Back to Blog

What is a DAO? - The Ultimate DAO Guide for Normies

Sam Sklar
@_samsklar

Most DAO Definitions Aren’t Helpful

This article is the result of months of research across 100+ DAOs. I’ve trolled Twitter. I’ve poured through Discord. I’ve sat refreshing my computer excitedly to participate in NFT drops. In some cases, I’ve made 20x returns on some, and on others, I’ve lost it all on top of hundreds in gas fees. I’ve spoken to DAO founders, core team members, and blockchain developers. I helped launch Blimp DAO. Still, I’m not an expert. This is a nascent space and we’re all here to learn.

This article is for everyone, but you’ll get the most out of it if you are not already a web3 expert and you come with an open mind. You’re right to be skeptical but sometimes innovation requires a leap of faith. 

I wrote this guide because the vast majority of DAO guides talk abstractly about the technology underlying DAOs. Most people don’t learn by reading textbook definitions. They need to see practical examples. Most importantly, the existing guides fail to articulate why we should care about DAOs and what they may mean for the future of work. 

In this guide, we’ll cover:

  • A (boring) textbook definition of a DAO
  • The Case for DAOs, from the origin of collective ownership to blockchain-based organizations
  • The Common DAO Pitfalls
  • 7 types of DAOs with examples
  • How to get involved in DAOs
  • Resources for learning more 

Ready to dive in? Good. While nothing presented below is investment advice, the market rewards innovators. If you’re here now, you’re early.

What is a DAO?

A DAO (Decentralized Autonomous Organization) is a collection of people with a shared purpose that control a treasury. It’s “decentralized” because no single person or group is in charge. Power is distributed. It’s “autonomous” because it has internal capital. The treasury, along with the human capital, is enough to achieve the group’s goal. “Organization” can only exist if there is a compelling purpose that convinces people to contribute time and capital. 

DAOs live on the blockchain. Contributors hold governance tokens that enable them to participate in DAO votes. They do not have CEOs or a board of directors. Oftentimes, they are strictly meritocratic since many members will participate fully anonymously (your wallet address, which proves your governance token ownership, is the only identity you need). 

In practice, the definition of a DAO has expanded considerably as many organizations are trying to bolster their organization with web3 tools. Some organizations that are centralized today, but plan to progressively decentralize, are commonly referred to as DAOs. Some believe that any organization issuing tokens or NFTs to community members are DAOs. 

I tend to be more flexible than most. I believe the minimum requirements for an organization to identify as a DAO are shared resources that are deployed via community decision making. 

Why are people excited about DAOs?

DAOs are challenging the way we think about ownership. Many traditional corporate organizations don’t distribute equity at all. Those that do tend to include only full time employees. Founders, and high ranking executives, own the majority of the stock. 

Well run DAOs, on the other hand, never grant even close to 50% of the tokens to the founding team. Instead, they distribute ownership across full time employees, contractors, and even early product users. 

DAOs are pushing the boundaries of how we run organizations. They don’t have a CEO or board of directors. Many decisions incorporate feedback from the entirety of the community - or are decided directly by community vote. Part time work, and participation in multiple DAOs simultaneously, is encouraged.  

For some, participating in DAOs has been lucrative. ConstitutionDAO’s governance token, $PEOPLE, has appreciated 1600% from the initial mint. I mention this not because I think past performance is likely to indicate future returns but it’s impossible to gloss over the fact that this has been a major driving force for many early participants. 

Finally, DAOs are fun. Packy McCormick, the founder of Not Boring, said “ We’ve reached a tipping point where the most fun outcome is often the most likely, and even the most financially rewarding .” People like making money but they also like making memes. In this case, they are lucky to be able to do both. 

To better understand why this is exciting we need to look at the status quo. 

The Uber Story

Uber is a phenomenal product. They nailed one of the most important and challenging logistical problems - transporting people. To date, 10 billion trips have been completed and Uber has 3-4 million active drivers worldwide . It has achieved a $78 billion market capitalization, all in 12 years. 

