What Is A DAO And How Do They Work?


I’m bullish about a decentralized web or what we now know today as Web3. In my last article, I explained in depth what DeFi (decentralized finance is all about). Today we are going in-depth on DAO. I love the acronyms used in Web3; they sound pretty Utopian.

DAO stands for Decentralized Autonomous Organization. They are more like an effective way to work with like-minds worldwide.

Trust doesn’t come easily; you need to have a level of relationship and past dealings with the person before gaining your trust. Before you go into business with anyone, you need to ascertain whether they are trustworthy.

DAO automatically removes this stress. With DAOs, you don’t need to trust anyone involved with the organization. The DAO code controls everything, and it is 100% transparent and verifiable by anyone.

The exciting thing about DAO is that they do not have a central authority or centralized decision-maker, which most constitutional systems have. In lay terms, DAO has no boss, no greedy CEO, or a dodgy CFO – who is ready to manipulate the books.

The folks who created the DAO concept wanted to eliminate human error or manipulation of investor funds by placing decision-making power into the hands of an automated system and a crowdsourced process. DAOs allow investors to send money from anywhere anonymously.

DAOs also solve the principal-agent problem through community governance. The principal-agent problem is a conflict in priorities between a person or group and the representative authorized to act on their behalf. It is possible for an agent to act against the principal’s best interests. With DAOs, stakeholders join only do so after learning the rules. Because they’re part of a group with similar goals, they don’t have to trust anyone acting on their behalf.

In a nutshell, DAOs are internet-native organizations owned and managed collectively by their members. They have built-in treasuries that members can only access with the community’s permission. Proposals form the basis for decisions—the group votes on these proposals over a set period. You are reading this article from the Developer DAO blog. Developer DAO could be interesting if you want to stay updated with everything Web3-related.

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How Do DAOs Work?

What makes DAO so compelling is the power of smart contracts. The backbone of a DAO is its smart contract. You might be asking yourself, what is a smart contract?

Smart contracts are simply programs stored on a blockchain that run on predetermined conditions. This definition comes with a new term, blockchain.

A blockchain is a system of recording information that makes it almost impossible to change, hack, or cheat the system. It is essentially a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain.

It is the responsibility of the smart contract to define the rules of the organization and hold the group’s treasury. Once the organization’s rules are programmed and run on the blockchain, in this case, Ethereum, no one can change the rules except by a vote. Even if anyone tries to change it or do something not covered in the smart contract, it will fail.

Another fantastic thing about DAOs is that no one can spend the group’s money recklessly without the entire group’s approval; a smart contract also defines the Dao’s treasury. The DAO members collectively vote on the spending decisions, and payments are authorized when the vote passes.


The Three Launch Stages of a DAO

Implementing Smart Contracts

To start, the founding members come together to create the DAO’s smart contract. After their launch, members can only change the rules set by these smart contracts through the governance system. To be safe, you should thoroughly test the contract to ensure you don’t overlook any critical details.

Funding of the DAO

After creating the smart contracts, the DAO must then decide how they will receive funding and how to implement governance. Tokens, which give holders voting rights, are frequently sold to raise funds.

Deploying the Smart Contracts

Finally, you have to deploy the DAO’s smart contracts on the blockchain after setting up everything. Stakeholders will decide the organization’s future from this point forward. I have written an elaborate article on deploying a DAO, which you can find here.

Why Even Bother Creating a DAO?

The number one reason to do this is to bridge the lack of trust. Traditional organizations require a great deal of faith in the people running them, especially on behalf of investors, but DAOs only need confidence in the smart contract. It is much easier to trust a code because it is open source. The DAO smart contracts require every action approved by the community and are completely transparent and verifiable. DAOs get rid of the hierarchical structure in a traditional organization. The lack of a hierarchy means any stakeholder can put forward an innovative idea that the entire group will consider.

How is voting done within the DAO

The community members create proposals about the future operation of the protocol. Members can use these proposals for decision-making in DAO, like adding and removing members, allocating shares, distributing funds, and interacting with other applications and communities. for more details on proposals visit daohaus.club

The community members then come together to vote on each proposal. It’s not politics as usual. It’s in the individual’s best interest to approve the proposals that best serve the best interest of the protocol because a robust protocol will have more usage, which ultimately increases the value of the tokens in possession of each DAO member.

If the protocol succeeds, so do the community members. Proposals that have a general acceptance are then accepted and enforced by the rules represented within the smart contract. Everything is out in the open on a transparent and secure blockchain ledger, and the smart contracts have the rules about spending DAO funds baked right in.

DAOs also don’t have a hierarchical system, where the board of directors decides where the members should put the organization’s assets. The idea behind DAOs is that collectively everybody in the DAO can vote on how it will allocate resources. It makes total sense because the odds are better if the collectives make the decisions. This should tell you what the DAO value proposition is, which means betting on the crowd’s wisdom and the collective capacity of the group to work together.

DAOs are not a new concept; they have been around for a while. BitShares, Steemit, and EOS (Block.one) founder Dan Larimer proposed the idea in 2015. In 2016 it was refined by the founder of Ethereum Vitalik Buterin.

