DAO (Decentralized Autonomous Organization)

These organizational structures exist on the blockchain, with transparent governance rules set in code. Through the procedures laid out in these rules, members are able to collectively vote on proposals. This creates a means of collective governance and group coordination without relying on a central leader.

Members propose actions — such as a treasury payout or fee structure change — then token holders are invited to vote via smart contract. If the proposal passes, its result is often automatically carried out by the smart contracts themselves, which can distribute funds or enact other changes. Every vote, result and subsequent action is recorded onchain, meaning anyone can verify how it transpired.

Typically, DAOs tie voting rights to a token, with larger holdings equating to greater voting weight. This structure means that those with a greater vested interest in the DAO’s success have a greater say in how it is managed. However, it also means that wealthier participants can simply buy influence in the organization, undermining smaller holders.

Additional downsides include low voter turnout, which is common across many DAOs, and legal ambiguity. In many jurisdictions, existing law has no clear category in which to place these organizations, which can lead to regulatory uncertainty over their activities.

DAOs can be established for any number of purposes. Some function like a VC firm, pooling capital and having members vote on its allocation; others manage the development and operations of DeFi protocols; others manage treasuries for blockchain ecosystems, handing out grants to projects building on the chain.