This chart visualizes Uber’s meteoric rise from 0 to $78 Billion:

Who is responsible for $78 Billion in value creation?  First we must credit Uber’s founders, Travis Kalanick and Garret Camp, for coming up with the idea and fighting to get their company off the ground. Early investors such as Benchmark and First Round Capital were also fundamental to their success - these firms risked capital and provided guidance during the formative years of the business. All these stakeholders were rewarded with billion dollar payouts

Uber’s initial employees - from the engineers who built complicated matchmaking algorithms to the operations folks on the ground handing out flyers to launch in new cities - also played a major role. No one denies their importance, and they have the equity to prove it. 

And let’s not overlook the early product evangelists. Passengers who committed to using a half baked and buggy app in Uber’s early days and accepted 25 minute wait times and frequent cancellations. 

Perhaps most importantly, how about the millions of Uber drivers? How do we value their contribution? Drivers earn 40k annually while Uber’s new CEO, Dara Khosrowshahi, pulls in a relatively modest salary (by CEO standards) of $12 million. And for those of us retail investor simpletons (including Uber drivers and early product evangelists) who invested around the IPO in May 2019 the payout is even worse: we have seen a -3% return over 30 months.

$78 billion of value creation happened before the IPO and a whopping negative $2 billion has been created after. 

Equities grow faster than wages. Work doesn’t get you rich–investments do. And most of the equity growth happens before funds hit the retail market. 

Technology has made connecting people to services they need easier than ever but we let technology creators (and the people who provide upstart capital) eat all of the wealth creation along the way. There’s no doubt that software providers are valuable - but the non technical network participants deserve their share as well.

Co-ops as an Alternative for Organizing Human Capital

Unequal distribution of wealth, particularly during periods of great innovation, is not a new phenomenon. 

During the industrial revolution, factories reigned supreme. Mass manufacturing facilities could produce goods for cheaper and were able to buy materials for less since the size of their contract gave them negotiation leverage. More advanced equipment and specialized factory workers meant faster production. 

Often, family-run businesses could not compete and their old owners were forced to shut down shop and take roles at the factories. Despite the fact that their output per hour of labor was actually higher at the factory, they earned much less because the factory owners took the majority of the profits with the justification that they had put up the capital to start the factory. 

To give the working class a fighting chance, William King proposed a cooperative business model (commonly called a co-op) under which workers could pool their time and capital to create a business in which all could share the profits in an equitable manner. Early co-ops originated with farming, allowing small farmers to purchase supplies and equipment jointly. Later, co-op grocery stores formed to provide affordable goods and food, free from price gouging by the larger retailers. 

Today, co-ops still exist in farming communities which now form large agricultural groups capable of better leveraging price negotiation. Credit unions are another notable modern day co-op: Ace Hardware and REI are notable retail cooperatives. 

So if cooperatives are better for workers, why don’t more people form and work at cooperatives? There are a few reasons.

(1) It’s harder for co-ops to get start-up capital than it is for more standard business models. Because co-ops more equitably distribute profits to workers/owners, it’s a less appealing investment opportunity for banks and venture funds. Workers have to supply their own capital which generally requires hundreds or thousands of people to invest in the initial start up.   

(2) It’s difficult to coordinate and make decisions. Without a CEO and board of directors, co-op members need to collectively make decisions. Taking and synthesizing feedback from hundreds thousands of distributed members requires advanced tools. 

(3) Lack of education about co-ops. Most job seekers and entrepreneurs don’t even know this business model is an option. 

Ethereum and DAOs

The cofounder of Ethereum, Vitalik Buterin, had a vision for how blockchain technology would revolutionize the future of work, sounding awfully similar to a co-op: 

“Whereas most technologies tend to automate workers on the periphery doing menial tasks, blockchains automate away from the center. Instead of putting the taxi driver out of a job, blockchain puts Uber out of a job and lets the taxi drivers work with the customer directly.” The “middle man'' is completely eliminated.

