; that is, a DAO contains some kind of internal property that is valuable in some way, and it has the ability to use that property as a mechanism for rewarding certain activities. BitTorrent has no internal property, and Bitcloud/Maidsafe-like systems have reputation but that reputation is not a saleable asset. Bitcoin and Namecoin, on the other hand, do. However, plain old DOs also have internal capital, as do autonomous agents."

• On the difference with Decentralized Organisations:

"Second, we can look at DOs. The obvious difference between a DO and a DAO, and the one inherent in the language, is the word “autonomous”; that is, in a DO the humans are the ones making the decisions, and a DAO is something that, in some fashion, makes decisions for itself. This is a surprisingly tricky distinction to define because, as dictatorships are always keen to point out, there is really no difference between a certain set of actors making decisions directly and that set of actors controlling all of the information through which decisions are made. In Bitcoin, a 51% attack between a small number of mining pools can make the blockchain reverse transactions, and in a hypothetical decentralized autonomous corporation the providers of the data inputs can all collude to make the DAC think that sending all of its money to1FxkfJQLJTXpW6QmxGT6oF43ZH959ns8Cq constitutes paying for a million nodes’ worth of computing power for ten years. However, there is obviously a meaningful distinction between the two, and so we do need to define it.

My own effort at defining the difference is as follows. DOs and DAOs are both vulnerable to collusion attacks, where (in the best case) a majority or (in worse cases) a significant percentage of a certain type of members collude to specifically direct the D*O’s activity. However, the difference is this: in a DAO collusion attacks are treated as a bug, whereas in a DO they are a feature. In a democracy, for example, the whole point is that a plurality of members choose what they like best and that solution gets executed; in Bitcoin’s on the other hand, the “default” behavior that happens when everyone acts according to individual interest without any desire for a specific outcome is the intent, and a 51% attack to favor a specific blockchain is an aberration. This appeal to social consensus is similar to the definition of a government: if a local gang starts charging a property tax to all shopowners, it may even get away with it in certain parts of the world, but no significant portion of the population will treat it as legitimate, whereas if a government starts doing the same the public response will be tilted in the other direction."

• On the difference with Decentralized Autonomous Corporations:

"Decentralized autonomous corporations/companies are a smaller topic, because they are basically a subclass of DAOs, but they are worth mentioning. Since the main exponent of DAC as terminology is Daniel Larimer, we will borrow as a definition the point that he himself consistently promotes: a DAC pays dividends. That is, there is a concept of shares in a DAC which are purchaseable and tradeable in some fashion, and those shares potentially entitle their holders to continual receipts based on the DAC’s success. A DAO is non-profit; though you can make money in a DAO, the way to do that is by participating in its ecosystem and not by providing investment into the DAO itself. Obviously, this distinction is a murky one; all DAOs contain internal capital that can be owned, and the value of that internal capital can easily go up as the DAO becomes more powerful/popular, so a large portion of DAOs are inevitably going to be DAC-like to some extent.

Thus, the distinction is more of a fluid one and hinges on emphasis: to what extent are dividends the main point, and to what extent is it about earning tokens by participation? Also, to what extent does the concept of a “share” exist as opposed to simple virtual property? For example, a membership on a nonprofit board is not really a share, because membership frequently gets granted and confiscated at will, something which would be unacceptable for something classified as investable property, and a bitcoin is not a share because a bitcoin does not entitle you to any claim on profits or decision-making ability inside the system, whereas a share in a corporation definitely is a share. In the end, perhaps the distinction might ultimately be the surprisingly obscure point of whether or not the profit mechanism and the consensus mechanism are the same thing."

Easy setups

• We’ve seen tools like Daohaus and PokeMol make it easy for people to quickly launch a DAO in under 5 minutes.
• From Linda Xie (13-3-2021):

"There are a number of tools built for creating and coordinating DAOs such as Aragon, DAOStack, DAOhaus, Llama, and MyCo so that members do not have to build everything from scratch.There are also tools like Snapshot that specifically manage proposals for voting by token holders, making it easy to see relevant details of the proposal and the status of the vote. There are even projects where you can buy and sell governance votes such as Automata."

Usage

• From Token Tuesdays (11-12-2019):

"All in all, we’ve seen 40+ unique Moloch forks with a total of over 200+ unique members. While these numbers are by no means staggering, it’s showing promising signs of traction. Funding is being dispersed to talented teams, effectively allowing the community to continue experimenting in order to find solutions that work."

• One DAO dashboard is made by DeepDAO (22-10-2020).
• From DeepDAO: The DAO ecosystem’s total asset under management (as tracked by DeepDAO) at the end of Q1’21 was $931 million.
• The State of Wyoming has recognized (23-4-2021) decentralized autonomous organizations (DAOs) as a new type of limited liability company.

Pros and Cons

Pros

• Global
• Low barrier to entry
• Potentially more efficient

Cons

• From Linda Xie (13-3-2021):

1. "Depending on how the DAO is set up, it might be more difficult to coordinate and move quickly compared to centralized leadership like a CEO making quick decisions when necessary. However, a DAO could set up quorums that don’t take too long and set requirements as to how responsive DAO members need to be. Also in the beginning when there are a lot of decisions to be made, there could be more centralization among certain members and then the DAO decentralizes over time in what is referred to as “progressive decentralization.”
2. There is also the possibility of voter apathy where not all members will want to vote or are even best qualified to vote on all changes. In this case there will likely be voters delegating to members that can be more informed and active in voting that also align with their beliefs. These representatives are sometimes referred to as protocol politicians as they often campaign for delegated votes by members in the DAO similar to how existing politicians do. We might have the emergence of protocol lobbying groups that try to influence these politicians’ decisions. On the flip side one day we might even see DAOs lobbying and be major political institutions in society themselves.
3. Another issue is that by having the membership be so open, it is possible that it could lead to lower quality and higher noise within the DAO but these can be addressed through DAO screening processes or minimum token holding amounts to at least make sure the participant has skin in the game and is incentivized to see the DAO succeed."

Digix DAO Liquidation and DAO Lessons

• From this post-liquidation article (28-1-2020):

"One of the world's few live DAOs, DigixDAO, has decided to hit the self-destruct button by passing a vote in favour of Project Ragnarok.

The idea was for Project Ragnarok to recur each quarter, providing periodic opportunities for community members to pull the plug. It didn't come to that though, as the apocalypse passed with overwhelming approval the first time it was put to vote.

The final count was about 670,000 DGD (over $20 million) for yes and 20,000 DGD (about $620,000) for no. 

It's easy for the community to vote on simple yes or no decisions like "should we keep doing this?" It would be considerably harder for the community to reach agreement on more complex questions like "how much should social media managers be paid?" or "how do we quantify the benefits of Gold Silver Bull advertising DGX to its existing clients?"

If there's a rule of thumb buried around here, it's probably that DAOs can handle small and simple decisions, but big, complex multi-faceted decisions are beyond them.

And in that case, it's quite clear that DigixDAO really doesn't need to maintain a $65 million treasury. Keeping it in the treasury is simply not a good use of money when it could be earning interest instead. Without actually crunching the numbers, it looks like the potential interest earned on $65 million would have been more than enough to fund every request the DigixDAO ever approved.

And with DigixDAO as an example, it's also clear that there are potential issues with small groups, consolidation of power and economic unsustainability in DAOs. There are over 11,000 DGD addresses, but the apocalypse was passed with only 58 votes. Despite the rewards for doing so, the vast majority of people still elect not to participate."