What is a DAO?

A (DAO) is an organization run with smart contracts on a public blockchain.

Think of a DAO as an organization that uses smart contracts to facilitate and enforce decisions made by its members. At its core, a DAO is a piece of software on the blockchain that manages permissions to other contracts and actors.

A DAO is self-governing in that it is managed directly by its members, as individuals or holders of assets, on the actions the organization takes. These actions occur onchain, meaning they are executed and recorded on the blockchain. Some actions include managing funds, holding votes, or changing the DAO's governance parameters itself.

What does each letter of DAO stand for?

Decentralized = Built on top of trustless, permissionless infrastructure such as the Ethereum blockchain. The infrastructure of Ethereum itself is decentralized, because it’s maintained by a network of computers spread across the world. There’s no centralized actor or entity that runs it. This means it can’t be “turned off” by attacking or applying pressure on a single entity.

Autonomous = Self-governing via managing permissions and automatic execution of those actions, with trust placed in the smart contracts that make up the core of the organization rather than in human actors. The smart contracts execute the decisions of the organization automatically. Permissions are managed autonomously by code, rather than by people.

Organization = Actors coordinating to reach shared objectives. These actors can be humans or possibly intelligent non-human actors (for example, AI) in the future.

Smart Contracts: the center of the DAO

Smart contracts are lines of code that interact with the blockchain. Think of them as “if, then” statements that are coded on-chain. They perform an action automatically and without human intervention as long as a certain condition is met.

Smart contracts are like vending machines. You click a button asking for a chocolate bar, and the vending machine automatically gives you the thing you requested without any human intervention.

You can also think of smart contracts as yellow cartoon minions that wait to be told what to do. They are programmed to execute an action, and then when it’s done, they wait for the next action. Just like these minions, smart contracts are reliable to get the job done exactly how you need them to.

Vitalik Buterin, founder of Ethereum, wrote, “a smart contract is a contract that enforces itself.” It doesn’t need a third party to get involved: it just does automatically.

Smart contracts are trustless—meaning you don't need to trust humans to behave in a predictable or reliable way —because they automatically execute specific actions when specific parameters are met.

They’re also permissionless because anyone in the world can use them, no matter who you are, your country of residence, or any other factor that could be used to stop someone from using them.

Smart contracts make up the backend of a DAO, but the frontend can look like any other website you’re familiar with, allowing anyone to participate in a DAO without writing any code.

This is why being deployed on a blockchain is a key feature of what makes an organization a DAO. A DAO can’t be decentralized or autonomous until it’s onchain.

How are DAOs different from traditional organizations today?

To get things done, humans have always organized themselves into groups, tribes, squads, crews, teams, companies, and other units of collective action. DAOs are no different. DAOs have ranged from groups of developers, investment clubs, advocacy groups, lean product teams, charities, digital public goods infrastructure, and more. The possibilities are infinite.

The main difference between DAOs and traditional organizations is that instead of enabling coordination by trusting central intermediaries to enforce decisions, DAOs can remove this need for trust by making and enforcing decisions on the blockchain.

Using blockchain as infrastructure grants DAOs unique properties when compared to traditional organizations, including:

1. Trustless execution of collective decisions: Smart contracts automatically execute the results of collective decisions, such as those held through votes. The results of this decision-making process are recorded onchain, are not alterable and are reliably executed by smart contracts.
2. Crypto-economic incentives create alignment between actors in the organization: DAO technology allows you to program incentives directly into the governance of your organization through smart contracts.
3. Governance experimentation at the speed of software: DAOs can experiment more freely than traditional large-scale organizations. Internet-native organizations can be more agile, creative, and dynamic, rather than slow and cumbersome (or potentially violent) like governance in nation states.
4. Blockchain as a source of truth: The blockchain is a distributed ledger that anyone can write in but no one can change the entries of anyone else. So, this means all transactions the DAO makes can be universally verifiable by anyone. This includes onchain votes, asset transfers, token mints, and more.
5. Transparent and open by default: DAOs operate open by default because the blockchain is transparent. Everything from treasury holdings to payment flows is visible to everyone globally. However, privacy-preserving technology, like Zero Knowledge Proofs, could be implemented to make certain aspects of DAO operations private.

How DAOs put organizational activities on the blockchain

The smart contracts within the DAO framework (smart contracts that run the DAO) facilitate, execute, and enforce actions without humans needing to intervene.

For example, the smart contracts dictate the conditions (such as passing a vote with a minimum quorum and level of support) to be met in order to withdraw funds. If those conditions are met, the smart contract will automatically send those funds.

