Decentralized Autonomous Organizations (DAOs) are an organizational structure that leverages blockchain technology to automate certain aspects of voting and transaction processing. DAOs are a key component of major blockchain applications including cryptocurrencies and Web 3.0, which is a proposed framework for the next generation of the internet, relying on the decentralization enabled by blockchain. DAOs can simplify the process of creating decentralized organizations that respect the interests of stakeholders outside the control of any single party. They are used for raising funds for specific projects and creating new types of business structures. DAOs on blockchain platforms like Ethereum can also automate many financial transactions to ensure stakeholders are compensated according to agreed-upon rules. DAOs excel in facilitating collective votes based on a certain level of investment, collaboration, or engagement. Proponents discuss using DAOs to replace trust-based systems (which depend on personal relationships or a central authority) with a blockchain-based smart contract. However, the goal of replacing trust with code is still a work in progress. DAOs do not automate direct material and legal processes such as filling out paperwork, paying taxes, or obtaining permits from government entities. Moreover, the smart contracts that control a DAO’s decision-making and execution are software bugs, not legally binding contracts. In most cases, consensus must be achieved through human agents whom participants trust, and the DAO organization must incorporate itself to support the desired legal, business, and tax structures independently of the original code.

Let’s look at DAOs from another perspective. DAOs could automate the Hollywood model for making films. The film industry has developed a model that allows hundreds of participants to quickly come together and produce a new film with uncertain prospects. In this model, every contributor, from A-list actors to costume designers, receives immediate compensation and a share in the long-term success of the project. DAOs could help automate this model in other industries as well, allowing people to be compensated not just for their labor rates but also for the overall success of the business, even if they cease active involvement.

4.1 – How Do DAOs Work? To start, programmers code smart contracts to automate financial transactions, create new tokens, and allocate votes. For example, should votes be allocated based on capital investment, grouped by cryptocurrency votes, or based on a logarithmic curve to reduce the risk of dominance by those who invest more heavily in the voting process? A DAO also needs a legal structure. The U.S. Securities and Exchange Commission has stated that DAOs must register as securities for the sale of cryptotokens. States including Tennessee and Wyoming have started designating DAOs as legal entities. Investment firm Andreessen Horowitz has also compiled a guide on the benefits and limitations of different legal structures for DAOs. Structurally, people can participate by contributing cryptocurrency directly or by performing verified tasks through a portal or other means. For example, a new environmental monitoring app might reward participants for sharing sensor data. A storage service could reward users for providing storage space using the Interplanetary File System protocol. Once operational, participants may feel good about helping to purchase a rare item or supporting legal efforts for a cause they believe in. A DAO could also have a positive impact on the world and earn returns that convert into base cryptocurrency based on tokens. In this scenario, participants would see an increase in the value of their tokens or feel the payment through Ether or another cryptocurrency.

4.2 – Benefits of DAOs A DAO can:

• Automate financial processes associated with a distributed organization.
• Speed up the fundraising process for a new idea.
• Ensure everyone gets a fair vote in the organization.
• Manage the distribution of returns and profits.
• Improve visibility in the rules for allocating investments and decisions.

Downsides of DAOs A DAO can have the following downsides and concerns:

• It may be very difficult to change automated smart contracts if a problem is discovered.
• Hackers could exploit vulnerabilities to misappropriate funds against the interests of shares or shareholders.
• Participants in initial DAOs could pay large transaction fees, up to $100 per transaction.
• Humans are still needed to perform material and legal processes that could undermine the intentions of the DAO.
• Governments are still scrutinizing the legal status of DAOs, presenting tax and legal risks for investors.

4.4 – Effects of DAOs on Organizations Work on DAOs is ongoing. In the near future, they are likely to have the most significant impact on fundraising for specific goals. Today, services like GoFundMe can help individuals participate in causes they find worthy. DAOs could further guide such initiatives by allowing participants to vote on strategies aligned with their intentions. DAOs could soon facilitate new types of investment organizations and automate the process of returning funds to participants. For example, residents of a particular city could use a decentralized loan app for their city and get some guidance in decision-making about the types of loans or advertisements they want to support. If the project is successful, their financial investment in the project could reward them based on their labor or skill.

4.5 – Examples of DAOs Decentralized Autonomous Organizations have gained attention in recent years and are now fully involved in many blockchain projects. For instance, the Decentralized Finance (DeFi) space uses DAOs to allow applications to be fully decentralized. A DAO starts with the idea of changing the world, opening a new business, or supporting an important cause. This is where DAOs stand out. By processing transactions on the blockchain, a DAO can attract significant investment for a good cause. The first DAO, aimed at creating a decentralized organization for a venture capital fund, quickly raised $150 million. After this DAO was hacked, the Ethereum community rallied to compensate investors. The ConstitutionDAO, which attempted to purchase an original copy of the U.S. Constitution, raised $47 million in a week. After losing the auction bid, each participant was offered a refund after deducting a $100 transaction fee.

Other DAOs have collected money to fund space flights, lend money, or hire legal teams for an individual or issue. Here are a few other examples:

• City DAO purchased 140 acres of land in Wyoming.
• Free Ross DAO created a legal fund to seek clemency for Ross Ulbricht, the imprisoned creator of the Silk Road website, which sold illegal goods.
• AssangeDAO bought NFTs to fund the legal defense of Julian Assange, the founder of WikiLeaks, who is charged with violating the American Espionage Act.
• MakerDAO developed a new type of decentralized bank through consensus voting.

DAOs are an exciting idea for using cryptocurrency to activate a new type of organizational structure, but this is just the beginning. In the long term, they could provide a powerful alternative to other business management structures. However, addressing issues of governance, risk management, and security could take several years to fulfill this vision. Creators of DAOs should also consider the technical aspects of programming smart contracts, tax and liability issues, and legal aspects of governance models.

Conclusion: The Future and Challenges of DAOs

In summary, Decentralized Autonomous Organizations (DAOs) represent a pioneering shift in the paradigm of organizational management and governance, harnessing the power of blockchain technology to foster transparency, autonomy, and decentralized decision-making. By automating processes through smart contracts and eliminating traditional hierarchical structures, DAOs offer a novel approach to collective investment, project management, and profit distribution. While they hold immense potential to revolutionize various industries by democratizing operations and enhancing stakeholder engagement, DAOs also face significant challenges including legal recognition, security vulnerabilities, and the need for effective governance models. As the landscape of blockchain and decentralized finance continues to evolve, the future of DAOs remains a promising yet uncertain frontier in the digital age, requiring ongoing innovation, regulation, and community engagement to realize their full potential.