In our Primer on Web3 Marketing, we explained how the World Wide Web has evolved from Web 1.0 to Web 2.0 to Web 3.0 (aka Web3, aka the Semantic Web). The internet today is vastly different from how it was at the turn of the century. Back then, in a time now christened Web 1.0, webpages had static pages and images and were read-only for most people. You went there to find information. Only webmasters could change things on a site. The advent of social media in the early 2000s led to the bi-directional Web 2.0 and the dawn of content creators. By then, everybody could participate and interact on the Web. However, website owners kept ownership of the content published on their sites and the collected data. If you upload content to Facebook, for instance, Meta gains control of it and can cancel your Facebook account and delete your Facebook page (removing its content) at their will.
More recently, we have seen the evolution to Web 3.0. We now have a decentralized web where users can easily build applications for other users to interact with and use. Users keep ownership of their content and data, much of which lives on decentralized servers. There is no central repository of data storage anymore. Much of the backend of the internet is now built using artificial intelligence (AI) and Natural Language Processing (NLP), and many people now use smart devices daily. With the advent of blockchain and cryptocurrency, we even have decentralized finance. And alongside that runs Decentralized Autonomous Organizations (DAO). But DAO usage is much wider now and is becoming a mainstay of the creator economy.
So, what is a DAO, and is it really the next big thing in Web3?
What is a DAO, and is it Really the Next Big Thing in Web3?:
What is a DAO?
If you haven't yet explored decentralized finance under Web3, then DAO might simply be another confusing three-letter acronym to you. Yet, a decentralized autonomous organization (DAO) is really just a flash way of describing an entity with no central leadership. You don't have leaders making decisions on behalf of the organization's members. Instead, the DAO's community makes all relevant decisions collectively based on an initial set of rules enforced on a blockchain. On joining a DAO, its members agree to abide by the rules on the blockchain to help them work towards a common purpose.
Nitin Gaur on CoinTelegraph describes a DAO as "an organization that records its membership, rules, and responsibilities on an immutable ledger enabled by blockchain technology. Its charter and evolution are public and unchangeable. Generally, joining requires resources and community membership of sorts, in the form of tokens, to either participate or vote as a participant."
Cooper Records describe DAOS as internet communities with a shared cap table and bank account. Members work together to create, distribute and capture value for a shared mission.
DAOs operate in a flat hierarchy. Every member has a stake in the DAO, but nobody has control. There are no CEOs or Boards of Directors.
DAOs are inherently internet-native organizations. As such, you can't use the term to describe any other types of decentralized organizations. Also, DAO is now a relatively generic term. It covers any internet-native organization that meets the description and uses a blockchain. In 2016, The DAO was set up as one of the first organizations of this type. Indeed, at one point, 14% of the entire world's supply of Ethereum (ETH) was locked in The DAO. However, as The DAO ultimately failed, it's essential to recognize that despite its name, it wasn't the only DAO, and many others have operated successfully since.
In some ways, DAOs are similar to non-fungible Tokens (NFTs). They both rely on having a unique digital asset managed on a blockchain. In the case of a DAO, each community has a token that grants holders governance rights, membership, and associated benefits. Members' vote share is usually proportional to their number of tokens.
DAOs can vary significantly in size, from a small group of like-minded people to massive organizations controlling multi-billion-dollar investments. They are all DAOs as long as they:
- Provide members with a voice through governance
- Operate a flat hierarchy
- Allocate resources for a defined purpose
Types of DAO
You can split DAOs into various categories depending on the purpose of their existence. Operating systems exist to help you create a DAO, with a range of templates, frameworks, and tools to help community members pool their resources for a purpose.
The early DAOs were created as a "fair" way to distribute grants. However, over time the use cases for the structure have expanded.
In all cases, groups use a DAO structure to coordinate resources, capital, and people, to ensure they meet stated goals.
1. Grants DAOs
Communities found that they could set up a DAO when they had donated funds to allocate. The DAO would have a governance document on a blockchain directing how to allocate capital to the various contributors. With the early Grants DAOs, members held non-transferable shares, although there are more options now. Members of the DAO then meet to allocate the grants according to the rules.
2. Protocol DAOs
Protocol DAOs exist to ensure the power of an organization is in the hands of its community rather than a governing team. These followed the first Grants DAOs and initially distributed transferable fungible tokens to the members, e.g., transferable ERC20 tokens with a secondary market value.
In this case, token holders can propose, vote on and implement changes to the underlying mechanics of the network. For example, projects commonly vote on how to distribute tokens.
Unlike most of the DAO types we list here, Protocol DAOs are more of a structural framework than a reason for a DAO to exist. For example, any DAO tasked with allocating grant funds counts as a Grants DAO, whether they give their members non-fungible shares or transferable tokens. DAOs, in the latter case, also classify as Protocol DAOs.
