A new phenomenon is beginning to impact public discourse: Decentralized Autonomous Organizations (DAOs). In early 2022, UkraineDAO made headlines when it swiftly raised $22 million to aid Ukraine after the Russian invasion. A few months earlier, ConstitutionDAO had raised $40 million in days, narrowly missing out on purchasing an original copy of the US Constitution at a Sotheby's auction. Or consider CityDAO, a collective that acquired 40 acres of land in Wyoming to construct a "decentralized city" operated by its citizens using blockchain technology.

 

The Rise of a New Kind of Organization

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These are just three examples of implementing a concept first realized on the Ethereum blockchain in 2016. The DAO, a community-based investment fund, raised $150 million and came to an inglorious end a few months later.

  

But what exactly is a DAO? Even Web3 insiders argue about the exact definition. This is partly because DAOs are still in their infancy and constantly and rapidly evolving.

 

Experts agree that DAOs are a new form of organization based on distributed ledger technology (DLT), where rules are recorded in computer code and automatically executed by smart contracts.

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DAOs represent a novel approach to collective organization that enables a group of individuals to self-organize, coordinate, and collaborate transparently to pursue a shared goal. As the name suggests, they are decentralized and autonomous, transcending physical boundaries and potentially disrupting traditional hierarchies. This potential to reshape power dynamics and enhance transparency could be a significant step toward addressing democratic challenges.

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An Open Framework

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Many promises have yet to be fulfilled, and building a DAO involves many areas of uncharted territory. While there is much to learn from traditional organizations, the possibilities are almost limitless when it comes to designing the framework - from governance structures to tokenomics to technological tools.

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Most DAOs operate with a treasury, a collective fund the members manage. This fund, which often includes cryptocurrencies such as Bitcoin (BTC) or Ethereum (ETH), stablecoins, and sometimes even traditional fiat currencies, is used to finance projects and initiatives that align with the organization's goals. The allocation of these funds is determined through proposals submitted by the community and voted on by members, ensuring a democratic and inclusive decision-making process. 

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DAOs raise many questions about possible use cases, the legal systems in which they operate, and their potential to democratize collective decision-making.

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Shortcomings of legacy systems

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In the search for fair, equitable, and just governance models for this new type of organization, the well-known weaknesses in conventional decision-making processes often come to light.

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"One share, one vote" (voting power proportional to the number of shares owned) is widely used in the corporate world. While giving more power to those who bring more resources to a project may seem fair, critics argue that stake-based voting provides even more power to those already wealthy and influential. In other words, it potentially reinforces existing power structures. 

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Meanwhile, most democratic systems are based on majority voting ("one person, one vote"). However, this principle often does not sufficiently consider the diverse wishes and needs of the community. Additionally, legal safeguards - such as constitutional rights - are needed to protect minorities from the so-called tyranny of the majority - consider the vote on same-sex marriage in a conservative society.

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Innovative Decision-Making Mechanisms

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DAO communities are at the forefront of researching, implementing, and testing innovative decision-making models. Whether at Aragon, Gitcoin, Uniswap, or Aave - they constantly strive to optimize governance and its outcomes for the community. Voting power is calculated in various ways. For example, Conviction Voting considers the duration of support for proposals, while Futarchy uses prediction markets to make decisions in the community's best interest. Additionally, some DAOs employ Holographic Consensus to facilitate decision-making with low participant turnout or incorporate reputation-based voting to value contributions beyond mere token holdings.

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Another concept that has gained prominence in the blockchain community is "Quadratic Voting" (QV), an approach championed by figures such as Ethereum founder Vitalik Buterin.