What are DAOs? Decentralized Autonomous Organization

DAOs Explained: Structure, Governance & Real Examples

A DAO (Decentralized Autonomous Organization) that is run by a community without any kind of central authority like, CEO, or any kind of government.

Instead of one group making a decision, members of the organisations vote using their governance token. The rules and process are already written in smart contracts which automatically carry out the decision once approved.

This process does not require any middleman that makes everything transparent and secure.

DAOs are used in crypto projects to manage the funds of the users, helping the upgrades and guide the future of the platform.

In this blog we will break down the DAO fundamentals like voting mechanisms, token-weighted vs conviction, proposal lifecycle, treasury management best practices, DAO examples, MakerDAO, Uniswap Nouns, and legal status by jurisdiction. 

Anatomy of a DAO

HOW DOES DAO WORKS (STEP BY STEP)

1. SMART CONTRACT:- Smart contracts are the rules written as a code as its core.

Smart contracts work automatically and follow rules, without any human command.

1. Governance tokens:- people join and get voting power.

To participate, people hold governance tokens. More tokens means more votes (in most DAOs).

Tokens can be earned, bought or given as rewards.

(in simple words tokens is like a vote)

1.  Proposals:- When someone suggests something, any user can suggest ideas like:

“Let’s fund this project.”

“Let’s change the fees.”

“Let’s upgrade the system”

These ideas become proposals.

1. Community:- Before any voting takes place in Decentralized Autonomous Organization, community members first discuss the idea, this discussion is known as off-chain discussion because this discussion takes place outside the blockchain.

Community members use apps like discord, whatsapp or any chatting app to discuss the proposal.

Let’s see what actually happens before voting-

Whenever someone proposes their ideas to the community, voting didn’t take place immediately, instead the proposal is shared with the community where members discuss things like:-

• “Is this idea actually good”

• “Are there any risks?” 

• “Can it be improved?”

Members might suggest some changes, problems, or reject the idea completely.

Sometimes the original idea gets improved based on feedback before the voting.

1.  Members vote:- After the community discussion, actual voting starts.

Now all eligible members vote by using their governance tokens.

Each member votes yes or no (sometimes more options are available).

Their voting power depends on how many tokens they hold.

The voting time has a fixed time duration.

Different ways of voting:-

Not all DAOs use same voting system:-

• Token-based voting:- In this system, more tokens means more power.

• Quadratic voting:- This system is designed to reduce the power of big holders and give more influence to small users.

• Delegated voting:- In this system, any holder can transfer their voting rights to someone they trust.

What decides the outcome?

For a proposal to pass it needs QUORUM (MINIMUM NUMBERS OF VOTE) AND MAJORITY (ENOUGH “YES”).

1. What happens next?

Once voting ends:-

If a proposal passes:- The decision is automatically executed by smart contracts (code).

If it fails:- Nothing happens and the idea is simply rejected.

1. Treasury:- Treasury is DAOs wallet, in which the funds of all the community members are stored like ETH, stable coins, and DAOs own token.

Funds are controlled and locked by smart contract and no person can access them.

Funds can only be accessed by the community through voting. 

Proposal lifecycle

In DAO decision takes time because it goes through a step by step process, to make sure the idea is property discussed, approved and tested by the community members before anything happens.

1. Idea:- Everything starts with a simple idea, where a single member shares his thoughts like “should we fund this” or “should we change this”.

Other community members react, comment and agree or disagree

1. Request for comments (RFC):- If the members like the idea, it becomes more detailed.

Now, the  proposal include:

• What the problem is

• What solution is suggested

• How much funds will it require

• How to implement

And community suggest improvement

1.  Snapshot/off chain:- Before spending money by going directly on chain (blockchain), Decentralized Autonomous Organizationdoes a test, where voting happens off chain (outside blockchain).

In this step, members show how they actually feel about this proposal.

1. On-chain vote:- Now comes the important part “voting”, where all the eligible members cast their vote on the blockchain, by choosing “yes”or “no” (sometimes there are more options available).

