In Eastern religions, this symbol pronounced “dao” means the way. It holds a lot of different meanings, but overall it symbolizes the way the universe works. In crypto, a DAO is an idea for how communities can work. D-A-O, short for decentralized autonomous organizations, or DAOs, have gotten a lot of attention over the past year. With the rise and fall of Olympus DAO forks, DeFi and blockchain development DAOs amassing enormous treasuries, and DAOs being used to run businesses and raise funds, these blockchain-based treasuries with tokenized voting power have a lot of potential. But what exactly are DAOs? How did they start? And what’s in their future? Today, we’re diving into DAOs and how they could become the future of blockchain development, DeFi, and even the future of work? I’m going to need some proof of that. Let’s get it! DAOs are organizations run by a group of people with no hierarchy where transactions and rules are recorded on the blockchain, decisions are voted on by the group, and funds are shared in a treasury. Bitcoin is considered the original blockchain DAO. And there are many different types of DAOs that run on blockchains today. Here’s a quick overview. Social DAOs are platforms for social networking, uniting groups with shared interests.
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An example of a social DAO is Friends With Benefits, a creative community with a mission to lead the transformation of Web3. The platform acts as a bridge between creators and blockchain technology, cutting out the middleman to fund artists and create culture. Investment DAOs raise money for DeFi activities and can be separated into different types. Utility investment DAOs use their funds to bring collateralization or utility to a project, usually a pegged asset. An example of this is MakerDAO, that establishes the value of Dai and Olympus DAO to build a collateral treasury. Venture investment DAOs are decentralized venture capital that allows venture capital firms to engage directly with the DeFi community. An example of this is BitDAO, which uses BIT token in governance to vote on how to invest the DAO’s treasury. Collector DAOs are used for NFTs. DAO members can own parts of high-value NFTs and decide what pieces they want to collect and sell. Flamingo DAO wants to tokenize important NFT art pieces, and their goal is to collectively purchase, archive and collect NFTs. Grant DAOs collect funds and allocate them based on DAO votes, usually to facilitate nonprofit donations. Aave Grants is an arm of Aave that has money allocated to it every quarter, and the grant DAO votes on how to distribute the funds. Media DAOs produce podcasts, write articles and create videos, and their content is driven by the DAO community. Bankless DAO is a media company focused on showing people how to become bankless using crypto. Decrypt is not a DAO, but it has an associated DAO that allows users to vote on the kinds of content they want to see. Protocol DAOs are the DeFi platforms we know and love. They use smart contracts to provide decentralized finance products, and decision making is done within the DAO by voting on proposals. Examples are MakerDAO, Uniswap, Yearn Finance and others. DAOs can be organized into sub-DAOs, where a subset of DAO members manage smaller areas of the operation, making decisions easier to manage as an organization gets bigger.
Balancer Protocol, an automated portfolio management and trading platform, created sub-DAOs as membership grew. So, how did DAO start? In May of 2016, members of the Ethereum community formed The DAO, also known as Genesis DAO. When it was created, anyone could send Ether to a wallet address and receive DAO tokens. Anyone could pitch a project to receive funding. Projects turned to profit. DAO token holders would receive rewards. At first, the project was successful. 12.7 million Ether was deposited into the DAO wallet, more than $150 million worth. It was one of the earliest high-profile projects built on Ethereum. The DAO met its end in June 2016 when a hacker found a way to drain funds from the DAO, stealing 3.6 million ETH within the first few hours of the hack. The hack was not only a drain on the DAO but also on legitimacy of the Ethereum blockchain at the time. The DAO was so heavily crowdfunded. It held around 14% of all Ethereum in circulation.
