What is a DAO?
A DAO, or decentralized autonomous organization, is a group of members who have come together to achieve a common aim. Typically used to raise money for a specific purpose, DAOs can be formed to predict stock market trends, collect rare nonfungible tokens (NFTs) and more.
DAOs are completely online institutions with members who rarely, if ever, meet in person. They operate through blockchain technology and smart contracts. Blockchain technology eliminates the need for a central governing authority in financial transactions and regulations, hence, the words "decentralized" and "autonomous" in the name.
Simply put, DAOs are like internet-native enterprises owned and run by their members. They have built-in treasuries that no one can access without the group's permission. All decisions are made through proposals and voting, ensuring that everyone in the organization has a voice.
Presently, the possibility of adopting the DAO’s structure and technology in various sectors such as business and government are being examined. Because of their purported transparency and efficiency, DAOs are seen as a potential solution to corruption and bureaucracy in many organizations, especially in governments worldwide.
MakerDAO, BanklessDAO, and MetaFactory are some active DAOs currently in operation. These organizations have various aims, from funding grant proposals and issuing funds against crypto collateral to promoting fashion and culture. The DAO can also be structured as a nonprofit organization to collect money and finance specific initiatives (charitable, environmental, social, housing, etc.), depending on the members' votes.
This article will discuss the history of decentralized autonomous organizations and how they work as well as token-based DAO memberships, their role in governance and e-government services, and the legality of DAOs in the financial ecosystem.
Who invented DAO?
The DAO was founded in early May 2016, when a few members of the Ethereum community announced the creation of The DAO, dubbed Genesis DAO. It was constructed using smart contracts on the Ethereum blockchain. The Slock.It team created the open-source coding framework, but it was collectively deployed by members of the Ethereum community under the moniker "The DAO."
Anyone could donate Ether (ETH) to a unique wallet address in exchange for DAO tokens on a 1-to-100 scale during the creation period. It was a success, exceeding expectations when it raised 12.7 million Ether (worth around $150 million then), making it the most successful crowdfund to date. When Ether was worth $20, the overall amount of Ether from The DAO was worth more than $250 million.
In a nutshell, the platform would enable anybody with a project to post their idea to the community and potentially obtain funding from The DAO. Anyone with DAO tokens could vote on proposals and get bonuses if they succeeded, and things were beginning to look up now that financing was sorted out.
However, on June 17, 2016, a hacker exploited a flaw in the programming and a combination of vulnerabilities that resulted in the transfer of 3.6 million ETH, valued at approximately $50 million at the time. Given the 28-day holding period terms of the Ethereum smart contract, the funds were moved to an account and hence, were not gone.
Many in the Ethereum community termed the attack valid but unethical. Members of the DAO and the Ethereum community were hard-pressed to come up with a solution. With many calling for the re-appropriation of Ether and many others calling for the DAO to be shut down, the Ethereum network eventually moved the funds in the DAO to a recovery address where their original owners could exchange them back to Ethereum. Token owners were given a 1 ETH to 100 DAO conversion rate, matching the initial offering.
How does a decentralized autonomous organization (DAO) work?
The smart contract is the heart of a DAO. The organization's smart contract holds its data. Because DAOs are open and transparent, no one can modify the rules without being detected. DAOs have a more democratic structure in comparison to traditional businesses. Instead of one person making decisions on behalf of the organization, all DAO members must vote for any changes to be implemented.
DAO funding is mostly dependent on crowdfunding, which issues tokens. The governance of DAOs is community-based, while that of traditional businesses is largely controlled by executives, the board of directors, and other shareholders. Traditional business activities are considered private and limited, while DAO operations are completely transparent and not restrained within geographical boundaries.
DAO membership
There are a variety of models for DAO membership. Membership may determine how voting is carried out and other crucial elements of the DAO.
Share-based membership
Share-based DAOs are more permissioned, meaning that not anyone can access the DAO—membership has to be approved. Anybody wanting to be a member may submit a proposal to join the DAO, generally offering a tribute in the form of work tokens. A member's shares represent voting power and ownership.
Share-based membership is typically used for more personal and connection-based organizations, such as charities, investment clubs and worker collectives. However, it can also be used to govern tokens and protocols.
MolochDAO is a DAO with this sort of membership. MolochDAO focuses on funding Ethereum projects and asks for a membership proposal so the group can see if an aspiring member has the required expertise and capital.
Token-based membership
Depending on the token, DAOs with token-based memberships are fully permissionless. Typically, their governance tokens can be traded freely on a decentralized exchange. Others must be earned through providing liquidity or demonstrating proof-of-work. Simply owning the token enables voting access.
