If you talk to anyone who has been in the crypto space long enough, they’ll tell you that crypto development and adoption usually happens in waves. More often than not these waves are driven by “crypto primitives” that unlock new use cases on a blockchain.

First it was the fungible token standard that gave way to the “ICO wave” of 2017, during which many new projects began raising capital on the Ethereum blockchain. Then came the “NFT wave” that reached peak hype levels starting in late 2020 with the explosion of platforms like OpenSea (and decentralized competitors).

While each of these waves have brought in millions of new users and billions of $ worth of liquidity, we believe that the most powerful wave yet is set to take off this year: Decentralized Autonomous Organizations, aka “DAOs”.

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In this article we lay out an overview of what DAOs are and why they will play such a crucial factor in our economy moving forward.

This is the first article in our series on DAOs. Follow us on Diamond or Twitter for future updates.

What is a DAO?

It’s important to start by understanding that the concept of a DAO actually isn’t all that new. In fact, Vitalik Buterin, the co-founder of Ethereum, mentioned the term in both the Ethereum whitepaper and an edition of Bitcoin magazine back in 2013.

Yet, despite the fact that the concept has been around for a while, very few people can succinctly describe what a DAO means. This is because there is a lot of diversity across DAOs— some of them are basically social clubs while others have bold capital-intensive missions like buying a copy of the US Constitution. This being said, after months of research, we think there's one common definition that binds all DAOs together:‍‍

A DAO is a group of people working collaboratively toward a common mission, using cryptocurrency as a coordination tool.

Beyond this brief description, we believe that the easiest way to fully comprehend what a DAO is (and how one works) is by providing an end-to-end walkthrough of the process of creating and engaging with a DAO.

Step 1: Mission

At the heart of any DAO is a shared mission that all of its participants are working towards. There are many different types of missions that DAOs can rally around, but more often than not, the most compelling DAOs tend to have a mission that is capital-intensive.

The space of possibilities here is limitless and we believe many capital-intensive processes that currently operate via opaque back-room dealings could be re-imagined as collectively-owned DAOs. To give some concrete examples, here are a few categories of potential DAOs that one could create:

Collectible DAOs

‍The most straightforward avenue for disruption through DAOs is to allow for the fractionalization of big-ticket collectible items. ConstitutionDAO was the harbinger of this trend but, if we play out the mechanic, DAOs can be used to purchase almost anything, including works of art (PicassoDAO), trading cards (PokéDAO), movie memorabilia (PotterDAO), and much more.

Movie DAOs

‍Imagine if a writer could put a movie script on the internet, raise money via a DAO, use the funds to produce the movie, and then redistribute the proceeds back to the DAO-holders. This would allow the writer to secure not just financing, but also a following before even making the movie itself. All while tapping into their most supportive group of investors: The fans.

VC DAOs

‍Today, if you want to invest in blue-chip technology startups, you're out of luck. All of the financing happens through a handful of elite venture capital firms. But what if we, the people, could run our own venture fund? What if the next great app could be funded not by Silicon Valley elites; but rather, by an army of the people, the users.

DAOs would also allow us, as both users and owners, to enforce better governance decisions over the apps that have such a far-reaching impact on our lives, as we will discuss.

In the extreme success case, we believe that getting backed by a VC DAO would be like getting the publicity of being on Shark Tank, but with better terms.‍

Community DAOs

Imagine someone in a small town, or in an under-represented neighborhood, wants to start a business to improve their community. It could be something as simple as a restaurant or a coffee shop. Where do they get the money?

Historically, they'd have to turn to banks, which would likely offer them onerous terms. But now they can launch a DAO, and receive funding (and possibly even digital services) from anyone in the world. DAOs not only enables this kind of global financing for the first time, but it also enables the investors themselves to get liquidity on their investment much earlier, as we will see.

Service DAOs‍

What if you had a group of really talented developers or designers, who instead of working for just a single company, could be hired by any organization for a defined timeline?

With service DAOs, we are already seeing this potential unlocked, with many talented Web2 builders leaving big tech companies and choosing to work for 1 or more service DAOs instead.

These are just a few examples of the types of DAOs that can be launched, and we believe that future DAO ideas will only get more ambitious and more creative as time goes on.

Step 2: Capital

Once the idea is established, people can invest capital into the DAO in exchange for the coins or NFTs that represent ownership in the DAO, and which provide them governance rights over the DAO.

In the case of a coin, the investment is usually fixed-price, meaning that for every 1 USD someone puts in, they get a fixed amount in return, say 1 million coins. The fixed-price model also makes it easy to issue a refund if the DAO is unsuccessful: Just give everyone back the USD that they put in.

