Decentralized Autonomous Organization (DAO): Definition, Purpose and Example (2023)

What is a Decentralized Autonomous Organization (DAO)?

Decentralized Autonomous Organization (DAO) is a new type of legal structure that does not have a central governing body and whose members share the common goal of acting in the best interest of the entity. Popularized through cryptocurrency enthusiasts and blockchain technology, DAOs are used to make decisions in a bottom-up governance approach.

Key operations

  • A decentralized autonomous organization is a unit structure where token holders participate in the management and decision making of the unit.
  • There is no central authority in the DAO; instead, power is distributed among token holders who collectively cast votes.
  • All votes and activities through the DAO are published on the blockchain, making all user actions publicly visible.
  • One of the first DAOs called The DAO was an organization created by developers to automate decisions and facilitate cryptocurrency transactions.
  • The DAO must ensure that security is a priority, as exploits could leave the DAO without millions of dollars in savings in its coffers.

What is the purpose of Decentralized Autonomous Organizations (DAOs)?

One of the main features of digital currencies is that theydecentralized. This means that they are not controlled by a single institution such as a government or central bank, but are distributed across different computers, networks and nodes. In many cases, virtual currencies use this decentralized status to achieve levels of privacy and security not typically available to standard currencies and their transactions.

Inspired by the decentralization of cryptocurrencies, a group of developers came up with the idea for a decentralized autonomous organization, or DAO, in 2016.The concept of a DAO is to promote the oversight and governance of a corporate-like entity. However, the key to DAOs is the lack of a central authority; a collective group of leaders and participants acts as a governing body.

How DAOs work

DAOs rely heavily on smart contracts. These logically coded agreements dictate decision-making based on the underlying activity on the blockchain. For example, based on the outcome of the decision, a certain code can be implemented to increase the circulating supply, use a selected amount of reserve tokens, or issue selected rewards to existing token holders.

The voting process for DAOs is published on the blockchain. Users often have to choose between mutually exclusive options. Voting power is often distributed among users based on the number of tokens they own. For example, a user who owns 100 tokens of the DAO will have twice the voting weight of a user who owns 50 tokens.

The theory behind this practice is that users who invest more money in the DAO are encouraged to act in good faith. Imagine a user who owns 25% of the total voting power. This user may engage in bad deeds; However, doing so will jeopardize the value of the user's 25% stake.

DAOs often have treasuries that hold tokens that can be issued in exchange for fiat. DAO members can vote on how to spend these funds; for example, some DAOs with the intention of acquiring raresNFT-ovican vote on whether to give up treasury funds in exchange for assets.


In 2021, ConstitutionDAO was founded in an attempt to purchase a copy of the US Constitution. Although the DAO failed to acquire assets, The DAO proved that a group of like-minded people can form and continue such endeavors.

Advantages of DAO

There are several reasons why an entity or collective group of individuals would want to continue with a DAO structure. Some of the benefits of this type of management include:

  • Decentralization. Decisions that affect the organization are made by a group of individuals, as opposed to the central authority, which is often outnumbered by its colleagues. Instead of relying on the actions of one person (the CEO) or a small group of individuals (Board of Directors), a DAO can decentralize authority to a significantly larger number of users.
  • Participation.Individuals in a unit can feel more empowered and connected to the unit when they have a direct influence and vote on all issues. These individuals may not have strong voting power, but the DAO encourages token holders to vote, burn tokens, or use their tokens in ways they believe are best for the entity.
  • Advertising.Within the DAO, votes are cast via the blockchain and are publicly available. It requires users to act in the way they think is best, as their vote and their decisions will be publicly visible. This encourages actions that will benefit the reputation of the electorate and discourages actions against society.
  • Community.The DAO concept encourages people from all over the world to come together to build a unified vision. With just an internet connection, token holders can communicate with other holders wherever they live.

Limitations of the DAO

But not everything is perfect when it comes to DAOS. Improper installation or maintenance of a DAO has serious consequences. Here are some limitations of the DAO structure.