This is how we ended up with Ethereum and Ethereum Classic. So Vitalik Buterin initially proposed a soft fork of the Ethereum network to blacklist the attacker, but through the rules set out in the smart contract code, the hacker claimed that the funds were taken legally and threatened to take legal action if the funds were seized, or bribed miners not to comply. A hard fork was proposed that would roll back the Ethereum network’s history and reallocate the DAO’s Ether to a different smart contract. This created controversy because Ethereum is supposed to be resistant to censorship. The network forked in June 2016 and created Ethereum as we know it now. Ethereum Classic is the original chain that oppose the hard fork. So fast forward to 2017, and DeFi DAOs are being heavily developed. MakerDAO was formed in 2014 by Danish entrepreneur Rune Christensen, On December 18, 2017, Dai and a smart contract were launched on the Ethereum network. Compound, founded by Geoffrey Hayes and Robert Leshner, and headquartered in San Francisco, was founded in August of 2017. Uniswap DAO was established in November of 2018. Aave was launched in 2017 with its original LEND token. Migration to the AAVE token was executed in September 2020. DeFi summer in 2020 saw explosive growth for these and many other DeFi DAO tokens. DeFi gained real traction with users. DeFi DAO tokens with over a billion dollars in market cap are Uniswap’s UNI token, with a market cap of over $3 billion, ApeCoin’s APE, with a market cap of over $2 billion, and Maker’s MKR and AAVE, with over a billion dollars each. Other project tokens in the top 10 for market cap are DASH, Curve DAO and Compound.
Another piece of DAO history happened last year when we saw the inception and rise in popularity of Olympus DAO and Olympus DAO forks, algorithmic currency protocols that promised high-yield APYs that some believes will make people rich. Olympus DAO developed a reserve currency protocol issuing the OHM token. Each OHM token is backed by one DAI, and only the protocol can mint or burn DAI tokens. When OHM trades below one DAI, the protocol buys and burns OHM. When OHM trades above one DAI, the protocol mints and sells new OHM. In theory, since the treasury holds only one DAI for each OHM, every time the treasury buys or sells, it makes a profit. The treasury either earns more than one DAI on the sale or spends less than one DAI on the purchase. Some saw this as the first decentralized bank, while others saw it as a Ponzi scheme.
Taking a look at the chart, I’d say the Ponzi scheme theory was correct. Debuting it around $400, the price of OHM saw a double top of $1,300. It fell spectacularly, as you would expect a Ponzi scheme would, to its current trading price around $15. Wonderland and its native token TIME, an Avalanche-based Olympus DAO fork, were once considered the most successful of all Olympus DAO forks, headed up by well-known developer Daniele Sesta. TIME achieved a $3.5 billion market cap in six months, only to suffer 95% decline when negative news about one of its co-founders caused investors to pull funds following an outage. Now, let’s talk about history makers. These DAOs are making history. Look at the BuyTheBroncos DAO, which is trying to raise $4 billion to acquire the Denver Broncos. In a recent tweet, Bronco DAO said that if they can’t buy the team outright, they’ve already discussed a partial stake in ownership. This will allow fans to control how the team is governed. DeFi DAOs have obviously made history. We’d be hard pressed to find someone in crypto who hasn’t heard of Uniswap, Maker, BitDAO, Compound, Curve and Aave. These protocols have massive treasuries, with the top three DeFi DAOs, Uniswap, Maker and BitDAO, having treasuries of over a billion dollars each. ENS, or Ethereum Name Service, made history by allowing users to register a human-readable name to Ethereum. This DAO has $125 million treasury with over 1.1 million names and 400,000 owners.
Rarible is a community-owned NFT marketplace where users can create, sell and collect NFTs. Its token RARI is used for voting and curating content. Rarible has a treasury of $111 million and was one of the first well-known NFT platforms. NFTs are history makers in the DAO space. They can grant access to DAOs, and collections can be owned by a DAO with each individual owning a fragment. Larger groups can control the NFT market, and members can decide which NFTs to buy. DAOs can help develop NFT projects. For example, Meebits has a DAO owned by Larva Labs. Their website says they’re creating a vehicle for funding innovative projects that will develop the ecosystem around Meebits. Gutter Cat Gang lets people decide what projects to invest in. Even the state of Wyoming made DAOs legal business entities with the Wyoming Legislature officially recognizing DAOs, giving them the same rights as limited liability corporations, or LLCs. This came into effect July 1, 2021.
