What is a decentralized autonomous organization (DAO)?

A decentralized autonomous organization (DAO) is a group operating through blockchain-based smart contract rules to eliminate traditional management structures.

DAOs forego centralized leadership. Instead, they distribute decision-making powers throughout the organization's participants, who hold tokens that grant them voting rights on changes.

Basics of autonomous organizations

In a DAO, decision-making authority is spread among all members instead of a single entity or small cluster. Members often hold cryptocurrencies to participate in how the organization is run — a process referred to as "governance." Cryptocurrencies that are specific to a DAO or protocol and also give the user voting power in the organization are called "governance" tokens. 

Token ownership signifies DAO membership and gives users a proportional say in the organization's decisions. This ensures the power dynamics are aligned with the level of stake each member has in the group.

Once deployed, DAOs can operate without human intervention in daily operations. Smart contracts, or self-executing contracts with the terms directly written into code, automate processes and management based on pre-defined rules.

The DAO may reward members with additional tokens for their contributions to incentivize participation and align individual efforts with the organization’s goals. Users might also stake their tokens in a related protocol as a form of commitment, which can also give dedicated members further perks. Each DAO has its own operational structure. 

DAOs may form around a particular protocol or item if enough people are interested in it. For example, in 2021, a group of people banded together and created ConstitutionDAO, which unsuccessfully sought to buy a rare copy of the United States Constitution. 

Cryptocurrency in a DAO

DAOs rely on cryptocurrencies for their basic functioning. By holding tokens, participants can propose, vote on and implement changes within the organization. This ownership fosters a sense of responsibility among members, who are motivated to act in the best interest of the group.

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Some popular cryptocurrencies are actually DAO tokens. For instance, MakerDAO oversees the decentralized stablecoin DAI and uses its native token MKR. The decentralized exchange Uniswap has UNI, which is a governance token in the protocol's DAO, and the decentralized crypto lending and borrowing platform Compound has COMP


Disclaimer: This article was produced with the assistance of OpenAI’s ChatGPT 3.5/4 and reviewed and edited by our editorial team.

© 2023 The Block. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

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MK Manoylov has been a reporter for The Block since 2020 — joining just before bitcoin surpassed $20,000 for the first time. Since then, MK has written nearly 1,000 articles for the publication, covering any and all crypto news but with a penchant toward NFT, metaverse, web3 gaming, funding, crime, hack and crypto ecosystem stories. MK holds a graduate degree from New York University's Science, Health and Environmental Reporting Program (SHERP) and has also covered health topics for WebMD and Insider. You can follow MK on X @MManoylov and on LinkedIn.