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How a DAO works

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A DAO (decentralized autonomous organization) is a group that holds shared money and decides through rules written in software, usually on a blockchain. Members propose actions, vote, and let code carry out the result. This page is general education, not financial or legal advice.

What a DAO is

A DAO is a club with a shared bank account and a rulebook written as public code. Anyone can read how the group decides.

Decentralized means no single boss holds the keys. Autonomous means some actions run by themselves. People still write the proposals.[1]

How a DAO works

Most DAOs share a few parts.

  • Members. Membership often comes from holding a governance token. It can also come from approval by existing members.
  • Proposals. A proposal is a written request, such as paying a contributor or changing a rule.
  • Voting. Members vote in a fixed window. A quorum is the minimum turnout for a result to count.
  • Treasury. The treasury is the shared pool of funds. Rules say who can move it.
  • Smart contracts. A smart contract is a program on a blockchain that runs the same way every time. It can count votes.
  • Multisig wallets. A multisignature wallet needs several keys to approve a transfer, for example three of five.[2]

Off-chain and on-chain voting

On-chain votes are recorded on the blockchain and can trigger code directly. Each vote usually costs a network fee. Off-chain votes use signed messages on a separate service. They are cheap, but people must carry out the result.

Real examples

The DAO in 2016

The first famous DAO, The DAO, launched on Ethereum in April 2016 as a fund that token holders would direct by vote. By 17 May 2016 the top 100 holders held just over 46 percent of the tokens.[3] In June an attacker used a flaw in the code to move about one third of the funds. Some people called the attack wrong but valid, since it followed the rules as coded.[3]

On 20 July 2016 Ethereum carried out a hard fork, a change to the software rules, and moved the affected funds to a recovery contract. Roughly 85 percent of miners joined the new chain.[4] Others kept the old chain, which became Ethereum Classic. In 2017 the US Securities and Exchange Commission concluded that the DAO tokens sold were securities.[3]

Uniswap and ENS

Uniswap documents three phases: forum discussion, an off-chain temperature check, and a binding on-chain vote with a two day timelock.[5] The ENS DAO also starts with a forum check. Its on-chain proposals get a seven day vote, a 1 percent quorum, and a two day timelock.[6]

Wyoming DAO LLC law

A Wyoming law took effect on 1 July 2021. It lets a limited liability company register as a DAO, and its articles must list a public identifier for any smart contract that runs the organization.[7] Wyoming was the first US state to recognize DAOs as legal entities.[1]

Common failure points

  • Low turnout. Many token holders never vote, so a few voters decide.[1]
  • Whale voting. When one token is one vote, large holders win.
  • Governance attacks. In 2022 one person gathered enough tokens to control Build Finance DAO and drained its funds.[1]
  • Security bugs. Code on a blockchain is hard to change once it runs.[1]
  • Legal liability. A group with no legal wrapper may be treated as a general partnership.[1]
  • Regulatory uncertainty. Rules differ by place and keep changing.

A checklist before you join or contribute

Write down your answers.

  1. Who holds voting power? If a few addresses can pass anything alone, your vote counts for little.
  2. How large is the treasury, and who controls it? Check for a multisig, its signers, and a timelock.
  3. How does a proposal pass? Note the discussion period, quorum, and approval threshold.
  4. Has the code been audited? Look for independent reports and later fixes. An audit lowers risk only.
  5. What is the legal wrapper? Learn who could be held liable.
  6. How do you exit? Check what you receive and how long it takes.
  7. What will you be paid, and by whom? Get terms in writing first.

A lightweight DAO-style process without tokens

A small group can borrow these habits without a blockchain.

  1. Shared treasury. Hold funds in one account that needs, for example, three of five named people to approve each payment.
  2. Written proposals. Each request goes on a public page with a goal, a cost, and a date.
  3. Time-boxed votes. Voting stays open for a fixed period, such as seven days, with a quorum set first.
  4. One member, one vote. Without tokens, nobody can buy influence.
  5. Public ledger. Post each payment and result for members to read.
  6. Change rules. Require a higher bar to change the rules than to pass an ordinary proposal.

A wiki page and a spreadsheet are enough to start.

DAO ideas, wikis, and agent-run organizations

Wikis already use some DAO habits. Edits leave a public history, and Wikipedia settles disputes by consensus, which is not the result of a vote.[8] The History of decentralized wikis shows the risk of central control. Self-sustaining wikis sketches a wiki that pays its own way, and a public ledger would fit. The Collaborative learning economy for humans and agents raises the question of who gets a vote.

An agent should act inside limits that humans set, as in Agent allowlists for spend and publish and Agent-to-agent commerce. Checks before a change becomes permanent, as in Publish gates before permanence, act like a timelock. A community that runs a shared AI, as in Community-run AI, could govern it the same way.

Discussion questions

  • Why might a group choose one member, one vote over one token, one vote?
  • Which failure point can code alone not fix?

Essay ideas

  • Argue whether a public vote can replace trust in a few people.

AI prompt ideas

  • Explain the 2016 DAO hack in five steps, then quiz me.
  • Help me design a seven day voting process for a small project, and ask me questions where my rules are vague.

Readings from Wikipedia

See also

References

  1. ↑ 1.0 1.1 1.2 1.3 1.4 1.5 Decentralized autonomous organization, Wikipedia
  2. ↑ Cryptocurrency wallet, Wikipedia
  3. ↑ 3.0 3.1 3.2 The DAO, Wikipedia
  4. ↑ Hard Fork Completed, Ethereum Foundation Blog
  5. ↑ Governance Process, Uniswap documentation
  6. ↑ Governance Process, ENS documentation
  7. ↑ SF0038, Decentralized autonomous organizations, Wyoming Legislature
  8. ↑ Wikipedia:Consensus, Wikipedia
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