Discover What You Need to Know About Decentralized Autonomous Organization (DAO)

The cryptocurrency industry is experiencing rapid growth, with increasing participation from major financial institutions and institutional investors. At the same time, new ways to profit from digital asset ownership are continuously emerging. DAO (Decentralized Autonomous Organization) is one of the concepts gaining significant attention and is expected to become a main trend in the near future.

What Is a DAO? Basic Definition

A DAO represents one of the most advanced applications in the decentralized finance (DeFi) sector, functioning as a governance mechanism for applications within this ecosystem. Compared to traditional finance, a DAO is similar to investment funds, but they operate in a fully decentralized manner, without a centralized leadership or unified management structure.

The core idea of a DAO stems from the desire to eliminate risks related to human error or abuse of authority in financial management. Instead, DAOs use smart contracts to automate decision-making processes and raise capital from the community.

DAOs allow investors to conduct global transactions with high anonymity, while granting voting rights to token holders on potential projects supported by the DAO. Billionaire Mark Cuban has publicly supported DAOs, stating that this model represents “the perfect combination of capitalism and progressive principles,” enabling efficient governance and absolute transparency without relying on centralized agencies.

The Nature of DAO Operations

A DAO is a powerful form of decentralized investment, pooling funds from individuals interested in supporting and funding blockchain projects, as well as having the opportunity to participate in startup management. Each DAO can have its own rules and governance structure, but all are based on community and shared goals.

The operation mechanism of a DAO relies on the power of smart contracts to enforce rules and distribute voting rights among members involved in governance. Many DeFi projects use this model to transfer control to the community after the application stabilizes.

DAOs incorporate a centralized reserve fund that the community decides to use through voting. Members can propose options to be voted on within a specified period, ensuring full autonomy and transparency in management. However, in practice, some DAOs face concentration of power when a large portion of governance tokens is held by a small group of members.

Despite challenges, DAOs continue to grow strongly, especially within the Ethereum community, where DAOs have created trustless activities and a higher degree of decentralization compared to regular smart contracts.

Main Types of DAOs

Protocol-Based DAOs

This type of DAO makes up the majority of decentralized autonomous organizations, powering the DeFi market. Leading DeFi protocols use DAO models to operate lending platforms, yield farming activities, all in a fully decentralized and transparent manner. These DAOs apply extensive decentralization principles for ownership and management, aiming to create greater fairness—an area where traditional financial organizations often struggle.

Investment / Venture DAOs

Known as investment DAOs, this is the second most common category of decentralized autonomous organizations. These DAOs operate by pooling capital from multiple investors to fund promising applications and projects in the blockchain space. Unlike traditional funds, project selection decisions are made by the entire DAO community rather than a management team. The community votes to select which projects will receive funding, giving small investors a more significant voice in early investment opportunities.

Funding DAOs

Similar to investment DAOs but with a different purpose, funding DAOs raise capital from the community to finance innovative DeFi projects and other applications. This creates opportunities for new projects to raise funds for development. The community behind these DAOs operates with greater flexibility in reviewing and voting on funding proposals.

Social DAOs

Since DAOs are communities of individuals with shared goals, there are naturally DAOs established to create social communication platforms. Social DAOs use the concept of social networks but in a decentralized manner. Potential members can join after paying a fee, which may be used to purchase the DAO’s native tokens. These platforms function as virtual social networks, allowing the community to share ideas and interact.

Collection DAOs

Collection DAOs gather a community to purchase high-value digital assets. This is the only method allowing small investors to own a share of expensive digital assets like NFTs. The community pools funds to buy digital artworks with price tags, and these assets are collectively owned by all members.

Notable DAOs Today

Uniswap (UNI)

Uniswap is one of the oldest decentralized exchanges on the Ethereum network. The governance token UNI was launched in September 2020, granting the community full decentralized control over platform operations and development. UNI holders can participate in voting or delegate tokens to others regarding infrastructure, services, etc.

The development team issued 1 billion UNI tokens, with 60% allocated to the community, 21.266% to staff, 18.044% to investors, and 0.69% to advisors. Uniswap’s DAO allows the community to control platform governance, manage funds, change fee structures, and more. Recently, the community voted to expand the platform to other blockchains, increasing operational efficiency.

Decentraland (MANA)

Decentraland is a prominent metaverse project with its own DAO managing all smart contracts and assets within the ecosystem. The DAO oversees contracts related to LAND, real estate, equipment, content servers, and the marketplace. Most of the native token MANA is held in the DAO’s reserve, helping it maintain autonomy in operating the metaverse.

The DAO is set up to make Decentraland a fully decentralized virtual world. The community has control over policies, which NFTs can be listed, LAND auction rules, etc. Members can also propose and vote on policy updates.

