How Do DAOs Really Work? Everything You Need to Know About the Hottest Trend in the Crypto World

There is a concept at the heart of the exciting developments you’ve seen in the crypto market in recent years: DAOs. These structures, defined as Decentralized Autonomous Organizations, are shaking up the foundation of the financial system. So, what exactly are DAOs and why have they become so important?

Why Are DAOs So Important?

In traditional companies, decision-making is in the hands of central authorities. There is a president, a CEO, a board of directors. In DAOs, however, the situation is completely different. Decisions are made through voting by the entire community. This rewrites the concepts of finance and governance from the ground up.

Even billionaire Mark Cuban has said that DAOs are “the ultimate combination of capitalism and progress.” Indeed, these structures offer a system that is decentralized, fully transparent, and does not require trust. Smart contracts aim to minimize human error.

How Do DAOs Operate?

Smart contracts are the heart of DAOs. Since all rules are converted into code, the system operates automatically. A DAO has a treasury, and community members vote on how to use this treasury to make decisions.

Members join by acquiring specific tokens. These tokens grant governance rights and also strengthen the sense of belonging. Proposals are submitted, discussed, then voted on. The entire process is recorded on the blockchain, ensuring full transparency.

Different Types of DAOs

Protocol DAOs: DeFi’s Central

DAOs supporting DeFi giants like Uniswap and Aave operate at the protocol level. Uniswap’s UNI token, Aave’s AAVE token, and similar tools manage the community ecosystem. These DAOs eliminate the centralized control offered by traditional financial institutions.

Venture Capital DAOs: A New Approach for Investors

Retail investors are now on equal footing with professional investors. The community decides which projects to invest in. This structure breaks down the gatekeeping of traditional venture capital funds.

Grant DAOs: Rewards for Innovation

New and emerging DeFi projects receive funding from grant DAOs. The community determines which projects are worth supporting. This encourages local and new ideas within the ecosystem.

Social and Collector DAOs

Social DAOs like Bored Ape Yacht Club bring like-minded people together. Collector DAOs enable the community to purchase expensive NFTs collectively. They offer the opportunity for individuals to co-own valuable digital assets that they couldn’t buy alone.

Real Examples: DAOs in Practice

Uniswap: The Central Governance of the DEX

Ethereum’s largest decentralized exchange, Uniswap, launched the UNI token in September 2020. While 1 billion UNI tokens were distributed, 60% went to community members, 21.266% to the team and employees, and 18.044% to investors. Today, even major decisions like switching to Polygon are determined through community voting.

Decentraland: The DAO of the Metaverse

All operations of the virtual world Decentraland are managed by its own DAO. MANA token holders decide which NFTs will appear on the platform, land auctions, and even marketplace rules. The security advisory board is also elected by the community.

Aave: The Architect of Flash Loans

Aave is the first protocol to introduce flash loans—instant, unsecured loans in DeFi. In December 2020, the AAVE governance token was introduced. Out of 16 million AAVE tokens, 13 million were distributed to community members. Today, any AAVE holder can submit new proposals to the platform.

( OpenDAO: The NFT Community’s Reward

At the end of 2021, OpenSea users started receiving free SOS tokens. Half of the 100 trillion token supply was allocated for airdrops. The DAO plans to use these tokens to compensate victims of scams on OpenSea.

) ConstitutionDAO: The Power of Community Funding

In November 2021, ConstitutionDAO raised $47 million to purchase the original copy of the US Constitution, demonstrating the power of the crypto community. The PEOPLE token is still held today as more than just a meme, as a genuine community token.

How to Join DAOs?

Joining an Existing DAO

Find a DAO that matches your goals and join its Discord community to test it out. Then, purchase the DAO’s tokens to become an official member. Actively participate in governance forums by discussing and voting.

Creating Your Own DAO

Choose a purpose, find like-minded individuals. Create tokens and distribute them. Design and implement governance mechanisms such as ###voting systems, reward structures, decision-making processes###.

( Investing in DAOs

By investing in DAO tokens from crypto exchanges, you can contribute to the success of a specific DAO. Some DAO tokens offer high returns, making them attractive investment tools.

The Tremendous Advantages Offered by DAOs

) Ownership Opens to Everyone

In traditional venture capital funds, the door was very narrow. In DAOs, anyone who can buy tokens can participate. Retail investors gain access to opportunities that were previously inaccessible.

Transparency Rule

Thanks to blockchain, every decision, transaction, and voting step is recorded and auditable. There are no secret decisions or backroom deals. The community can see everything.

Security at the Highest Level

Thanks to cryptographic signatures of smart contracts, no one can make changes to the system. Malicious actors cannot take any steps within the DAO. Decisions made cannot be altered.

Increased Community Power

Members contributing to the DAO are rewarded. This way, the community becomes not just external customers but also owners. The higher the participation, the greater the value and potential of the DAO.

Risk Is Distributed to All

If an investment fails, losses are spread across everyone. Unlike traditional venture capital investors, individuals do not suffer significant personal losses. This is especially advantageous for startup investment DAOs.

Challenges DAOs Need to Overcome

Regulatory Uncertainty

Authorities don’t know whom to punish when trying to regulate a DAO. If no one is fully responsible, then who is? This legal gap can create serious problems.

Illusion of True Decentralization

During formation, the core team often controls most of the governance tokens. Until the community grows enough, the structure remains centralized.

Token-Based Governance Issues

Some DAOs require very high token amounts to participate in voting. This concentrates power in the hands of the wealthiest members and undermines the principle of decentralization.

Code Quality Is Critical

DAOs operate with automated systems. If the code is poor or if a flawed vision is implemented, the entire project can collapse, and the community can suffer significant losses. Many DAOs have shut down for this reason in the past.

The Future of DAOs Looks Bright

As Web3 technologies spread, interest in DAOs will grow. As end users better understand the power of decentralized technology, demand for these structures could surge. Developers will focus on building more resilient, more decentralized, and more accountable DAOs.

The coming years will reveal how DAOs overcome their challenges. Models that offer true decentralization and succeed in the long term will become dominant.

Summary: What You Need to Know About DAOs

1. DAOs are decentralized structures that distribute decision-making power among the community via smart contracts.

2. There are many types, including Protocol DAOs, Venture Capital DAOs, Grant DAOs, Social DAOs, Collector DAOs, each with its own purpose and function.

3. The success of projects like Uniswap, Aave, Decentraland, OpenDAO, and ConstitutionDAO demonstrates the power of DAOs in the crypto ecosystem.

4. Options to get started include joining an existing DAO, creating your own DAO, or investing in DAO tokens.

5. The core benefits of DAOs are transparency, democratized ownership, increased community participation, security, and distributed risk.

6. Major challenges include regulatory uncertainty, the difficulty of achieving true decentralization, token-based governance issues, and reliance on code quality.

7. The future of DAOs looks promising. As technology matures and communities grow, DAOs could transform the structure of finance and governance.