The internet, namely its ability to connect like minded people around a cause, has solved co-op problem #1 - fundraising. Kickstarter, a platform that lets anyone promote and fundraise for an important cause, has helped people raise more than $6 billion to date. Blockchain technology is well on its way to solving co-op problem #2 - people coordination. By issuing governance tokens, projects can align contributor incentives and ensure that everyone has a voice in company decisions. Problem #3 - lack of awareness is still an issue and something that we are addressing with articles like these. Fortunately, DAOs are starting to get mainstream media attention ( Links DAO , ConstitutionDAO , CityDAO , the rise of DAOs )

What are the limitations of DAOs?

Security is a major concern. The original DAO, called “The DAO”, launched in 2016 as a pooled ethereum investment vehicle.  Over 18,000 people contributed to one of the most successful crowdfunds of all time. The DAO raised over $150 million which was 14% of the total ether supply at the time ($53 billion at the current market cap).

One month after fundraising, hackers exploited a vulnerability in the source code and were able to steal ⅓ of the DAO’s treasury. You can read more about the hack here and how it led to the creation of the ethereum we know and love today where we pretend that hack never happened (the original ethereum branch still exists as ethereum classic, it’s just much less popular). 

As we continue to onboard quality engineers to the ecosystem, we have more people auditing open source contracts that help plug holes and increase the integrity of our systems. 

Better code will never be a solution for human engineering exploits though. The message below was taken from Links DAO’s #spam-report channel. Every popular project has messages like this daily. 

On top of security, DAOs struggle with human coordination. It’s difficult to run large distributed organizations with members in all different time zones. Quality documentation and smaller internal teams with unique goals can help combat this but doesn’t fully address the problem.

Legally, there are also a number of open questions.

In 1977, Wyoming created the LLC (Limited Liability Corporation) to empower entrepreneurs to start businesses that had the liability protection of a corporation while being as simple to set up as a general partnership. Why does liability protection matter? When a general partnership is sued, not only are the business's assets on the line, but also the owners’ personal assets. 

The Wyoming Decentralized Autonomous Organization Supplement (Aug 2021) paved the way for people to launch and engage with DAOs while having the liability protection of an LLC. Moreover, the DAO LLC has created a seamless path for DAOs to start engaging with traditional business infrastructures, including engaging in legal contracts and opening bank accounts. DAO LLCs are not broadly recognized in other states, however. Many founders are choosing to launch their organizations overseas due to friendlier regulations abroad. 

Another important question is whether DAO tokens are securities. As it stands currently, the only real answer is: “It depends.” Utility tokens that are used to access a service and governance tokens that are used to vote on community outcomes are not commonly not considered securities. Tokens that represent ownership in an investment DAO likely are securities. We did a deep dive here. Regulators need to come up with a framework that enables everyone to participate in the massive DAO value creation over the next 20 years while ensuring the proper disclosures so that people can weed out fraudulent projects. (NOTE: none of this is legal advice. You should consult an attorney should you have questions related to securities.)

Despite the risks, the reward is worth it if we can get DAOs right. Next, I’ll present some examples to show you the amazing progress and to spark your creativity for the future. 

Types of DAOs

Decentralized Finance

Decentralized finance has been the early front runner of DAO success (and they hold the vast majority of DAO treasury funds). 

Traditional finance (as opposed to Defi) has been exclusionary to immigrants and minorities. People of color are more than twice as likely to be rejected for a mortgage . Those who are lucky enough to participate in our banking infrastructure lose out on huge margins that banks claim for their work connecting lenders with borrowers. 

Defi enables everyone to participate, regardless of background, and dramatically improves the economics by cutting out the middleman. 

