James Burtt and Paul Abercrombie are peeling back the curtain on DAOs in this week’s episode of Understanding Crypto. They explain what DAOs are, how they work, as well as the pros and cons. You can also learn how to add a DAO to your business if it’s right for you.

What’s a DAO and how does it work?

A DAO - Decentralised Autonomous Organisation - is “an organisation represented by rules encoded as a computer program that is transparent, controlled by the organisation members and not influenced by a central government,” says Wikipedia. It’s a similar idea to a traditional co-op or social club, Paul explains, where community members get together to achieve a shared goal. There’s no hierarchy or centralised leadership in a DAO, as it’s a member-owned society designed to be a safe space for people to collaborate while remaining anonymous. It’s also a safe space for people to commit funds to, as the business entity exists within a smart contract on the blockchain. Members are given rights to the business through governance tokens or NFTs. Usually, the more tokens you own, the more voting rights you have. [Listen from 00:46]

A DAO can have its own crypto wallet and address, which makes it very much like a bank account. This forgoes the lengthy bureaucratic process of opening a traditional bank account, Paul tells listeners. “The DAO can be responsible for a wallet address which is the treasury, and whatever the collective cause is, people can contribute their funds. So whether that's buying the tokens and the money from the sale of those tokens or the cryptocurrency from the sale of those tokens that's generated, goes into the shared treasury or the shared wallet and then the community can vote on how that money is spent or used,” he comments. As such, a DAO facilitates a community’s ability to fund their project quickly and effectively. Recently people created a DAO to purchase a copy of the US constitution. They were able to raise $20 million in a fortnight. Another famous example of a DAO is Friends with Benefits. People are coming together from all over the world, pooling their assets to deliver on a greater promise, through DAOs. [Listen from 7:28]

Tearing down barriers

Many crypto projects and businesses have some DAO elements built into them. For example, a group of software engineers from around the world may work together, but would be unable to open a bank account to receive payment because they cannot prove beneficial ownership. A DAO tears down these cross border payment barriers, as payment can be made in crypto to the DAO wallet. [Listen from 12:32]

A normal business hierarchy is like a pyramid, where the leader makes decisions that filter down through the business. A DAO has a flat structure by contrast. “You have a flat level of hierarchy where no one person is in charge; the collective vote is in charge, the collective vote of the community decides on the direction,” Paul remarks. “When a vote goes over a certain level it triggers the decision [based on the rules and structure put into the smart contract].” [Listen from 13:57]

Pros and cons of DAOs

“Not every business can operate as a DAO,” Paul advises. In a traditional business the founders would expect to be financially rewarded for building the business. There’s no clear way to do this in a DAO as it by nature is decentralised and no one person has sole governance. The money raised from token sales is locked in a liquidity pool and the community votes on how it can be used. If the smart contract is not set up in the right way, you can find that you have little control over the organisation’s direction, even though you founded the DAO and put in hours of work to make it successful. [Listen from 15:40]

On the other hand, Paul points out, charities and not for profit organisations can adopt the DAO structure with few issues. In fact, using a DAO would help them circumvent lots of bureaucracy and mobilise quickly. “Blockchain has removed a lot of friction and the concept of the DAO and the structure of how they work, I think will be a big one for 2022, and you'll see more of these popping up,” Paul predicts. [Listen from 19:08]

Paul mentions several key points to consider about DAOs including:

• A hybrid structure - some DAO elements and some elements of a traditional business - can marry the best of decentralisation and hierarchy.
•  Nobody really knows how DAOs sit legally.
• “The concept of having a business built on the blockchain and having a voting structure that’s set out in a smart contract that can't be changed because it's in the code of the contract, in certain use cases is quite powerful.”
• DAOs, while awesome in theory, will only work in practice if the smart contract that controls it is efficient, and operates with clear parameters.
• Layer two blockchains such as Polygon and Aragon make DAO creation cheap and easy.
• Legal and logistical hurdles to DAOs will be progressively overcome as Web 3.0 becomes mainstream.

[Listen from 20:58]

Key Takeaways

• A DAO is a community-owned safe space for members to collaborate on a shared goal.
• A hybrid structure - part DAO, part traditional business - can be a viable option for modern for-profit businesses.
• DAOs will become more mainstream as legal and logistical kinks are ironed out.

Resources

James Burtt on Twitter | LinkedIn | Instagram | Clubhouse

Paul Abercrombie on Website | Twitter | LinkedIn | Instagram 

Episode 4: Layers of Blockchain 

Wikipedia: Decentralised Autonomous Organisation

Friends With Benefits DAO