What is a DAO? A Crash Course

We recognize that readers of this book will come from many different backgrounds. Some will be hazy about what a DAO is, while others may have direct experience contributing to multiple DAOs.

Before diving into the core subject - Impact DAOs - the aim in this initial chapter is to communicate a clear definition of the word DAO and present some of the key elements that make it a truly new approach to working together to solve some of the world’s biggest problems.

More specifically, we will cover:

• Basic Definition: What is a DAO, in the shortest possible number of words?
• Detailed Definition: Okay, what do those words mean?
• Development: How do DAOs evolve and what defines maturity?
• Rationale: What problems can DAOs solve, and how do they differ from traditional organizations?
• Landscape: What are the various sub-groups within the DAO universe?

Basic Definition

The term “DAO” has become common parlance among cryptopians, and is making its way into the mainstream discourse. But like many things in Web3, people differ on what the word means.

This is because, like many things in Web3, it is still evolving.

For an intuitive understanding of what a DAO is, the internet itself is a good starting point. This article on the Aragon blog describes the internet as a proto-DAO:

“…people self-organize into communities with a common purpose: we discuss on Twitter, vote with our attention that Facebook is better than MySpace, for example, and fund shared commons like Wikipedia.”

Precise definitions differ, but here is our version, based on the qualitative research we conducted with 30 present-day DAO builders.

“A DAO is an online community with a shared purpose and a shared crypto wallet that coordinates through collective decision making.”

This graphic, again from Aragon, gives a nifty overview of the key points of difference between DAOs and traditional corporations.

More Detailed Definition

In practice, DAOs are more complex than the above might suggest. Let’s start by unpacking the acronym “DAO”.

Decentralized: DAOs are also typically composed of self-managing guilds and project teams, meaning that power is diffuse rather than concentrated, and data is widely accessible rather than restricted. In some DAOs, certain core processes (e.g. off-boarding members) are automated by means of smart contracts and do not require human input.

Autonomous: Refers to the ability of an entity or group to side-step the standard requirements (e.g. approval to exist!) that ordinary organizations must abide by. This is possible because of the decentralized (see previous point) nature of the entity, which makes it hard for a 3rd party to exert influence. Autonomous also refers to sovereign individuals that have a right to enter and exit the DAO.

Organization: This term encompasses the ‘why’, or shared mission around which the DAO and its collaborators function. While the mission should remain consistent over time, the structures and processes of the organization will and should evolve.

Every DAO is at a different level of progress with respect to the above parameters. Some are more decentralized than others, some require partnerships and cannot be fully autonomous, and some document every key meeting meticulously in Notion while others rely on Discord chats. In its early stages, the organization is largely held together less by smart contracts and more by a strong sense of community, or ‘vibes’.

Confused? Good, that is normal. Let’s keep going.

Development

It’s best to think of DAOs in terms of a spectrum of development. Let’s begin on the left-hand side, with the least developed or ‘minimum viable’ criteria for a DAO.

Minimum Viable DAO

The MVD (Minimum Viable DAO) is the “group chat with a shared bank account”. It will have these three elements.

• Mission: This is what brought the people together in the first place. As we’ll see later, there is virtually no restriction on what this goal could be.
• Money: While members may initially at least be happy donating their time, any project requires funding at some point, and common funds are necessary.
• Medium: As people are typically in different locations, some kind of communication channel is needed for coordination such as a chat client like Discord.

The above might be better described as a pre-DAO. That said, the above three elements are the starting ingredients you need to form a DAO, and many DAOs will begin in this form.

Mature DAO

To progress beyond the MVD stage, a DAO will need to add more elements at some point. These are not just for show, but necessary to ensure sustainability and effective coordination.

• Multi-sig Treasury: If one person controls the group’s funds, they effectively own the organization.. To decentralize power, and move with speed (i.e. not at the slow pace of a bank), a multi-sig crypto wallet (i.e. requiring multiple individuals to verify transactions outgoing from the account) is a must.
• Teams: For a large group of people, both collaboration and specialization (e.g. for technical tasks) are required. Small teams of people can be given tasks by the wider group to execute independently.
• Governance framework: This is an overarching framework that represents how the group makes decisions, resolves disputes, and in particular, how and on what the community votes.
• Delegated voting: For a particularly large DAO, it is unrealistic to expect constant engagement from all voting members. Therefore, members often delegate their votes to a representative, who will participate directly in the decision-making process for proposals that arise in the DAO.
• Cashflow: In general, an organization with regular costs to cover needs regular revenues. This could be from fees (if the DAO is a business) or through monetizing member talents (e.g. NFT drops). Some may also use the native DAO token as a source of initial funds.
• Compensation/Reimbursement: Members will vary in the amount of effort they contribute to the DAO’s workings and this should be reflected financially. There also should be a clear policy on expenses (e.g. reimbursement of gas costs for voting delegates).
• Dedicated Tools: As DAOs mature, the DAO infrastructure sector is also developing to meet its growing needs. An advanced DAO will have graduated from Discord-only and added Aragon Voice or Snapshot (hopefully before the original system - or membership - breaks!).
• Onboarding process: Onboarding new members (like induction and admin at the first day at a new company) is a process that is both time-consuming and important to get right. Mapping out the required steps and designing a failsafe workflow is vital to sustaining membership growth and avoiding a knowledge gap between newcomers and the original members.
• Culture: Vision is one thing, but culture and values are another. Culture is not encoded in a DAO’s technology, but in behavior and how people treat each other. Setting an example that abides by the collectively decided mores of the group and (where necessary) addressing the behavior of others is a collective responsibility.
• Open-source data systems: As stated above, decentralization means the accessibility of data to everyone in the group. This requires systems that are non-opaque by design. Examples of tools used to make this data available include Notion, DuneAnalytics, and GitHub.

