As of June 2021, over $1 billion has been committed towards blockchain-native analogs of traditional corporations called decentralized autonomous organizations or DAOs. A DAO uses blockchains and smart contracts to organize the mechanics of corporate governance, thereby facilitating collective participation of distributed participants in the funding and production of community goods. There are now several prominent DAOs in the Ethereum community, and recent legal moves in places like Wyoming have begun establishing bridges between traditional legal structures and these new on-chain entities.

In this post, we’ll explore what DAOs are and why they’re important. We'll also look at some of the most exciting DAO projects out there.

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What are DAOs and why are they important?

On a fundamental level, you can think of DAOs as internet-native constitutions. Like regular constitutions, DAOs embed a fundamental set of rules and principles that establish an organization and determine its governance structure. But unlike regular constitutions, DAOs can execute some activities fully autonomously. For example, a DAO with its own internal capital can automatically buy and sell cryptocurrencies based on specific programmatic conditions.

The autonomy of DAOs is enabled by smart contracts, which are self-executing contracts with terms written as code and then deployed on blockchain networks like Ethereum. The use of smart contracts means that a DAO may function without necessarily relying on the human decision-makers in the organization. A smart contract will execute its terms regardless of what specific individuals think or want, which means that DAOs enable more decentralized decision-making for their users.

In practice, this decentralization makes DAOs particularly well-suited to funding and managing projects on the internet. So far, people have created DAOs that fund and manage projects like stablecoins, venture capital funds, decentralized cryptocurrency exchanges, and meme-buying cartels. These projects manage hundreds of millions of dollars and allow strangers on the internet to come together and work towards common goals.

How do DAOs work?

To understand what DAOs are, let’s explore a simple example. Let’s say that you want to invest in the most interesting memes on the internet. Memes can be expensive when represented as NFTs (one went for over $4M in a recent auction!), so it makes sense to pool money together with many people to buy them. But this plan poses several large-scale coordination problems.

• How do you find people to work with and verify that they’re serious? You will need to dig through your network, post announcements online, interview and vet people, gain their trust, and make sure they’re willing to commit to this project.
• How do you decide which memes to buy and what to do with them after you have them? You'll need a lot of meetings to select target memes, sort out who owns them, and decide when or if to sell them.
• Who’s in charge of the organization and who gets to make the rules?
• And how does the organization allocate its capital?

To answer these questions, people have traditionally resorted to creating centralized entities like companies and institutions. These organizations have rules and procedures that allow them to coordinate people towards a common goal. However, this isn't practical to do at internet scale with people in many jurisdictions whose identity you may not even know. DAOs solve this coordination problem with the help of a blockchain and smart contracts.

In our meme buying example above, a DAO can help us each of the problems associated with coordinating large groups of people on the internet:

• DAOs can help you find serious people to work with by leveraging both monetary rewards and proof of seriousness. For example, a DAO may ask each of its members to buy a minimum amount of DAO tokens in order to join the organization. Similarly, each member can expect that the value of their tokens will appreciate as the DAO realizes its stated goal and more people buy into it.
• DAOs can help their members coordinate and decide on what memes to buy and sell using simple algorithmic-based frameworks. For example, a DAO may be designed such that members have to put forward proposals for what memes to buy, and if the proposal is voted by 2/3 of the DAO members, the DAO will automatically buy a specific meme. (In this sense, a DAO is autonomous, since it will deploy capital if a proposal passes regardless of what the leaders of the project want).
• DAOs can also contain governance provisions. For example, amendments to the DAO could be added when a quorum of members agree on them. A member could be defined as someone who owns a specific amount of DAO tokens, and multiple classes of members may exist, each with its own powers.

As internet-native constitutions, DAOs have several advantages compared to their traditional counterparts. By nature of being decentralized and relying on blockchain networks, they are better suited to grassroots organization. They also create more transparency, and they’re open to anyone to participate from anywhere around the world. The ultimate goal of DAOs is creating organizations where all participating members have a say.