DAOs automatically make working with people easy – there’s no need for a legal contract. They incentivize their members by rewards in tokens that help them work towards a unified goal.

Ethereum and DAOs

Ethereum is the perfect foundation for DAOs because it allows DAOs to run by the rules in smart contracts, and no one can tamper with them. It will enable smart contracts to send/receive funds.

Also, because of the collaborative nature of the Ethereum community, it allows for the best practices and a sound support system. Finally, Ethereum uses a distributed consensus and is established enough for organizations to trust the network.

How Can You Get Involved?

Before you get involved, it is imperative to figure out the core function of the DAO. For instance, if the DAO focuses on technical governance, you need to determine the type of voting rights granted to token holders and what kind of proposals are at stake. For instance, for DAOs like Uniswap, token holders can vote on distributing a portion of the fees that the protocol collects amongst themselves. In some other DAOs like Compound, token holders can vote on allocating these protocol fees towards bug fixes and system upgrades.

In some instances, such as Uniswap, token holders can vote on distributing a portion of the fees that the protocol collects amongst themselves. In other protocols such as Compound, token holders can vote on assigning these protocol fees towards bug fixes and system upgrades.

Types of DAOs

There are several types of DAOs. I have listed them below

  • Protocol DAOs
  • Service DAOs
  • Product DAOs
  • Special Purpose DAOs
  • Social DAOs
  • Collector DAOs
  • Investment DAOs
  • Grants DAO
  • Education DAOs
  • Media DAOs

DAO Governance Structure

Unlike traditional organizations, where hierarchy is essential, DAOs are typically flat. A new idea proposed in conventional organizations usually requires approval from someone in the managerial or executive layers before implementing it.

  • Proposed ideas are voted on in a fully transparent manner by everyone in the DAO using tools like Snapshot, which IFPS and the Ethereum power.
  • Any discussions before voting take place on open-source and customizable platforms like Discourse (e.g., Uniswap’s Governance Discourse).
  • DAOs also use tools like Boardroom, which provides a 30,000-foot view of their DAO’s operations for a full-suite DAO governance and management experience.
  • The concept of Holocracy, which promotes autonomy and ownership over bureaucracy and hierarchy, inspired this method of governance.

Some DAOs to Check Out

Developer DAO: Developer DAO exists to accelerate the education and impact of a new wave of web3 builders.

MetaversePRO: The Reserve Currency for Metaverse and Blockchain

DAOhaus: DAOhaus is a no-code platform for launching and running DAOs. It is owned and operated by the community. All DAOs on the platform utilize the glorious open-source code of Moloch.

MakerDAO: MakerDAO enables the generation of Dai, the world’s first unbiased currency and leading decentralized stable coin. You can get involved in governance by voting on changes to the Maker protocol.

RaidGuild: RaidGuild is the premier design and dev agency of the Web3 ecosystem, deeply entrenched in the bleeding edge of DAOs, DeFi, DApps, and everything else in between. Hailing from the MetaCartel network, their team consists of a diverse group of talent with over 9000 years of combined experience.

Opolis: This member-owned digital employment cooperative offers benefits and shared services for the independent worker.

BanklessDAO: IBanklessDAO is a decentralized community with one mission: Help the world Gobankless. You can learn more here.

MolochDAO: Moloch DAO can refer to the DAO framework, a description of a DAO that uses the framework, or the name of the Ethereum grant-giving DAO that initially created the framework.


The concept of DAOs will set a new standard for managing modern businesses and can foster new avenues of productivity by valuing collaboration and transparency among team members. If you are interested in this space, find a project that aligns with your passion, find their Discord, and join the conversation. Learn how to use a Web3 wallet like MetaMask and vote using Snapshot.

Chinonso Anyaehie

Chinonso Anyaehie

Web3 Product Designer & Editor-in-Chief @ Decentrapress

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14 thoughts on “What Is A DAO And How Do They Work?

  1. oyesomiomolara@gmail.com'
    · January 8, 2022 at 12:59 pm

    I always wanted to get into DAO, this article has clearified the difficult co concept

  2. oyesomititilope@gmail.com'

    Now I understand DAO better. Thank you

  3. oyesomiopeyemi2222@gmail.com'

    I think this is the best written article on DAO, very detailed and self explanatory.. Anyone can learn more about DAO with this

  4. Fantastic article. Very descriptive.
    You just made me understand DAOs better.
    Thanks for that.

  5. prince.okonkwo1@gmail.com'

    An amazing article

  6. Mofolusadesonaike@gmail.com'

    Keep these articles coming. The future is upon us and understanding the future of money and finance as well as the terms of engagement will help one position for success. Thanks for breaking down the concepts. Will check out the DAOs mentioned.

  7. […] is the holy grail of decentralization. I have written about DAO and DeFI extensively. Without Ethereum non of those can exist. Ethereum is the community-run […]

  8. […] Her topic for the day was “Types of DAO” (boy), and she sure did justice to that topic. You can read more about DAOs on our website here. […]