Aave (AAVE)

Aave is another well-known DeFi protocol that has adopted a DAO to enable user participation in management. The Aave Governance DAO was launched in December 2020 with the AAVE token, providing true decentralization for its operations.

Previously, only developers could propose changes. Aave is an open-source DeFi protocol allowing users to earn interest on deposits and lend assets. The project is famous for flash loans—unsecured loans that must be repaid within the same day.

All AAVE holders can propose platform changes. The DAO also features a dual voting mechanism, allowing members to delegate separate voting rights for proposals. To protect DAO principles, a group of “Guardians” is elected with the authority to halt harmful proposals.

OpenDAO (SOS)

OpenDAO is a relatively new addition to the DAO community, launched at the end of 2021. The project distributes SOS tokens for free to users of the NFT marketplace OpenSea. Any user who made transactions before December 23 is eligible to receive SOS.

Out of a total of 100 trillion SOS tokens, 50% are allocated for airdrops, 20% are held in the DAO, 20% for staking, and 10% for liquidity providers. The DAO aims to use 20% of its shares to compensate victims of scams on the marketplace, promote NFT artists, and fund developers.

ConstitutionDAO (PEOPLE)

ConstitutionDAO quickly gained popularity after its formation in November 2021 with the goal of raising funds to purchase the original U.S. Constitution. Founded by Jonah Erlich and a group of 30 others, the DAO raised approximately $47 million on Ethereum to participate in an auction.

Although the DAO was not successful in its initial goal, the attention they received led the founder to decide to retain the PEOPLE tokens. Despite originating as a meme, PEOPLE has attracted a significant crypto community, with members continuing to buy and hold the tokens.

How to Join a DAO

Join a DAO

If you are interested in DAOs, you can start by researching those that align with your goals or interests. There are many options, and a great way to narrow down the list is to understand the mission of each DAO. You can also join the DAO’s Discord community before committing.

The next step is to purchase the DAO’s tokens to become an official part of the community. Then, you can participate in governance forums to vote on important decisions.

Create a DAO

If you want to create your own DAO, start by defining your goals and finding interested individuals. Then, establish ownership by creating and distributing tokens to members. Next, determine the governance mechanism, including voting procedures and how to distribute rewards for contributions.

Invest in DAO Tokens

Some DAO tokens perform well in the cryptocurrency market. If you want to participate in the success of a DAO indirectly, the simplest way is to buy DAO tokens through a cryptocurrency exchange.

Key Benefits of DAOs

Democratizing Ownership

The decentralized model of DAOs ensures that all members feel a sense of ownership and responsibility. Token holders can openly vote on the future direction of the DAO, creating more accessible opportunities for the public.

High Transparency

Built on blockchain, DAOs provide complete transparency in decision-making processes. All community members are given full information about voting procedures and how decisions are implemented, leading to greater fairness.

Strong Security

All actions within a DAO are executed via cryptographically secured and immutable smart contracts. The governance system cannot be tampered with by malicious actors, and all decisions are enforced by smart contracts.

Enhanced Community Engagement

DAO communities are rewarded for their contributions, leading to higher engagement with shared visions. The more active the participation, the greater the value of the DAO and its tokens.

Risk Distribution

DAOs distribute risks among members. If an investment decision fails, losses are shared rather than concentrated on an individual or small group.

Greater Inclusivity

Anyone with enough capital to buy tokens can become a DAO member. This allows small investors to access investment opportunities that previously only professional investors could participate in.

Challenges of DAOs

Regulatory Risks

The decentralized nature of DAOs makes it difficult to determine legal responsibility. Authorities cannot identify which entity is liable for misconduct, potentially creating significant risks for members.

Difficulties Achieving Full Decentralization

Many DAOs struggle to attain true decentralization, especially in early stages. Control often remains with the core development team until more members purchase governance tokens.

Quorum and Voting Issues

As DAOs grow larger, governance becomes more complex. Some require a minimum stake to participate in voting, which can concentrate power among members holding the most tokens.

Risks from Poor Code

DAOs rely entirely on smart contracts to operate. Poorly implemented code or bad governance decisions can lead to collapse, causing significant losses for the community. Some DAOs have had to shut down due to such issues.

The Future of DAOs

With the development of Web 3.0 technology, end-users will increasingly recognize the potential of decentralized systems. This could boost demand for DAOs as online communities. Although DAOs still face drawbacks, growing consumer awareness may drive innovation.

The demand for systems with high accountability and genuine decentralization will grow. Responsibility will then fall on developers to meet these needs and build DAO ecosystems that address current challenges, while providing more sustainable and flexible solutions.