Example - Aave: Aave is a decentralized finance protocol that connects lenders with borrowers. Borrowers put up crypto as collateral and take out loans from lenders who stake currency with Aave. The interest rates depend on the current market volume as well as a protocol defined “risk factor”. 

For lenders, the benefit is obvious. The current yield on cash deposited in a Chase checking account is .01% whereas Aave deposits are pushing a 2% yearly yield. For borrowers, unlike at a bank, there is no application process that considers credit score or past banking history. Anyone with sufficient crypto to put up as collateral can get a loan. Aave allows them to get the liquidity they need without selling their crypto position. 

People who participate in the Aave network (lenders and borrowers) are rewarded with Aave tokens. The Aave protocol dictates agreements between lenders and borrowers entirely through open-source smart contracts. These contracts can be edited only if a sufficient quorum of Aave token holders vote to ratify a proposal. 

Crowdfunding

Over $6B has been raised on Kickstarter since it was founded in 2009. Internet crowdfunding existed before crypto–crowdfunding on the blockchain is just better.

Blockchain-based crowdfunding aligns incentives between contributors and creators. On Kickstarter, your contribution is either done as a goodwill donation or an early purchase of a product that is still in development. DAO contributors get access to a governance token that can appreciate in value if the project succeeds. The DAO may also choose to distribute profits out to token holders based on their proportional ownership stake - though this is more complicated in the United States where we have stricter securities laws. 

It also enables greater transparency. Blockchain contracts can be audited and transactions can be traced. When you contribute to a DAO fundraiser, you know the rules of the game in advance if you can read the smart contract. 

Contributors then get a say in the future of the project since they can submit and vote on proposals with their governance token. 

Example - Links DAO: 15,000 (and counting) golf enthusiasts raised $10M to buy a golf course. The group issued NFT “membership cards” that grant the holder governance assets, discounts with golf apparel partners, and will eventually be used to purchase membership at the Links DAO owned course.

The group doesn’t own a course yet - they are on the hunt for the right opportunity - and the decision will be finalized by community vote. 

The idea isn’t as wacky as you might think, many of the world’s most exclusive golf courses are owned collectively by the equity members of its country club. The obvious challenge is that deciding on a location that makes everyone happy will be more difficult for a distributed community.

Social Clubs

I don’t make the rules, exclusivity is cool. NFTs/Governance are an immutable way to gatekeep access to an exclusive community. These social clubs can be virtual (Discord / Telegram) or IRL (restaurants, concerts, art studios, etc.)

Example - FWB ( Friends with Benefits) is an exclusive web3 social club that connects builders, operators, artists, and other notable people in the web3 space. Think Soho House + crypto. 

To join, you need to have your application approved by the core team and purchase at least 75 $FWB (FWB’s tokens, about $4,000 USD today). And unlike in a traditional social club where your initiation fee is an up front cost, FWB members can sell their tokens later and may even see a profit. The early FWB members who helped make the community what it is today have seen a 7x appreciation of their tokens. 

They have a token-gated Discord community and host members-only meet ups around the world. 

Service DAOs

Consulting is a $260 billion market in the US. Consulting is appealing because it enables people to work with a number of different companies and have more flexibility than a standard nine-to-five. To achieve this flexibility, they often give up the right to an equity stake in the companies they work with and a significant chunk of the value they create to the agency owner. 

Example - Vector DAO is an organization of designers that work with web3 companies to create quality product experiences that “accelerate the mainstream adoption of crypto.”

Designers can be accepted for a “season” and choose how much time they want to commit to incoming projects. Vector DAO requires that a portion of their compensation be in equity / tokens. Designers in a given season share in the equity from all of the projects so that they have a balanced portfolio similar to the way investors share in carry across a firm’s entire fund. 

