The only DAO ran by NFTs
DAO stands for “Decentralized Autonomous Organization”. Each of these words can be interpreted in many ways, spawning different definitions of DAOs with emphasis on one aspect or another. In order to clarify the concept, let’s analyze each term.
The essential feature of DAOs is that their operating rules are programmed, meaning that they are automatically applied and enforced when the conditions specified in the software are met. This differentiates them from traditional organizations, whose rules form guidelines that someone must interpret and apply.
For example, imagine the case of an organization whose members wish to allocate funds to various projects through a commission of experts. In the case of a traditional organization, once the experts have given their opinion, employees must carry out many steps in order to release the funding, from drafting the minutes of the commission to sending the money transfer instructions to the bank.
In the case of a DAO, funds are instantly transferred as a result of the commission’s approval. Nothing can stop it, neither internal stakeholders nor third parties such as banks or even a public authority.
For the automated and secure execution of operating rules to be effective, they must be running on a public, permissionless blockchain such as Ethereum. There are two main reasons for this:
- 1.Traditional software cannot directly handle funds. It can only transmit orders to the financial intermediaries in charge of moving money around. Using a public blockchain makes it possible to place (crypto-) currency or other (crypto-) assets under the direct and unique control of the DAO, which acts a software representation of the organization and of its rules of operation.
- 2.Traditional software relies on an infrastructure operated by a third-party. If the rules are programmed in an application running on a cloud like AWS or on one of the company’s servers, then their execution depends on the cloud operator or the IT department, which are vulnerable to outages, errors, and outside influence.
A DAO is autonomous in the sense that its rules are self-enforced. No one can stop it nor change it from the outside.
The decentralized aspect can be understood in two different ways which shed a light on the conflicting definitions of a DAO:
1. The DAO is decentralized because it runs on a decentralized infrastructure, i.e. a public, permissionless blockchain that cannot be taken over by a State or another party.
This definition echoes the concept of autonomy described above. Yalda Mousavinia, for example, defines a DAO as “a corporation running on the digital jurisdiction”. Nothing is said about how the corporation is governed.
Similarly, Tim Bansemer states that a “DAO is a composition of smart contracts running on the underlying permissionless blockchain (e.g. Ethereum) to form an organization infrastructure.” Again, nothing is said about how power is distributed within the organization.
2. The DAO is decentralized because it’s not organized hierarchically around executives or shareholders, and it does not concentrate the power around them.
Conversely, Matan Field argues that a DAO necessarily relies on a distributed governance system, meaning that the exercise of power within the organization is collective. The COALA think-tank describes the power structure of DAOs as “heterarchical”, that is to say, based on mechanisms of cooperation without subordination.
According to this perspective, the novelty of DAOs lies precisely in their ability to coordinate a very large number of people while avoiding the ponderousness of hierarchical structures. This characteristic differentiates them from traditional organizations on a fundamental level.
These two views became the dominant narratives around DAOs. The first one could be called “The Fight for Freedom” and is perfectly captured by Aragon’s promotional video of the same name. DAOstack’s own video beautifully conveys the second narrative which could be called “The Future of Collaboration”.
In the end, these two views can be seen as complementary when considering that the essential feature of a DAO is its ability to escape seizure by a third party, be it external (autonomy) or internal (decentralization).
The first DAO which claimed itself as such is “The DAO”, created in 2016 to finance projects contributing to Ethereum development. The idea of using a DAO rather than a foundation or venture capital was in keeping with the ethos of decentralization dear to the Ethereum community. Indeed, The DAO was an investment fund whose decisions were directly made by investors, instead of being delegated to specialized managers.
The concept of DAO was introduced earlier by Dan Larimer who, in 2013, coined the term “DAC” — Decentralized Autonomous Corporation. Dan Larimer was comparing Bitcoin to a firm whose shareholders would be the bitcoin holders and whose employees would be the miners.
The same year, Vitalik Buterin generalized the idea by imagining how a company could do without its managers. Business automation is often seen as the process of replacing low-skilled people with robots or computers, keeping more qualified staff at the controls. However, Vitalik suggested the opposite, that is to say, the replacement of management by a software technology capable of recruiting and paying people to perform the tasks that contribute to the company’s mission.
Such software technology could even pay cloud service providers to have computers on which to operate, and thus become independent of any particular infrastructure. Of course, it would be vital to ensure that this technology is protected from theft of its resources or destruction by a third party, hence the rationale for making it autonomous and decentralized.