  • Speed ​​up.If a public company is led by a CEO, one vote may be required to decide a particular action or direction the company will take. With the DAO, every user has the opportunity to vote. This requires a much longer voting period, especially considering time zones and priorities outside of the DAO.
  • Education.Similar to the speed issue, the DAO has a responsibility to educate many more people about pending entity activities. It is much easier to keep one CEO responsible for the company's development, while DAO token holders may have different educations, understanding of initiatives, incentives or access to resources. A common challenge with DAOs is that while they bring together a diverse set of people, that diverse set of people must learn to grow, strategize, and communicate as a unit.
  • Inefficiency.Partially summarizing the first two points, DAOs are at high risk of being inefficient. Because of the time required to educate constituents, communicate initiatives, explain strategies, and onboard new members, it is easy for the DAO to spend much more time discussing changes than implementing them. A DAO can get bogged down in trivial, administrative tasks due to the need to coordinate many more people.
  • Security.The problem that all digital platforms for blockchain resources face is security. DAO requires significant technical expertise to implement; without it, there may be invalidity in the manner in which votes are cast or decisions are made. Trust can be broken and users will leave the entity if they cannot trust the structure of the entity. Even when using multi-sig orcold wallets, DAOs can be exploited, treasury reserves stolen and vaults emptied.



  • Different individuals can meet around the work to function as a unified whole.

  • Several people have a voice in the company's planning, strategy and operations.

  • Since votes on the blockchain are publicly visible, token holders are naturally incentivized to behave more responsibly.

  • DAO members can feel empowered to collaborate with like-minded people with similar goals within a community.


  • It often takes longer to make decisions because there are more participants voting.

  • User education is often a greater burden because the collective voting population is diverse with varying offerings of education and knowledge.

  • It takes more time to vote or collect users due to the decentralized nature of the device.

  • Serious attacks such as theft of government reserves are possible if the DAO's security is not properly established and maintained.

DAO eksempel: DAO

The DAO was an organization that was designed to be automated and decentralized. It worked as a moldventure capitalfoundation, based on open source code and without a typical management structure or board. To be fully decentralized, the DAO was not connected to any particular nation-state, even though it used the ethereum network.

The DAO launched in late April 2016 thanks to a month-long token crowdsale that raised more than $150 million in funding.At the time, the launch was the largest crowdfunding campaign ever.

Why was the DAO dissolved?

As of May 2016, the DAO held a huge percentage of all ether tokens issued up to that point (up to 14% according to reportsThe Economist).Around the same time, however, a document was released that addressed several potential security flaws and warned investors not to vote on future investment projects until those issues were resolved.

Later, in June 2016, hackers attacked The DAO based on these vulnerabilities. Hackers gained access to 3.6 million ETH, worth around $50 million at the time.This sparked a large and contentious debate among DAO investors, with some people suggesting different ways to deal with the hack and others calling for the permanent dissolution of the DAO. This incident was also highlighted in the hardforkof ethereum that happened shortly after.

What are some criticisms of the DAO?

According to IEEE Spectrum, The DAO was vulnerable to programming errors and attack vectors.The fact that the organization was carving out new territory in terms of regulations and corporate law probably did not make the process any easier. The consequences of the structure of the organization were potentially numerous: investors were concerned that they would be held accountable for actions taken by the DAO as a wider organization.

In July 2017, the Securities and Exchange Commission (SEC) issued a report that found The DAO was selling tokenized securities on the Ethereum blockchain, in violation of parts of US securities laws.

The DAO has also operated in a murky area as to whether or not it sells securities. Furthermore, there were lingering questions about how the DAO would work in the real world. Both investors and entrepreneurs had to convert ETH to fiat currencies and this could affect the value of ether.

After a contentious debate about the future of the DAO and a massive hack earlier this summer, in the fall of 2016, several prominentdigital currency exchanges, such as Kraken, removed the DAO token, marking the effective end of the DAO as originally intended.

What is DAO?

A DAO is a decentralized autonomous organization, a type of bottom-up unitary structure with no central authority. DAO members own DAO tokens and members can vote on initiatives for the entity. Smart contracts are implemented for the DAO, and the code that governs the operation of the DAO is made public.

What is the purpose of the DAO?

The DAO aims to improve the traditional management structure in many companies. Instead of relying on an individual or a small group of individuals to lead the entity, the DAO intends to give each member a voice, a voice and the ability to propose initiatives. The DAO also seeks to have strict governance dictated by the code on the blockchain.

How does DAO make money?

The DAO initially raises capital by trading fiat for its initial token. This native token represents the voting power and share of ownership among members. If the DAO succeeds, the value of the original token will increase.

The DAO can then issue future tokens at a higher value to raise more capital. The DAO may also invest in assets if the members choose to approve such measures. For example, the DAO can acquire companies, NFTs or other tokens. If the value of this asset increases, the value of the DAO increases.


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