Imagine a group of random people (sitting anywhere in the world) who have a common interest, and decided to work together on a specific goal where everyone gets paid for the effort they put in once/during the goal is achieved.
Do you think today’s companies do that?
Do you get paid differently for getting a website with 1000 visitors vs 3500 visitors? If the answer is no, that means you don’t have the skin in the game.
That’s not the case with DAOs.
Do you have someone (like a manager) on top of you (hierarchy) to tell you what to do? That’s not the case with DAO.
And I can go on with these comparisons. But let’s stop it here and go deep into DAOs.
DAO, short form for Decentralised Autonomous Organisation is an entity with no centralized authority. It’s an application of blockchain technology and DAOs operate through smart contracts.
Because DAOs are dependent on a blockchain (A distributed ledger that no single person/entity can control), they are decentralized. And since smart contracts are part of the DAOs, they are autonomous because the contract executes once the conditions are met.
By conditions, I mean rules. ‘Rules’ are encoded on a blockchain.
Simply put, random people from different parts of the world who share a common goal can come together online and form an entity, can organize themselves (governance), create a shared bank account (vault), and work to achieve their goal only to get paid in tokens and be a part of the success/failure (skin in the game).
Recommended Read: Token Economy of Web3
In a single sentence: DAOs are organizations (ORGANIZATIONS) deployed as smart contracts (AUTONOMOUS) on top of Blockchain (DECENTRALISED).
Vitalik Buterin in a blog post in 2014 described DAOs as “it is an entity that lives on the internet and exists autonomously, but also heavily relies on hiring individuals to perform certain tasks that the automaton itself cannot do”.
What that means is that there is a social layer to DAOs and that not everything is automated. On a core level, it is still people that will be making decisions and getting stuff done.
Many used to say (some still say that?) that Bitcoin (as a network) is the first DAC, Decentralized Autonomous Corporation. But eventually, people forgot that (I guess) and somehow the DAC turned to DAO.
We came to a consensus that DAOs, are only DAOs when smart contracts (or some kind of automation) are used, And hence removed Bitcoin from the equation, as it doesn’t support smart contracts.
Then ‘The DAO’ happened.
In 2016, the first-ever DAO was created, titled “The DAO”. It is an investment DAO launched via token sale only to become one of the largest crowdfunding campaigns in history.
But after a month, even before the token sale ended, it was hacked. Yes, the first DAO ever created which was also named ‘The DAO’ was hacked. Due to a bug in the smart contract, the hacker was able to withdraw funds.
Related Article: History Of Some Of The Biggest Crypto Scams + Lessons To Learn
And to restore the lost funds (around $50M at that time) a hard fork of the chain was proposed. And not everybody agreed with that. So we have two chains Ethereum Classic (ETC) and Ethereum (ETH) today.
So, DAOs didn’t have a good start for sure. But that didn’t discourage people to come together online and work on to achieve their common goal.
In 2018 and 2019, there were only a few DAOs (can be counted). The initial wave started with DAOs like Uniswap, Compound, REN, and Synthetix.
Now, to check the number of DAOs we need to use tools. As per DeepDAO, there are 2200+ DAOs. And there might be more that aren’t listed on DeepDAO.
The DAO hack made Ethereum much stronger. And the DAO infrastructure (tools to build DAOs) is only getting better.
Yes, there are a lot of categories in DAOs. Just like ‘What type of business it is?’, we have ‘What type of DAO it is?’.
Here are some categories with examples:
And each DAO might fit into multiple categories based on what they do. Here is an infographic that should help you understand the different types of DAO we have today.
For DAOs, the financial level (Tokens), the technology level (Smart Contracts), and the hierarchy level (No hierarchy) are completely different from traditional companies.
Like Blockchains, DAOs are trustless, permissionless, and open organizations.
Trustless because an individual doesn’t have to rely on a few people making decisions in a board room. A centralization trade-off all the current organizations make.
Permissionless because anyone can submit a proposal and get approval from the community if it’s a promising one.
The financial expenses are open. Anyone can track the wallet (vault – common shared bank account) and see where the expenses are going and nobody can go against the rules (smart contracts).
And my favorite aspect of working for a DAO is the ‘Skin in the game’ aspect. You get something done for a DAO (let’s say design a logo for a DAO), and you get paid in tokens.
Now, if the DAO succeeded very well after a couple of years, you can still take advantage of that success if you are holding those DAO tokens which you got paid for. On the other side, everything can go to zero too!
Note: Looking for ways to work for DAOs and get paid? Read this article I wrote on how to find web3 bounties.
Most importantly, DAOs solve the ‘Principal-Agent problem’ that most organizations face.
As we move along more and more people prefer to work for DAOs because of the power, freedom, and skin in the game (tokens) it gives to an individual.
We have seen that with remote work in the post-pandemic world. And we probably will see people shifting towards working for DAOs in the future.