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A decentralized autonomous organization (DAO), sometimes called a decentralized autonomous corporation (DAC), is an organization managed in whole or in part by decentralized computer program, with voting and finances handled through a blockchain. In general terms, DAOs are member-owned communities without centralized leadership. The precise legal status of this type of business organization is unclear.

A well-known example, intended for venture capital funding, was The DAO, which amassed 3.6 million ether (ETH)—Ethereum's mining reward—then worth more than US$70 million in May 2016, and was hacked and drained of US$50 million in cryptocurrency weeks later. The hack was reversed in the following weeks, and the money restored, via a hard fork of the Ethereum blockchain. Most Ethereum miners and clients switched to the new fork while the original chain became Ethereum Classic.

The governance of DAOs is subject to controversy. As these typically allocate and distribute tokens that grant voting rights, their accumulation may lead to concentration of power.

Background

Although the term may be traced back to the 1990s, it was not until 2013 that it became more widely adopted. Although some argue that Bitcoin was the first DAO, the term is only understood today as organizations deployed as smart contracts on top of an existing blockchain network.

Decentralized autonomous organizations are typified by the use of blockchain technology to provide a secure digital ledger to track digital interactions across the internet, hardened against forgery by trusted timestamping and dissemination of a distributed database. This approach eliminates the need to involve a mutually acceptable trusted third party in any decentralized digital interaction or cryptocurrency transaction. The costs of a blockchain-enabled transaction and of the associated data reporting may be substantially offset by the elimination of both the trusted third party and of the need for repetitive recording of contract exchanges in different records. For example, the blockchain data could, in principle and if regulatory structures permit it, replace public documents such as deeds and titles. In theory, a blockchain approach allows multiple cloud computing users to enter a loosely coupled peer-to-peer smart contract collaboration.

Vitalik Buterin proposed that after a DAO is launched, it might be organized to run without human managerial interactivity, provided the smart contracts are supported by a Turing-complete platform. Ethereum, built on a blockchain and launched in 2015, has been described as meeting that Turing threshold, thus enabling such DAOs. Decentralized autonomous organizations aim to be open platforms through which individuals control their identities and their personal data.

Governance

DAO governance is coordinated using tokens or NFTs that grant voting powers. Admission to a DAO is limited to people who have a confirmed ownership of these governance tokens in a cryptocurrency wallet, and membership may be exchanged. Governance is conducted through a series of proposals that members vote on through the blockchain, and the possession of more governance tokens often translates to greater voting power. Contributions from members towards the organizational goals of a DAO can sometimes be tracked and internally compensated. Inactive holders of governance tokens can be a major obstacle for DAO governance, which has led to implementations allowing voting power to be delegated to other parties.

Issues

Social

Tokens that grant voting powers are often not used to vote. Inactive or non-voting shareholders in DAOs often disrupt the organization's possible functionality.

Another risk is the concentration of power in the case that individuals accumulate large amounts of tokens that grant voting power. Concentration of these tokens defeats the ambitions to distribute governance power. In a study of decentralized finance DAOs, the distribution of tokens was shown to be highly concentrated among a small population of holders.

Legal status, liability, and regulation

The precise legal status of this type of business organization is generally unclear, and may vary by jurisdiction. On 1 July 2021, Wyoming became the first US state to recognize DAOs as a legal entity. American CryptoFed DAO became the first business entity so recognized. Some previous approaches to blockchain based companies have been regarded by the U.S. Securities and Exchange Commission as illegal offers of unregistered securities. Although often of uncertain legal standing, a DAO may functionally be a corporation without legal status as a corporation: a general partnership. Known participants, or those at the interface between a DAO and regulated financial systems, may be targets of regulatory enforcement or civil actions if they are out of compliance with the law.