Some coins can be "reserved" for the DAO founding team. E.g. the founding team could specify that 10% of each investment goes to them. Using the previous example, an investment of 1 USD would result in 900k coins going to the investor, and 100k coins going to the founding team. Such a mechanism can improve the alignment between the DAO founders and the investors.

Step 3: Trading

Once a user has a DAO coin, they are able to exchange it back for another currency or coin using either a decentralized exchange (DEX) such as Uniswap, or a centralized exchange like Coinbase.

This is also important, because in the case in which there is a fixed supply of DAO coins, it allows new users to join the DAO if they are interested and have the capital to make an exchange.

Step 4: Governance

Once a DAO has raised a treasury, the actions of the DAO can be controlled by a vote of the coin-holders. The fact that a DAO makes key managerial decisions by voting, rather than solely by the discretion of a centralized entity, is a key property that distinguishes a DAO from a traditional investment entity.

Step 5: Socializing

DAOs are social by nature. Once members join a DAO they need to be able to see which other members are also in the DAO, and to communicate with them about DAO-related (or other) topics.

Today most DAO communities live off-chain on centralized platforms like Discord or Twitter. As a layer-1 blockchain optimized for storing social content, we believe that this model can and should change, but that’s a topic for a future post. 

Step 6: Distributions

Once a DAO has allocated its funds, it can generate cash flows off of its assets. This can be used to reward holders of the coin or to compensate people that are doing work to help advance the DAO.

In addition to the above steps there are a number of other microtasks and aspects to launching and participating in a DAO. Up until now, the tooling to help complete these tasks has been fragmented and underdeveloped. However, as more attention is paid to DAOs, we believe that the offerings will improve, and could eventually consolidate under one DAO platform that provides all of these as out-of-the-box features.

Why are DAOs important?

Now that we have a better understanding of what DAOs are, it’s important to consider why DAOs are important, and the potential they can unlock.

To better understand the potential of DAOs, it’s helpful to consider some of the macro trends that we have seen take place in our society over recent years.
In the wake of covid, we have accelerated towards a more distributed workforce and an increasingly digital global economy. 

Unfortunately the current tools and systems we have in place, fall short in addressing these changes in our society. Below are some ways in which DAOs can help fill some of these gaps.

DAOs allow for greater flexibility for workers

Today if you want to work for an organization it is a slow and arduous onboarding & offboarding process. On the way in, you need to spend weeks interviewing, going through company training, and integrating with your team. Then if you want to leave, you need to give at least 2+ weeks notice, figure out your benefits and speak to all the members of your team.

DAOs disrupt this model by allowing members of the global workforce to join and leave an organization at-will. In fact, some people may choose to work for multiple DAOs part-time to diversify their interests. This allows for easier migration of workers and for talented people to pursue work that they actually care about (not just what is convenient).

DAOs create greater access for individuals

As we mentioned in some of our earlier DAO examples, there have been many segments of our society that have been shut out from participating in different activities due to their current financial standing.

The concept of owning a multi-million $ ticket item was something that has historically been out of reach for the average individual, but with tokenized ownership, everyone can easily own a part of an expensive item or project.

Furthermore, similar to how Robinhood allowed anyone (of legal age in the US) to start trading stocks from a smartphone, DAOs will similarly allow anyone to participate in organizations with a few clicks.

DAOs remove borders

Talent and capital is spread throughout the world, but with the existing model, it’s difficult to bring people into an organization that don’t live near the “headquarters”. As the names suggest, DAOs are inherently decentralized.

That means anyone, anywhere in the world can join and participate in one. We believe this will allow connections of talent and capital that have historically been impossible. This also unlocks one of the key benefits of cryptocurrencies in general, in the sense that they are all borderless and permissionless. 

The value props above are heavily focused on the participants of a DAO. For a better understanding of the strategic advantages of DAOs from a business standpoint, check out this post by Packy McCormick which lays out “The 7 Powers of DAOs”. 

Conclusion

To conclude, we believe that we are standing on the edge of the next zeitgeist, which will be centered around DAOs.

This zeitgeist will be motivated by the current trends we are already seeing move us towards a more distributed, global, and digital economy. 

The key next step for us all to figure out is how we can leverage this new primitive and build the proper tooling necessary to help unlock its full potential.

The DeSo Foundation team has strong opinions on what the gaps are and how they can be filled, and we will discuss them during our next 2 editions in our DAO series.