The actions a smart contract can take are determined up front by the actors who deploy the DAO. These can be changed later, following the initial conditions and parameters. For example, a smart contract with token-based voting couldn’t just decide to change its parameters to implement wallet-based voting. You would need to follow the parameter changing process—maybe by holding a vote—to do this. If you can’t, then you would need to deploy a whole new DAO that has the rules you want.

Here are a few key parts of an organization that are run onchain in a DAO framework:

Human organization activity: membership is defined (ex.by paying monthly dues).

On-chain equivalent: purchase the DAO’s governance token to get voting rights, similar to “membership,” in the organization.

Human organization activity: a community makes decisions to achieve a common goal (ex. with a committee or board resolution).

On-chain equivalent: wallets cast governance tokens in votes, like voting chips.

Human organization activity: a shared pool of funds is managed (ex. a checking account at a bank)

On-chain equivalent: funds are withdrawn and deposited directly on the blockchain.

Components of human organizations applied to DAOs

DAOs are another step forward in the evolution of human organizations. They use the same components that many organizations past and present have, such as:

1. Actors. People or other agents participating in the DAO. In crypto, we use wallet addresses to represent humans or potential non-human actors (like a computer program or AI). These wallets hold tokens that allow them to participate in governance. However, one person can hold multiple wallets, so don’t link these too tightly.
2. Assets. DAOs have shared resources, such as fungible and nonfungible tokens.
3. Permissions. Like rules, but enforced by code rather than by law.
4. Decision making. Different mechanisms, like voting, that the DAO uses to decide what to do next.
5. Shared purpose and goals. People organize because they’re bound by a shared purpose or have goals in mind.

Like any human organization, DAOs have limitations. They are not a solution to every problem. But they are the most exciting next step in human coordination that we’ve seen in centuries.

Let’s cover the five components of human organizations above and apply them to DAOs:

1: Actors

In DAOs, actors (people, organizations, or AI) use wallets and tokens to interact. Let’s briefly cover how each one works:

Wallets

A real-world wallet is where you hold your cash. In the web3 world, a crypto wallet is similar—except here, it’s where you hold your tokens (also called crypto or cryptocurrencies).

You can think of your crypto wallet as your access point to the blockchain. You use your wallet to interact with the blockchain to buy, sell, move, and store tokens, and create and confirm actions in blockchain-enabled organizations like DAOs.

A wallet is necessary to interact with DAOs, because you’ll need to hold tokens to participate. You can also use wallets for governance, because they can be put on an allowlist that grants your wallet access to vote. We’ll go into detail in that below!

Tokens

DAOs mint tokens to use in governance. The DAO might assign tokens to wallets or put them on a decentralized exchange for wallets to purchase.

You “hold” your tokens in your wallet. Really, your wallet just holds the keys to access your crypto on the blockchain. But you may hear that your tokens are “in” your wallet.

DAOs mint tokens that are unique to them. For example, at Aragon we use the Araon Network Token ($ANT) to cast votes and conduct governance.

But, it’s not necessary for a DAO to have a token at all! In fact, many DAOs choose to never mint tokens, using different governance models instead.

2: Assets

Cryptocurrencies, including DAO governance tokens, are recorded on the blockchain. That means you need to make a transaction on the blockchain to move or interact with them. It’s often said that crypto is simply “on” the blockchain. They’re also called on-chain assets. This is opposed to off-chain assets, such as the local currency of your country, which is not stored on the blockchain.

Your crypto wallet is your access point to the blockchain. You use your wallet to interact with the blockchain to buy, sell, move, and store tokens, and create and confirm actions in blockchain-enabled organizations like DAOs.

Typically, a crypto wallet is a piece of software that appears as a browser extension on your computer. It holds the keys to your wallet address. That means you need to use your crypto wallet to “talk” to the blockchain to tell it to move your funds. You do this by signing a transaction, which gets included in the next block on the blockchain.

A DAO treasury, sometimes called a vault, is similar to a wallet, except one person can’t just sign the transaction and move funds. It’s managed by a smart contract. In order to move them, you must meet the conditions set in the smart contract, and then certain parameters must be met, such as number of votes (counted as tokens) and a certain percentage of tokens that need to be cast for “yes.” We will cover the details of making decisions below!

3: Permissions

A permission management system is a set of smart contracts that determines who and what can perform certain actions.

The "who" refers to the one able to execute the action. This can be any wallet or smart contract. The "what" refers to the action that gets triggered. This can be a token transfer, a transaction execution, or anything that you can write into a smart contract. In web3, this is all done trustlessly and automatically through smart contracts.

An onchain permission management system, or a DAO framework, is a set of smart contracts containing parameters that determine who can perform certain actions.

DAOs use on-chain permission management systems to determine who is able to execute actions and under which circumstances. For example, one person cannot withdraw the entire DAO treasury into their own wallet, because there are conditions and parameters, such as holding a vote that meets a certain quorum and level of support for proposals, required to gain access to the treasury.