Security

A DAO's code is difficult to alter once the system is up and running, including bug fixes that would be otherwise trivial in centralized code. Corrections to a DAO require writing new code and agreement to migrate all the funds. Although the code is visible to all, it is hard to repair, thus leaving known security holes open to exploitation unless a moratorium is called to enable bug fixing.

In 2016, a specific DAO, "The DAO", set a record for the largest crowdfunding campaign to date. Researchers pointed out multiple problems with The DAO's code. The DAO's operational procedure allowed investors to withdraw at will any money that had not yet been committed to a project; the funds could thus deplete quickly. Although safeguards aimed to prevent gaming shareholders' votes to win investments, there were a "number of security vulnerabilities". These enabled an attempted large withdrawal of funds from The DAO to be initiated in mid-June 2016. On 20 July 2016, the Ethereum blockchain was forked to bail out the original contract.

DAOs can be subject to coups or hostile takeovers that upend its voting structures especially if the voting power is based upon the number of tokens one owns. An example of this occurred in 2022, when one individual collected enough tokens to give themselves voting control over Build Finance DAO, which they then used to drain the DAO of all its cryptocurrency.

List of notable DAOs

See also

• Cooperative
• Decentralized Finance
• Decentralized application
• Decentralized computing
• Distributed computing
• Incentive-centered design
• List of highest-funded crowdfunding projects
• Smart contract
• The Social Contract

Notes

1. Depending on English dialect, it may also be spelled decentralised autonomous organisation. The terms decentralized autonomous company, distributed autonomous organization, etc., have also been used.

