By Leslie Quander Wooldridge (@lesliequander), with additional reporting by Michael Scott
Here, we look at the genesis, evolution, and milestones of these autonomous entities—plus trends for 2022 and beyond.
These days, organizations don’t have to be governed by a typical board of directors to represent shareholders—or a hierarchical collection of committees or executives. That’s because, today, we also have entities called DAOs.
So what is a DAO? It’s a “decentralized autonomous organization,” which is an entity that doesn’t have central leadership and uses a set of rules written in code and enforced on a blockchain.
Here, let’s linger on the word “autonomous.” Something or someone, autonomous is “existing or acting separately from other things or people” and is “independent,” as Merriam-Webster confirms. So does that mean everyone agrees on what makes a DAO autonomous? Not always.
“For some people, ‘autonomous’ means that different parts of the organization work independently. For others, that means that the organization is automated and autonomous from human intervention,” explains Grace Rachmany, founder of DAOleadership.com and co-author of So You've Got a DAO: Handbook for distributed and connected leadership 1.0. As she explained to Gokhshtein Media: “Conceptually the idea is that people will decide together as equals, rather than in a top-down hierarchical manner. Today, the DAOs most commonly will govern a pool of cryptocurrency, or a blockchain project itself.”
To become a member of a DAO, usually you’d buy its cryptocurrency, which would allow you to vote on proposals and updates in a proportional manner to the amount you hold.
The rules of DAOs are established and programmed into smart contracts (i.e., automatic agreements that execute when and if certain conditions are met). These entities are, thus, autonomous and transparent.
What are the origins and milestones of DAOs?
Werner Dilger, a German computer science professor, is often credited as defining the basis of DAOs in 1997 with his work titled “Decentralized Autonomous Organization of an Intelligent Home on the Principle of the Immune System.”
Fast forward to the period after Bitcoin was introduced. The phrase “Decentralized Autonomous Company” popped up with a company called Bitshares. This e-commerce platform linked sellers and customers without a central authority, and it let people become stakeholders by purchasing or being paid in stock.
And in 2016, The DAO organization (note the capital “T”) was founded on the Ethereum blockchain, acting as a venture capital fund. After developers shared concerns that a bug in the smart contracts left it vulnerable, a hack resulted in a loss of $60 million worth of ETH from The DAO’s wallet, which led to a hard fork in the Ethereum network to reallocate funds. This clearly wasn’t a great development for DAOs at the time.
How have DAOs evolved?
Over the years, these entities have become part of various blockchain projects, particularly in decentralized finance (DeFi). For instance, decentralized networks can launch stablecoins and their own tokens, helping investors share risks and potential rewards.
DAOs also bring together thousands—or tens of thousands—of members who collaborate on a “peer-to-peer basis,” without regard to members’ backgrounds or geographical locations, noted Aaron Wright, clinical professor of law at Benjamin N. Cardozo School of Law, in the June 2021 Stanford Journal of Blockchain Law & Policy.
“From late 2016 to mid-2018, billions of dollars were collected by entrepreneurs (and sometimes nefarious actors) through token sales to raise funds for the development of new software applications, networks, and platforms. These same capabilities are now manifesting with DAOs,” Wright wrote. “Instead of harnessing the power of blockchain technology to fund an individual software development project, DAOs now are being used to pool capital to engage in venture-style type investments or other forms of investment activity.”
Today, entities also may allow members to easily withdraw their capital, offering risk protection if, say, members disagree with group decisions. (Feel free to check out the Stanford journal article for more information.)
What are some trends or issues to watch?
First, liability can be a landmine. “A team using a DAO can be pseudonymous, so the DAO isn’t formally owned and presumably the members can escape liability in terms of the financial responsibility or any other damage,” Rachmany notes. “I’m not saying this is good or ethical, but it is a trend we’re seeing,” she continues.
Rachmany also points to the possibility of alternative gaming currencies being used instead of local fiat currency, with DAOs potentially used for governance. “In some countries [like the Philippines], we are already seeing that local businesses are accepting…game currencies such as Axie Infinity SLP,” she adds.
Rachmany suggests anonymity may be “a good idea” in some cases, such as when there is “oppressive government censorship or other types of repression.” But anonymity also can be dangerous when there is a legitimate governance model and it’s not possible to know people’s biases or expertise, she says.
So what’s the path forward in the next 6 to 12 months, in Rachmany’s view? With fiat currencies weakening, she expects DeFi trends to continue. She also expects the U.S. Securities and Exchange Commission to crack down on governance tokens used as “speculative assets” in the United States. For the broader blockchain space, she expects pushback from global entities such as the International Monetary Fund and European Central Bank, which may “drive a large part of the industry underground in one way or another,” she suggests.
As always, the near future remains to be seen. But, at this point, it appears DAOs will be part of it.
Leslie Quander Wooldridge is a writer, editor, consultant, and speaker whose articles have reached tens of millions of readers. Her work at Gokhshtein Media includes writing as well as developing and hosting the podcast “Market Mindset With Leslie Quander.” Visit her at www.lesliequander.com or follow her on social media platforms, including Twitter, @lesliequander.
