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What is a DAO?

March 06, 2023

Read Time 4 MIN

A DAO is a company administered by self-executing smart contracts that operate on a blockchain.

A decentralized autonomous organization, or DAO, is an organization run entirely by computer code and accessible to everyone. Being autonomous, smart contracts allow the majority of operations to function without the involvement of humans. A community creates and runs a DAO, managing its resources and initiatives as a whole.

The 2016 launch of Ethereum's venture capital fund "The DAO" helped DAOs gain popularity. Sadly, the project experienced an attack because of a flaw in the code three weeks into the token sale. A hard fork caused the cash to be later restored. Despite the early challenges, the DAO concept has improved over the years, and it is now one of the most popular governance models for decentralized finance (DeFi) projects.

Each DAO is unique, although the majority adhere to the same fundamental ideas. Each holder of the DAO's governance token has a certain number of votes, which is proportional to their token holdings. Holders may also suggest modifications to the DAO's operational procedures.

A DAO is a company administered by self-executing smart contracts that operate on a blockchain. The decisions made by DAO participants are then carried out using these smart contracts. In practice, a DAO can run continually and without human upkeep. Due to its immutable nature, the DAO's framework will continue to exist even if DAO members lose interest in or give up on the project.

Voting systems based on governance tokens are the most typical way that DAOs make decisions. You have more voting power the more of the governance token you own. In some DAOs, any member may submit a proposal, while this ability may only be granted to a select group in others. In the crypto industry, DAOs are frequently used to run DeFi initiatives, blockchains, and other protocols.

For example, an investment DAO often operates based on a broad objective or guiding idea. Some invest in specialized business sectors, such as GameFi or DeFi protocols. Using a proposal procedure, investment decisions are made following these predefined guidelines. Proposals can be made by holders of the governance token for the investment DAO. Some DAOs will restrict this to token holders who own a specific threshold of tokens or to some other segment of the population. This may be done to prevent spam or to restrict the ability to advise investment decisions to members with sufficient stakes.

Users can use their voting rights after the proposition has been made by either staking their tokens or through a Snapshot mechanism. Without locking the tokens, Snapshot divides voting rights based on the number of governance tokens in each wallet. This prevents users from influencing the vote by purchasing more tokens after seeing a proposal. After the voting is completed, the choice is made and put into effect.

Investment gains are distributed to governance token holders either through airdrops or a staking mechanism. They can then obtain a portion of the earnings from the smart contract by staking their governance token.

DAOs frequently host community channels on Telegram and Discord to help organize, inform, and facilitate their proposals. A DAO relies heavily on its community for success.

Types of DAOs

There are eight main types of DAOs:

  • Protocol DAOs
  • Grant DAOs
  • Philanthropy DAOs
  • Social DAOs
  • Collector DAOs
  • Venture/Investment DAOs
  • Media DAOs
  • SubDAOs

A DAO makes investments collectively. Anyone who holds the governance token for the investment DAO is eligible to vote. Investment DAOs raise money for their treasury by holding token sales, issuing NFTs, and providing services that generate income. The legality of investment DAOs is governed by local legal regulations.

How Do You Create a DAO?

You'll need a system for processing votes and proposals on the technical side. Other open-source options can be used. One well-liked option for the Ethereum blockchain is Aragon. Another that operates across many blockchains is Snapshot. However, the methods through which they each give that structure can vary. Some DAO systems use off-chain polling while others use on-chain polling. Your DAO's priorities will determine the specific option you should select.

How Do You Invest in DAOs?

You can invest in DAOs by investing in governance tokens, participating in governance and voting or lending crypto to the DAO. However, it is much easier to invest in platforms that allow DAOs to be created. This way, you can invest in the general trend of DAOs. At its core, DAOs are enabled by smart contracts, hence smart contract platforms are needed to support them. VanEck provides a straightforward, diversified and easy way to invest in a broad selection of smart contract platforms that support DAOs.

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