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Decentralized Autonomous Organization (DAO): Defined and Explained

You may have come across the term DAO or Decentralized Autonomous Organization when reading about crypto or NFTs and realized you do not know what that means. If that is the case and you would like to know more, you have come to the right place.

What is a DAO or Decentralized Autonomous Organization?

A DAO, or decentralized autonomous organization, is a group of people who enrolled into a smart contract on the blockchain with one another for the purpose of achieving a collective goal. That goal could be anything from obtaining an expensive rare NFT to joining a social club or even to fund a cause. They typically provide each member with equal say or voting power for making decisions and usually are created to raise money and concentrate that money for a specific purpose.

DAO - Decentralized Autonomous Organization NFT Crypto Ethereum
DAO – Decentralized Autonomous Organization

Last year DAOs stole some headlines when it was announced that “ConstitutionDAO”, comprised of 17,000 members, raised $40 million dollars and put in a bid on an early copy of the United States Constitution. The bid was overtaken by hedge fund billionaire and investor Kenneth Griffin, however it helped bring attention to DAOs and the power they posses. Other DAOs have successfully purchased million dollar NFTs and even formed DAO based businesses. One example is Mantra DAO, which created DAO community governed decentralized finance business that offers people the ability to borrow, lend and also stake their crypto assets. There are even donation based DAOs that allow members to decide how the donations are best spent.

What separates DAOs from standard business agreements between multiple parties?

DAOs or Decentralized Autonomous Organizations are different from a business arrangement in a few key ways. DAOs are only online and members typically never meet or even speak in real life. Also, the details, rules and regulations are defined on the blockchain they exist on, and not in a standard legal agreement enforced by a justice system. The blockchain itself enforces a permanent record of digital information that is not controlled by any one person or entity and acts as a ledger for actions and transactions. As there is no leader of the DAO, decisions are all made collectively making it decentralized. Typically having more tokens or assets inside the DAO provides more voting power.

Each DAO will be setup with a specific goal and also a set of rules. Many times the rules are as simple as no decisions will be made without a majority vote to stating each member is committed to purchasing X amount of NFTs or virtual land for the DAO. It could also state, members may not sell below a certain price or before a timeframe. The rules or contracts are the strength of the DAO as it confirms that the members combined resources will only be applied towards achieving the collective goal of the DAO.

DAO Decentralized Autonomous Organization
DAO – Decentralized Autonomous Organization

What is the future of DAOs?

DAOs had a major impact on the crypto and NFT spaces in 2021 and appear to be growing and expanding in scope and popularity, I would expect a big year for DAOs in 2022 as well. Some publishers, like Blockworks, have already started to pitch DAOs during ad opportunities, such as event sponsorships, eyeing a high profit potential. “DAOs are becoming the new institutions. There are DAOs with more than $10 billion in their treasury [and] media companies have not recognized this,” said Jason Yanowitz, co-founder of crypto trade publication Blockworks.

Another added value proportions for DAOs and web3 is the ability to build community, said Amanda Cassatt, CEO and co-founder of web3-based marketing agency Serotonin. DAOs provide “a powerful alignment engine to collapse the categories of user or buyer, company or team, and investor into a single group that’s aligned and part of a community that cares about a certain artifact or a certain experience. And [they’re] all participating together,” she said. Celebrity, business tycoon and crypto enthusiast Mark Cuban stated in a tweet last May “The future of corporations could be very different as DAOs take on legacy businesses” and “Entrepreneurs that enable DAOs can make money. If the community excels at governance, everyone shares in the upside.”

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