Investing

Top Venture Capital funds invest in deals that the average investor cannot access. They have a team of analysts that watch closely for promising companies and the quality of their brand and advisor network draws entrepreneurs their way. If you’re sufficiently wealthy and well connected, you may be able to get your money into Andreesen Horowitz  - but they will charge a 2% management fee and 20% carry. DAOs can be an innovative solution for investors because it enables a large group to pool capital and leverage “the wisdom of the crowd” to deploy it accurately. DAOs can weaponize their members to be product evangelists of the companies they invest in, making their non-cash value add competitive with bluechip VCs. 

Example - Flamingo DAO is an NFT investment collective: they own a number of popular NFTs including Bored Apes and Cryptopunks, and their investment decisions are entirely member managed. With many NFTs selling for millions of dollars, a pooled investment vehicle allows the members to get exposure to a number of different projects at a lower investment size.

Members can leave the collective at any time and redeem their share of the fund’s treasury. 

Philanthropic Organizations

Charitable organizations have expenses (marketing, payroll, etc.) just like any other organization - that’s why not every dollar you donate to St. Judes goes to the patients. While most reputable organizations are good stewards of your capital, not all philanthropies are created equal when it comes to how efficiently they deploy their capital. Charitable DAOs enable greater transparency around how donations are deployed (all on-chain transactions can be tracked) and contributors can have an active vote around what causes the treasury goes toward. 

Example - BigGreen DAO is a 501c3 non profit whose mission is to minimize food insecurity by encouraging food production - Kimball Musk, Elon’s brother, is a major contributor. Donors receive a “Big Green DAO” governance token that allows them to vote on which organizations receive grants. The organization hopes to combat inefficiencies that are common in the philanthropy industry.

Metaverse

Facebook isn’t the only one working on the metaverse. Virtual worlds with finite (and non-fungible) space have attracted a lot of speculators who are investing in virtual land and assets. New worlds need new forms of governance, and what better way to govern a virtual world than with a DAO. 

Example - Decentraland is a virtual world run on Ethereum smart contracts. The Decentral DAO governs updates to the land and mana (the in-game currency of Decentraland) contracts. Primitive worlds only need primitive forms of governance but as people live and interact more in the metaverse the Decentral DAO will be forced to manage increasingly complex disputes. 

How to get involved

The opportunities are endless and it’s all up to you! You can spend 5 min a week in Discord or transition to full time employment. Yes, you can work full time at a DAO…

Here are some tips for getting started:

  1. Follow DAOs on Twitter / Discord: DAOs aren’t mainstream (yet). Most of the conversations are happening on crypto Twitter and Discord. Start reading and ask questions!
  2. Buy / Hold tokens and participate in governance: Most DAOs are open to everyone who is willing and able to buy their governance token. While this isn’t feasible for everyone, for those who have spare money that they are willing to risk, this is the easiest way to get involved directly in governance. 
  3. Bounty Programs: If you don’t have the money to put towards governance tokens, you can earn them through small tasks and challenges put forward by the DAO. Some can be as simple as retweeting a launch announcement tweet. You can find bounty programs in the communities Discord or on a bounty service like Layer3. Coinbase, among others, have adopted a “learn to earn” framework where you can get crypto by completing educational programs online.
  4. Full time employment (developer, community manager, etc.): Many DAOs have a regular job board with roles similar to what you’ll see at any company. While traditional companies will look for formal degrees from brand name institutions, the web3 ethos is to value people based on the quality of their contributions. This makes it a great launch pad for people from non-traditional backgrounds. 
  5. Starting a DAO: Starting a DAO is all about community building. If there’s a mission that you are passionate about, and you can effectively inspire others to join you in working on it, you can start a DAO. When you’re ready, reach out to us and we will help make your idea a reality. 

DAOs are a new way to organize human and financial capital. The DAO structure is being leveraged to redefine banking + lending, give service workers new ways to organize, and help golf fanatics buy a course. 

DAOs create more equitable financial and power outcomes for their contributors. And most importantly, they are enabling groups of internet strangers to accomplish audacious goals that were never before possible. If you aren’t already paying attention, you should start now.