This kind of membership is typically used to govern broadly decentralized protocols and/or tokens. MakerDAO is a good example of a DAO that uses the Maker protocol. MKR, the native currency of this organization, can be bought and sold on decentralized exchanges like Binance and Bibox. As a result, anybody may acquire voting power over the Maker protocol's future by investing in it.
The role of DAO in government
Most countries now provide e-services, where public services for the betterment of their citizens are carried out with the help of information and communication technologies.
Many government activities, such as voter registration, driver's license acquisition, immigration, taxes and more use these e-services. Overall, e-services have enhanced government productivity and efficiency in information collection, security and dissemination.
Collectively, electronic systems used in government can also be called an "e-government system." In a bid to improve efficiency and transparency in governments, such solutions are increasingly being adopted globally.
However, current e-government services are still centralized and rely heavily on humans to control or oversee them. The highly centralized IT infrastructure is extremely vulnerable to external assaults due to its lack of decentralization.
Outsiders are a potential risk since they have access to systems that might affect data integrity—for example, through infected laptops or misplaced external drives. Furthermore, inside rogue users may also compromise data integrity themselves.
Another downside is that depending on individuals to watch and regulate operational processes puts the system at risk of faulting and opens the door for bureaucracy and corruption.
The use of blockchain technology in e-Government services
What would the use of blockchain-based DAOs in e-government services look like? Theoretically, such a system would be fully decentralized and thus immune to malicious attacks. This approach has the potential to regulate and manage all relationships between decision-makers, management, agency staff, other agencies, clients, contractors, stakeholders and citizens using smart contracts.
Some of these contracts would have the force of law, while others could be formal operating agreements (e.g., internal processes, standards, etc.). Every government transaction (e.g., use and transfer of money, property, data, access/use rights) would be recorded on a public blockchain to maintain transparency and accountability. Depending on a role-based authority system, smart contracts might also be structured to offer varying degrees of access.
Since a blockchain-based DAO would be controlled by pre-defined rules enacted via a smart contract, it would eliminate errors and paperwork associated with traditional human processes.
A wide range of government procedures could also be automated using the blockchain. A smart permit, for example, might handle many routine government activities. A smart permit, like a blockchain smart contract, is a kind of legal agreement that establishes obligations for various parties.
The government and the permitted entity would have separate responsibilities (i.e., as pertains to the issuance of licenses). A non-governmental organization may do a regulated function under the authority of a permit.
Of course, introducing a new government-DAO (or eGov-DAO) to the general population may call for huge adjustments that could pose challenges due to the complexity of government processes and the public’s initial hesitation to adjust to technology.
However, applying blockchain technology to various government services will undoubtedly provide additional security and reliability since the eGov-DAO will be both immutable and transparent as is the case with most blockchains.
As such, the processing time of many government services will be greatly reduced, improving the efficiency of most offices. The general public will see the benefits of adopting such a system and will likely adjust to the technology.
How can DAOs improve the e-Government system?
Currently, e-government services do not have fully automated and efficient systems that integrate all the participants and deliver transparency. Adopting a blockchain-based eGov-DAO will allow real-time monitoring and evaluation of e-government services.
The government will benefit from more efficiency and transparency as well as improved resource management. This approach safeguards all records for auditing, reducing litigation between parties and speeding up contract allocation and execution.
Both public and commercial services have been hacked several times in the past through ransomware and denial-of-service attacks. The e-Gov DAO will certainly overcome these security concerns while lowering IT infrastructure costs.
The ultimate goal of e-Gov-DAOs is to save governments money, increase efficiency, and reduce risk by establishing a transparent and secure e-government system with minimum cost.
At a time when public trust in government has waned, blockchain might be the way to renew people's confidence in their governments.
Is DAO legal?
The legality of DAOs varies by jurisdiction. In some cases, a DAO may be considered a company or nonprofit, while it may be seen as a contract in others. As with most things related to the law, it's important to consult with an attorney versed in the relevant jurisdiction to get a definitive answer.
In the United States, the legal environment for federal governance and regulation is generally suspicious of cryptocurrency and DAOs. Regulating entities include the Federal Reserve, the Securities and Exchange Commission (SEC), the Department of Treasury, and the Commodities Futures Trading Corporation.
The SEC may be interested in the following types of crypto activities:
What will the federal government do to regulate DAOs? On the one hand, if a DAO is intended to trade different types of cryptocurrencies, it will be regulated by the federal government owing to similarities with equity investment vehicles or exchanges.
On the other hand, many DAOs will not necessarily be about the tokens used to execute business operations in the DAO but rather about how to deploy resources more efficiently to accomplish an objective that members of the DAO believe is important.