2. Timelock and execution:- After a proposal passes through voting, nothing happens suddenly, there is usually a waiting time known as timelock.

What is timelock?:- Timelock basically is a waiting period or delay usually (1-3 days). 

In timelock the decision is approved but members can review it again.

Why add a delay:- Delay is added to double check the decision, to catch mistakes or bugs and to give the community time to react and review.

What is execution?:- After the waiting period (timelock) smart contract automatically performs the action that was approved. 

1. Treasury management:- A DAOs treasury holds all the money of the community members and it is the main source of its power and survival.

DAO uses this money to pay contributors, fund projects and to grow.

If money is not managed properly, even a strong DAO can fail.

How a well balanced treasury is structured

A well balanced treasury spread their funds into multiple different assets instead of keeping it in one place:

• 50% Native token → the DAOs own token

• 30% Stablecoins → safer, price-stable money

• 15% ETH / BTC → strong crypto assets

• 5% Other tokens → smaller investments

Reasons for diversification of funds:-

Token prices can be volatile and could change in future.

A crash in prices can make Decentralized Autonomous Organization unable to pay.

Treasury best practices:-

Managing treasury is not just about holding funds, but to make sure that DAO can survive, fund, grow, and avoid unnecessary risks.

Here the simple breakdown:-

1. Diversify into stablecoins:- DAOs should not keep all their funds into volatile assets like its own Native coin and ETH/BIT, as prices can go down if the market crashes.

To prevent the market crisis DAOs also invests in stablecoins like USDT/DAI as the value doesn't change much.

By putting money in stablecoins, DAO can prevent the worst cas scenario and will have enough money to pay salaries, run operations and to fund projects for at least 12–24 months.

1.  Use vesting for payments:- Instead of giving money in full amount DAO releases funds gradually over time.

In this way members don’t disappear and continue to contribute in future.

1. On chain transparency:- In most DAOs all treasury activities are transparent and visible to all.

This transparency builds trust in the community and also prevents  misuse of the funds.

1.  Set spending rules:- In DAO, setting spending rules means deciding the budget in advance, so there is no need for voting on every small expenditure, this spending rule can prevent the delay that happens during voting and allows DAO to function smoothly.

Dao examples: MakerDAO, Uniswap DAO and Nouns DAO

There are 3 types of DAO in the ecosystem. All three show different  ways in which DAO can work from financing to trading to social experiments. 

• MakerDAO:- MakerDAO is a decentralised system that created the stablecoin DAI, which is designed to stay very close to $1.

People can borrow DAI only by locking their crypto like ETH.

MakerDAO is one of the oldest DAO created in 2016 and has survived many market crashes.

• Uniswap DAO:- Uniswap DAO is a decentralised exchange where people can exchange their crypto without any middleman.

Uniswap became one of the most influential governance systems in di-fi.

• Nouns DAO:- Nouns DAO combines NFT ownership, governance, and funding into a single system that runs continuously and is one of the most interesting DAO experiments

• Nouns DAO follows a daily cycle where 1 NFT is created every day and auctioned to the high bidder.

• People bid through ETH.

• The winner gets 1 governance token and the ownership of the NFT.

Legal status by jurisdiction:-

• DAO is still a new concept for many countries and governments, some still haven’t figured out how to regulate them.

• That's why there is a difference in DAOs legal status around the world.

• There are some places like Marshall Island and Switzerland where DAOs are recognised to have legal status.

• There are also some places with partial clarity like the UK and Singapore.

• In the United States and China, there are still no laws regarding the status for DAOs.

 Conclusion

DAOs (Decentralized Autonomous Organizations) are a new way for 

people to work together online without a boss or central authority. 

They use smart contracts and community voting to make all the processes transparent and secure.

DAOs are opening new ways of operating things from managing funds to doing new experiments.

DISCLAMER

This blog is for educational and information purpose only and should not be considered as a financial advice.

Always do your own research before investion any thinng in DAOs.