A DAO is an organization that runs on smart contracts instead of traditional managers and boards. Voting is done via tokens, and rules are public. The vision is an organization governed by members without central overrides. In reality, it is much more complex and messy.
What Is a DAO?
A DAO coordinates members toward shared goals. Its rules and funds are handled by smart contracts. Anyone holding a governance token can vote on plans and proposals. The contracts execute the majority vote automatically.
The term autonomous means that code executes rules automatically after a vote. The term decentralized means voting power is spread among all holders, not just a board of directors.
How DAOs Govern
Governance has a set path. A member submits a proposal to spend funds or change settings. The community debates the proposal before starting an on-chain vote.
Step 1: Forum discussion: Proposer posts idea to DAO forum for initial community feedback.
Step 2: Temperature check: Informal off-chain vote (using systems like Snapshot) to gauge interest.
Step 3: Formal governance proposal: Formal submission, requiring a minimum holding threshold to prevent spam.
Step 4: Voting period: Formally executed on-chain. Requires a minimum Quorum and majority vote to pass.
Step 5: Execution: The contract updates automatically. Often has a timelock to allow users to exit if they disagree with the change.
Governance Tokens
Governance tokens give you votes based on how many you hold, similar to stocks. However, large funds and founders often hold most tokens. They can easily override normal votes, creating plutocracy risk.
Tokens may also grant fee shares, aligning financial interests with voting. However, this creates complex motives. Large holders might vote for short-term price gains over long-term protocol health.
Real-World DAO Examples
• MakerDAO: Governs the DAI stablecoin parameters. One of the largest and oldest operating DAOs in the DeFi space.
• Uniswap DAO: Governs the Uniswap protocol upgrades and grants. Features a massive treasury but suffers from voter apathy.
• Compound DAO: Governs the Compound lending market. Notable for initiating the yield farming era via COMP token distributions.
• ENS DAO: Governs the Ethereum Name Service (.eth domains), managing policies and registry fee reserves.
DAO Limitations
DAOs face key limits that make them less effective than traditional companies.
Low voter turnout is a major issue, often between 5% and 15%. This means a small group decides for everyone. Wealth also equals votes, allowing capital funds to dominate. Finally, voting takes days, which is too slow to handle security crises.