4: Decision making

DAO governance is who can make decisions and how those decisions are made. We use wallets and tokens to execute DAO governance.

We are still in the early days of experimenting with DAO governance, but today it comes mostly in the form of voting, either wallet-based or token-based.

For example:

In 1 authorized wallet = 1 vote governance, the voting power is the same for every wallet on the allowlist. So, if one wallet holds 2% of tokens, and another wallet holds 5%, they still have the same voting power as long as they're both on the allowlist.

In 1 token = 1 vote governance, an individual’s voting power is directly proportional to the number of tokens they hold. So, if a token holder has 2% of tokens, they have 2% of the total available voting power.

Fungible tokens (ERC-20s) and non-fungible tokens (ERC-721s) are two types of tokens your DAO might mint. Minting a governance token is like creating voting chips or issuing membership cards, except on the blockchain.

DAO governance is still evolving. Right now, DAOs typically use voting to make decisions. We have both token voting and wallet voting available in the Aragon App. But there are tons of governance mechanisms out there today. DAOs don’t need to have voting at all to still be considered DAOs!

5: Shared purpose and goals

Actors organize to achieve a shared purpose and goals. The goal could be anything: raising funds for a community garden, starting a new protocol, or launching a sports fan club.

Since you can join most DAOs permissionlessly by buying their governance token, many competing priorities and strategies can emerge. This can create more innovative spaces where DAO members propose and decide on the most compelling direction for the project to take. This creates more dynamic and creative organizations, because there is a diversity of viewpoints and approaches amongst the organization’s members.

Even though the members of a DAO may try to advance different strategies and goals, smart contracts can be used to align incentives. DAO technology allows you to program incentives directly into the governance of your organization. This can encourage certain behaviors, aligning incentives to reach certain goals.

Smart contracts introduce the possibility for unique incentive structures. For example, if you need more participation in votes, you can program incentives into the contract that are given to token holders when they cast votes.

The programmability of smart contracts makes shared purpose not just intrinsic, but extrinsic as well.

DAO technology can be applied to any type of organization

DAO technology can be applied to nearly any type of organization you can imagine. There’s no “right” way to use this technology. It’s more like a box of legos you can use to build whatever type of organization you want!

The legos are the building blocks—the blockchain, smart contracts, wallets, tokens, parameters, open source DAO frameworks, and more—which can be put together in so many ways, most of which we haven’t figured out yet!

We’re still in the early days of DAOs, and we can’t predict all of the ways they will change the world around us. But we do know that DAOs have had tons of impact!

Here are a few existing use cases:

Managing protocols and products: DAOs are well suited for managing public goods transparently. From MakerDAO to Lido to ENS, there are tons of DAOs managing the critical infrastructure of the web3 ecosystem with transparent governance.

Investing in onchain assets with others: Investment DAOs are alive and well on the blockchain, and for good reason! Before DAOs, investment groups had a high barrier to entry. Now, anyone can start an investment club and start making money with their friends today in a more unintimidating, democratized and accessible way.

Raising money for charitable causes: DAOs are a great way to raise money for charitable causes. Organizations like Ukraine DAO and Unchain Fund have shown how important this use case is today!

Starting social clubs: There are also many social DAOs that have found success. Friends with Benefits, Boys Club, and BanklessDAO all have social components and have found their niche here in web3.

Fan clubs and sports DAOs: DAOs can also be used as ways to raise money for and start fan clubs and sports DAOs. Get inspiration from KrauseHouse, Links DAO, and WAGMI United!

Building games and exploring the metaverse: DAOs are also a great fit for building user-owned games. Aavegotchi and Decentraland are just two examples of DAO-run games that are exploring the metaverse in exciting ways!

New nations and jurisdictions: Projects like Nation3 and CityDAO are exploring what it means to live in an on-chain world on top of your geographic one. Exploring a network state is possible with DAO technology!

We've only just scratched the surface of what DAOs can do. What DAOs will you build?

There's no limit to the type of organizations you can build with DAOs! We’re on the cusp of unleashing the true power of this groundbreaking technology, and we’re so excited that you’re here with us.

Let’s see what kinds of new, exciting organizations we can build together! Good luck experimenting with governance at the speed of software, and know that we’ll be by your side the whole way!

DAO Resources

To learn how to start and manage your DAO, visit our education portal. You can also dive straight in and create a DAO with the Aragon App. If you have any questions, join us on Discord.

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Aragon builds flexible and secure tools for creating, managing, and scaling DAOs, allowing everyone to experiment with governance at the speed of software. See the latest at aragon.org, subscribe to our monthly newsletter, join the conversation on Discord, or follow us on Twitter.

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