3. Investment DAOs
A common feature of early DAOs was that they were non-profit. For example, they may have existed solely to distribute grants equitably. However, with the advent of Protocol DAOs and transferable tokens, people discovered more options. One example is the formation of investment clubs, where members pool their money to give a large enough fund to access investment opportunities they would otherwise not face.
In this case, members invest capital in the DAO, which in turn invests the combined sum in hopefully profitable investments. All group members have a say on how the investment fund operates and receive investment returns as outlined in the investment DAO's rules.
4. Service DAOs
Service DAOs act as talent allocators. They create decentralized working groups for people to work for the open internet and are effectively crypto-native talent agencies for creators. In addition, they often pay these creators in tokens/cryptocurrency, creating ownership over the value they have created for the network.
5. Social DAOs
Social DAOs are an evolution of group chats, where friends become co-workers, and the group chat becomes a digital business. These are often where people with a common interest join together to socialize and expand their social network and want everybody to have an equal say in how the group functions. Once the initial members agree on a standard set of rules and procedures, they save them on the blockchain to keep a permanent record of any changes over time.
6. Collector DAOs
Collector DAOs typically collect/collate NFTs once they have proved they are long-term and have value. For example, a group of like-minded artwork collectors may join a DAO to collect NFTs and then share any proceeds when they sell the NFTs in the future.
7. Media DAOs
Media DAOs give power to creators rather than the big media corporations that control traditional media. Media DAOs also recognize the importance of viewers, listeners, and readers, allowing them to become part of the decision-making process.
8. Creator DAOs
Somewhere between Social DAOS, Collector DAOs, and Media DAOs, you have Creator DAOs. They are exclusive communities belonging to a creator's most dedicated fans. To be a member, you typically need to own an NFT from the creator.
Creators gain an additional revenue stream, which isn't dependent on somebody else's platform. For example, if they make the bulk of their money from being a YouTube partner, receiving a cut of the ads people watch on their channel, they are beholden to YouTube. If they upset YouTube or breach one of the streaming platform's policies, they can find that YouTube demonetizes their videos without warning or explanation. With Creator DAOs and NFTs, there is no risk of anybody unilaterally canceling their income stream or censoring their content.
The fans who possess the NFTs and belong to the Creator DAO are no longer merely passive followers and consumers. They become active stakeholders. Early users may gain from an increase in the value of the creator's NFT or other token.
Benefits Of a DAO
DAOs eliminate the need for centralized, hierarchical decision-making. Instead, users and contributors of an organization become genuine investors and owners. Those who actively work in the organization have a say in critical decisions regarding its future.
Creators benefit from having more control over the distribution of their content. They don't have to spend hours making content for a big platform only to find that the platform owner decides to demonetize or take down their work. In addition, user-members of a DAO get benefits they might otherwise not have, like gaining direct access to a favorite creator, early access to events and new products, discounts on merchandise, and other exclusive items.
Problems With DAOs
By not having somebody with the responsibility to make final decisions, DAOs may lead to uncertainty and indecision. However, with ownership of DAOs typically being in proportion to individual contributions, some people may still have a greater voting share than others – DAOs represent equity in voting rights rather than equality.
Collaborative decision-making isn't quick decision-making. It may ultimately result in the best outcome, but not necessarily when the decision is most needed.
How do DAOs Govern?
In many ways, the most challenging part of operating a DAO is the need for consensus. As a result, there is a range of governance structures from which DAOs can select to achieve their goals:
- Direct on-chain democracy - members vote on a proposal directly on-chain. Typically, DAOs use token-weighted voting, so those members with more tokens get more weight for their vote than others. So, for example, each token might be worth one vote rather than each member having one vote. So, if you held ten tokens, you would get ten votes.
- Direct off-chain democracy – here, the vote occurs off-chain using snapshots. Again, these votes are typically weighted in proportion to the members' tokens.
- Representative democracy - a DAO uses representatives who vote on-chain to approve proposals submitted to the DAO. Members initially vote for the representatives, who will typically gauge members' views before voting on each decision.
- Quadratic democracy – the DAO uses quadratic voting, a system based on the equation cost to the voter = (number of votes)2. So, for example, a voter with one token might receive one vote. However, to get five votes, you would need 25 tokens, i.e., 52.
Launching a DAO
There are a few things necessary for any legitimate DAO. These include:
- Formation of a legal entity with clear rules
- A clear token distribution schedule so all members understand how many tokens will be released and when
- Clear communications channels
- A governance process to enable voting on important issues
- Some form of community treasury to enable fund allocation
You could use one of the DAO operating systems, such as Aragon, DaoStack, DaoHaus, Colony, Syndicate, Orca, or CW, to assist with setting up your DAO.
There are various other tools to assist with managing your DAO, including Gnosos Safe (to help manage community treasuries), Snapshot (to assist with voting), Discourse (a forum where you can discuss governance proposals), Parcel (treasury management), and Sybil (to create and track on-chain governance delegation).