If you want to gauge how far a DAO is down the path to maturity, seek details on the above parameters. If those details don’t exist or are not widely available, you might be looking at an MVD.

Ongoing development

DAOs don’t have a long history. They first emerged into the mainstream in 2016, with the public rise and fall of “The DAO” - an ill-fated experiment brought down almost immediately by a smart contract hack.

The pace of the movement was naturally slowed by this fiasco, and only 10 DAOs existed in 2018. By 2020, this number had grown to 200, and today the number is in the thousands and growing.

The DAO concept, however, is still in the infancy stage relative to other institutions. That means every DAO is an experiment, and ‘best practices’ are all capable of improving.

In the meantime, the Web3 world is busy continuing to build out the infrastructure to support not only DAOs but also networks of DAOs through DAO2DAO collaboration mechanisms.

Rationale

To an outsider, it could be difficult to understand why all of this is necessary. What can you do with a DAO that you couldn’t do before? Isn’t this just another Web3 solution looking for a real-world problem?

These are good questions. Here are some good answers:

• Selects for motivation: DAOs demand skin in the game, but they are easy to leave. The members who stick around, and are willing to invest their time, tokens, and talent - make for a team that is truly passionate about the cause.
• Eliminates bureaucracy: other forms of organizations such as corporations are inefficient in part because they are non-transparent, slow-moving and resistant to change. DAOs are agile by both nature and design.
• Fast to setup: For now, there is no red tape in setting up a DAO - no government officials, lawyers, or bankers to wait on for approval. That means when rapid response is needed (e.g. a humanitarian crisis), DAOs can be first on the scene.
• Limitless talent pool: Work visas and immigration lines are not an issue. You can recruit from the world population and benefit from a deeper, more diverse pool of candidates.
• Decentralized Finance (DeFi): An obvious point, but in their financial affairs, DAOs benefit from all the advantages of DeFi. Multinational teams can use the same currency without worrying about exchange fees.
• Non-discriminatory: Members can be pseudonomous which means biases have less of a chance to operate.
• Self-correcting: If a DAO falls off-track, becomes hijacked or toxic, members easily vote with their feet, making destructive behaviors self-correcting by either forking into a new DAO, or in extreme cases meaning that bad DAOs lose all their members and/or shut down.

Blockchain technology and smart contracts play a large role in lowering costs and increasing speed. From a cultural perspective it is possibly the ‘pre-motivated’ nature of DAO members - attracted by a common cause, and prepared to invest time in it - that gives DAOs their key advantage. In the regular world of work, not everyone loves their job, but in the DAO world, intrinsic motivation is a pre-requisite!

DAOs naturally have problems that off-chain organizations don’t have - smart contract risk, wallet hacks, and governance hijacking to name a few. But in a constantly evolving field, these problems are not here to stay.

Current landscape

DAOs not only exist across a spectrum of maturity, but also operate across many sectors. For example:

• Collector DAOs Pool funds to purchase high-value items in the digital world (e.g. NFTs) and physical world (rare albums, documents). Examples: PleasrDAO, FlamingoDAO

• Grants DAOs Members vote on how to allocate funds to projects, typically related to the development of the blockchain ecosystem or metaverse ecosystem. Examples: MolochDAO, GitcoinDAO

• Social DAOs Attracts users whose primary aim is to communicate and network with one another, often culminating in collaborations inside or outside the DAO itself. Examples: Friends with Benefits

• DeFi DAOs Some of the earliest DAOs were straight-up companies providing a service, and have proved to be both successful and stable. Examples: MakerDAO, Uniswap

• City DAOs A new class of DAOs are emerging that are city based focused on strengthening local communities through real life interactions and mutual aid. Examples: NYC Pact DAO, Tampa Bay DAO, Belgium DAO

• Service DAOs DAOs that exist to provide support to other DAOs. Examples: dOrg, BanklessConsulting,

As you can see, the list of possibilities is endless. In the early days, DAOs were either DeFi or investment-focused. However, the concept is rapidly extending into every area of the online and offline universe.

Which brings us to Impact DAOs.

Of all the emerging categories, we believe this is the most exciting and important. The aim of Impact DAOs is to take on major social and environmental problems that traditional institutions have ignored, failed to address or failed to solve completely.