So, what’s the current state of DAOs and what’s in their future? Are they just, as Ameen Soelimani jokes, little more than group chats with a joint bank account? DAOs are likely here to stay. But right now they’re in their infancy. Although many DAOs are successful, their use is still limited. Within the next few years, I can see DAOs being used by people already in the crypto space for DeFi to fund blockchain development and share assets. Many DeFi platforms are doing well. And I believe the use of DAOs and DeFi will likely continue and improve. Although DAOs will likely be a major player in the future of Web3, they first need to become more user-friendly and blockchain more widely trusted. As you and I know, blockchain has a massive learning curve, and bringing new people into DAOs will require blockchain and DAOs to be more accessible. DAOs and blockchain also have some trust issues. Just look at the Terra LUNA UST disaster that unfolded when UST depegged from $1. Even Gavin Wood, co-founder of Ethereum and founder of Polkadot, isn’t funding the Web3 Foundation with a DAO. This just shows that DAOs just aren’t quite ready for primetime yet. With DAOs, it’s not necessarily the people you have to trust. It’s the DAO’s code’s ability to prevent bad actors that need to be trustworthy from coming into play. Increasing trust requires increased understanding of blockchain and the contracts that execute transactions.
More knowledge and ability for DAO members to do their own research and find weak spots in code will create more trust. In the next few years, I can see DAOs continue to be a tool for users and developers already in crypto to continue development of DeFi, blockchain projects, philanthropy, crypto assets. For DAOs to gain even more traction with people in crypto, we will need to see DAOs and crypto in general become more user-friendly, community collaboration and the massive treasuries that DAOs can provide, and be subject to fewer failures and hacks. Community collaboration and the massive treasuries that DAOs can provide are definitely keys to blockchain innovation now. And in the future. The more talented people DAOs can onboard, the better. Vitalik Buterin said in a 2021 blog post entitled The Most Important Scarce Resource is Legitimacy, funding and development for blockchains is a small cost compared to the value that is created by them. In this way, even if DAOs are only ever limited to pooling funds and resources to develop blockchain technology, then the DAO concept will still be successful. Blockchain development is just getting started, and we haven’t even scratched the surface of what this technology is capable of. If the reputation of DAOs continues to improve, the DAO structure gains more traction within crypto, the biggest DAOs could manage billions of dollars, giving them the power to influence blockchain and financial infrastructure in powerful ways. DAO voting tokens are like equity in public companies. When a DAO does well, DAO members will be rewarded through protocol fees. Great decision making is rewarded, just like in a traditional company. Unlike a traditional company, though, everyone compensated proportional to their contribution is the key to the DAO’s growth. This has the power to increase the legitimacy of DAOs and the projects they fund and develop. Can the use case for DAOs go even further than blockchain? It’s possible that one day DAOs could become the future of how businesses are ran.
If companies will run as DAOs, there will be more opportunities for global communication and collaboration that could lead to more talented workers, better products and greater company success. Companies would no longer be owned by a single person, but shared by everyone working on them. They also wouldn’t be limited by their geography and be able to use talent and collaborate with people all over the world. This is the utopian vision of DAOs, and I believe it can be achieved once technology catches up. Imagine religious organizations using DAOs to track money and vote on proposals or a philanthropic insurance collective where people unite to pay hospital bills. DAOs can be the future of GoFundMe, allocating funds without the need for the middleman. Companies, banks, even government sectors could be run by DAOs, and the people working on them could have the freedom to work where and when they want. Making use of the efficiency, automation and borderlessness of blockchain could be good for business and workers will be intrinsically motivated to work. After all, the success of the company will become everyone’s success. DAOs have come a long way. And their future is bright. Comment below with your favorite DAO.
This article is a transcription of a video made by BitBoy Crypto
Original video: https://youtu.be/gjRzNniDVFs
