What is a DAO? Decentralized Autonomous Organizations Explained

Web3, cryptocurrencies, and NFTs are taking over the world.

The more they seep into the mainstream, the more Decentralized Autonomous Organizations (DAOs) will become important.

A key ethos in the crypto space is decentralization. Society has grown tired of the powerful keeping all the power to themselves.

Removing a central figure removes the opportunity for the misuse of power.

This is an issue that DAOs tackle.

So, more than ever, it’s important to know…What is a DAO?

What does DAO stand for and how is it pronounced?

First off, DAO stands for Decentralized Autonomous Organization.

DAO is pronounced DA-OW.

What is a DAO? 🤔

A DAO is a way for a web3, crypto, or NFT project to organize itself without the need for a company or individual to be in power, resulting in a completely decentralized organization.

Instead of asking a CEO to make decisions, a DAO will ask its members to vote on what will happen.

Stakeholders will own a token which will be the equivalent of one vote. If 1000 tokens are released and you own one token, you will then have a proportional 1/1000 of the voting power.

A DAO removes the need for a human at the end of decisions. Once the vote is complete and the stakeholders have selected a winner, there is no CEO that clears the decision.

Instead, the DAO’s smart contract will execute what it needs to do. Think of it as a refreshed, more democratic, digital-based way to run a company.

Do DAOs need humans at all? 🤖

A DAO needs humans to vote on proposals and, of course, it must be created by humans.

The developers who create it will set the parameters on which the DAO will begin to operate. These are things like the name, how many tokens will be released, etc.

Maybe the most important decision developers make, early on, is what voting mechanism the DAO will follow.

Currently, the most popular voting mechanism is token-based quorum voting. This requires a defined threshold of voters for a proposal to be passed (e.g. 70% of voting power must vote) then once the proposal is passed, the decision with the highest votes wins.

This is only one system of many, which is way beyond the scope of this article. But if you’re a nerd like me and want to read more, check out Eric Arsenault’s Medium article.

That being said, the DAO is not stuck the way the developers made it forever.

Stakeholders have the opportunity to vote on these issues and change them in the future. Once a DAO is fully up and running, the developers will have no power over the beast they created.

It’s kind of like Frankenstein and his monster but hopefully less scary.

Some DAOs, however, are set up as a hybrid organization.

They will get stakeholders to bring forward and vote on proposals, but they may still have a group of developers or admins that have an element of control over what happens.

This makes the DAO less decentralized.