What is a DAO?
  • Member-owned communities without centralized leadership.
  • A safe way to collaborate with internet strangers.
  • A safe place to commit funds to a specific cause
  • DAOs show potential and promise in the web3 space and real life.

A DAO (decentralized autonomous organization) is an organization represented by rules encoded as a transparent computer program, controlled by the organization members, and not influenced by a single individual or by a sole party. In other words, they are member-owned communities without centralized leadership. A DAO's financial transaction records and program rules are maintained on a blockchain.

The above is a well-known description of a DAO, but this is not always the case in actual real usage.

Members of DAOs often buy their way in, most of the time purchasing a governance token.

A well-known example intended for venture capital funding and the first most well-known cryptocurrency DAO was "The DAO". They had amassed $150 million in crowdfunding in May 2016. Unfortunately, they were hacked and drained of US$50 million in cryptocurrency a few weeks later. The hack was reversed via a hard fork of the Ethereum blockchain: this incident is the birth story of the Ethereum Classic. (I will address in another entry regarding hard forks and soft forks in a blockchain and how this Ethereum classic story is very interesting and a pivot note in the crypto NFT space)

How are DAOs governed?

A DAO is coordinated and run by the decisions and votes of its underlying NFTs. In comparison to traditional companies, DAOs is a democratized. All the DAO members could vote for any changes in the community. The funding of a DAO is based mainly on crowdfunding (minting funds) that issues initial NFTs.

The holders of these NFTs have the power to nominate a proposal vote and vote on actions to take within the DAO. Additionally, admission to a DAO is limited to people who have confirmed ownership. In other words, an NFT is a governance token of a DAO. Furthermore, possessing more governance tokens often translates to greater voting power.

Contributions from members towards the organizational goals of a DAO can be tracked and can be internally compensated. Each DAO operates differently, but inactive or non-voting shareholders in DAOs often disrupt the organization's possible functionality. Hence some DAOS established rules as long as 10% of the tokens holders vote; proposals will be passed.

Government regulations

The precise legal status of DAO is generally unclear and may vary by jurisdiction and country. Some previous approaches to blockchain-based companies have been regarded by the U.S. Securities and Exchange Commission as illegal offers of unregistered securities when a $token with a monetary value is generated from a DAO. Hence the liquidity pool of the underlying $token is not implemented by the founders directly but by the community. Although often of uncertain legal standing, a DAO may functionally be a corporation without legal status as a corporation or just a gathering of NFT collectors and friends.

How DAOs are used

The proper DAOs envision a collective organization owned and managed by its members, everyone having a voice. Many experts affirm that this type of organization is not only getting more popular and may even potentially replace some traditional companies. DAOs have been used for many purposes such as investment, charity, fundraising, borrowing, or purchasing NFTs, all without intermediaries.

A DAO's financial transactions and rules are recorded on a blockchain, eliminating the need to involve a third party in a financial transaction, simplifying those transactions through smart contracts. The firmness of a DAO is a smart contract. The smart contract represents the organization's rules and holds the organization's storage. No one can edit the rules without people noticing because DAOs are transparent and public.

However, some DAOs still need a working team to operate, and they are obliged to obey the majority's opinion.

The community wallet is where the DAO funds are stored, but when the wallets are Multisignature wallets, they would require two or more member private keys to sign and send a transaction. Adding an extra layer of protection to the funds.

However, when the community wallet isn't multi-signature but single-signature or is held by the NFT project founder, the founder can easily run away with these funds. As a result, disagreements between the founder and community can arise related to using these funds, which the founder can ignore. To solve this underlying issue, the community usually elects a non-staff member to become part of the multi-signature wallet to avoid such conflicts.

DAOs are the new VCs

While most NFTs have taken the form of tokenized JPEGs with little to offer in the way of utility to date, using them as membership cards to a DISCORD server or a website. DAOs have a lot of funds that they're willing to spend to meet their community goals.

Each DAO has a different mission. For example, they could easily invest in new projects or donate to a charitable cause. For instance, HEADDAO has purchased multiple NFTs (such as Cyrptopunks & Bored Ape Yacht Club & CloneX) and put in into their fractionalized vaults. The underlying $token generated from this vault represents fractional ownership of these NFTs. Its members will be able to oversee the purchase of the NFTs. HEADDAO members receive $HEAD tokens representing the fractional shares of these NFTs. Members also get exclusive access to the DAO community and voting rights over the DAO's assets.

HEADDAO Profile Picture NFTs
HEADDAO Profile Picture NFTs

Or DAOs can vote to create a P2E gaming metaverse ecosystem like the famed "BAYC" ("Bored Ape Yacht Club"). Additionally, some DAOs' missions are based on personal interests. Such as "ConstitutionDAO," which banded collectors together in the hope of buying one of the original copies of the U.S. Constitution from Sotheby's. "IreneDAO" appears to be an early example of a fan club DAO. Yet, it pivoted to a social platform where musicians, celebrities, and content creators leverage the blockchain to interact with their fans.

A disadvantage of a DAOs structure is that it can take an extended time to decide on project development. In real life, a startup project with lots of funding can go at lightning speed, but here in the NFT web3 space, with everyone living in different places, getting work done together efficiently may present a challenge. With the NFT space ever-changing ever so quickly, these team members are under immense pressure from the community. Mistakes could be made by moving too fast, failing to plan and layout the proper groundwork, overpromising, and not being proficient in all needed areas, such as smart contracts auditing, inadequate communication to the community, and marketing to new prospects.

In short, DAO is an excellent approach to managing a community or organization that helps overcome the shortcomings and show potential and promise in the web3 space and real life.

Thank you. Look forward to hearing your own insights and comments.

Cheers,

Eric F

If you want to get in touch about interesting NFT ideas or projects or want to hear about a specific topic, I'm @ericclfung on Twitter.

Thanks to @Ulkdoodle & @Rocketman1988 & @BEAN for reviewing this post.

Disclaimer: I am just an NFT dreamer who has some success in this crypto and NFT space. The above does not constitute an offer or solicitation to offer or recommend any investment product.

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