References

1. ^ Hassan, Samer; De Filippi, Primavera (2021-04-20). "Decentralized Autonomous Organization". Internet Policy Review. 10 (2). doi:10.14763/2021.2.1556. ISSN 2197-6775. S2CID 235559086.
2. ^ Vigna, P.; Casey, M. J. (2015-01-27). The Age of Cryptocurrency: How Bitcoin and the Blockchain Are Challenging the Global Economic Order. St. Martin's Press. ISBN 978-1-25006563-6.
3. ^ Hodson, H. (2013-11-20). "Bitcoin moves beyond mere money". New Scientist.
4. ^ "The DAO of accrue: A new, automated investment fund has attracted stacks of digital money". The Economist. 2016-05-21.
5. Prusty, Narayan (2017-04-27). Building Blockchain Projects. Birmingham, UK: Packt. p. 9. ISBN 978-1-78712533-9.
6. The Decentralized Autonomous Organization and Governance Issues Regulation of Financial Institutions Journal: Social Science Research Network (SSRN). 5 December 2017.
7. ^ Popper, N. (2016-05-21). "A Venture Fund with Plenty of Virtual Capital, but No Capitalist". New York Times.
8. Barbereau, Tom; Bodó, Balázs (2023-07-01). "Beyond financial regulation of crypto-asset wallet software: In search of secondary liability". Computer Law & Security Review. 49: 105829. doi:10.1016/j.clsr.2023.105829. ISSN 0267-3649. S2CID 258733922.
9. Price, Rob (2016-06-17). "Digital currency Ethereum is cratering amid claims of a $50 million hack". Business Insider. Retrieved 2016-06-17.
10. ^ Barbereau, Tom; Smethurst, Reilly; Papageorgiou, Orestis; Sedlmeir, Johannes; Fridgen, Gilbert (May 2023). "Decentralised Finance's timocratic governance: The distribution and exercise of tokenised voting rights". Technology in Society. 73: 102251. doi:10.1016/j.techsoc.2023.102251. S2CID 258245920.
11. ^ Wright, A.; De Filippi, P. (2015-03-10). "Decentralized Blockchain Technology and the Rise of Lex Cryptographia". SSRN 2580664.
12. Norta, A. (2015-08-18). "Creation of Smart-Contracting Collaborations for Decentralized Autonomous Organizations". Perspectives in Business Informatics Research. Lecture Notes in Business Information Processing. Vol. 229. pp. 3–17.
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15. Deegan, P. (2014). "Chapter 14—The Relational Matrix: The Free and Emergent Organizations of Digital Groups and Identities". In Clippinger, J. H.; Bollier, D. (eds.). From Bitcoin to Burning Man and Beyond: The Quest for Identity and Autonomy in a Digital Society. Amherst, Massachusetts, USA. pp. 160–176]. ISBN 978-1-937146-58-0. creating an operational and autonomous Trust Framework ntegrate with a secure discovery service in the form of a Decentralized Autonomous Organization ...{{cite book}}: CS1 maint: location missing publisher (link)
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17. "Decentralized Autonomous Organizations Find a Home in Wyoming". JD Supra. Retrieved 2021-07-09.
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19. "SEC Charges Bitcoin Entrepreneur With Offering Unregistered Securities". US Securities and Exchange Commission. 2014-06-03.
20. ^ Levine, M. (2016-05-17). "Blockchain Company Wants to Reinvent Companies". Bloomberg View: Wall Street. Bloomberg News.
21. Peck, M. (2016-05-28). "Ethereum's $150-million Blockchain-powered Fund Opens Just as Researchers Call For a Halt". IEEE Spectrum. Institute of Electrical and Electronics Engineers.
22. Vigna, P. (2016-05-16). "Chiefless Company Rakes in More Than $100 Million". Wall Street Journal.
23. Waters, R. (2016-05-17). "Automated company raises equivalent of $120M in digital currency". Financial Times.
24. Popper, N. (2016-05-27). "Paper Points Up Flaws in Venture Fund Based on Virtual Money". The New York Times.
25. Popper, N. (2016-06-17). "Hacker May Have Taken $50 Million From Cybercurrency Project". New York Times.
26. Price, R. (2016-06-17). "Digital currency Ethereum is cratering amid claims of a $50 million hack". Business Insider. Retrieved 2016-06-17.
27. "Democratic DAO Suffers Coup, New Leader Steals Everything - VICE". www.vice.com. 2022-02-15. Retrieved 2022-02-16.
28. "'Cypherpunks have rallied to Assange': NFT auction raises $52m for WikiLeaks founder". The Guardian. Reuters. 2022-02-09.
29. Roose, Kevin (2021-11-17). "They Love Crypto. They're Trying to Buy the Constitution". The New York Times. ISSN 0362-4331. Retrieved 2021-11-17.
30. Fox, Matthew (2022-01-19). "Tokens of the defunct DAO that failed to buy a copy of the constitution are worth $300 million even after disbanding". news.yahoo.com. Retrieved 2022-01-28.
31. Matthew, Leising (2021-05-11). "Overnight Crypto Sensation Sets Out to Undo Internet's Failings". Bloomberg.
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Further reading

• Wang, Shuai; Ding, Wenwen; Li, Juanjuan; Yuan, Yong; Ouyang, Liwei; Wang, Fei-Yue (2019). "Decentralized Autonomous Organizations: Concept, Model, and Applications". IEEE Transactions on Computational Social Systems. 6 (5): 870–878. doi:10.1109/TCSS.2019.2938190.
• Santana, Carlos; Albareda, Laura (2022). "Blockchain and the emergence of Decentralized Autonomous Organizations (DAOs): An integrative model and research agenda". Technological Forecasting and Social Change. 182: 121806. doi:10.1016/j.techfore.2022.121806.
• Augustin, Nils; Eckhardt, Andreas; de Jong, Alexander Willem (2023). "Understanding decentralized autonomous organizations from the inside". Electronic Markets. 33: 38. doi:10.1007/s12525-023-00659-y.
• Rikken, Olivier; Janssen, Marijn; Kwee, Zenlin (2023). "Governance impacts of blockchain-based decentralized autonomous organizations: an empirical analysis". Policy Design and Practice. 6 (4): 465–487. doi:10.1080/25741292.2023.2270220.
• Van Kerckhoven, Sven; Chohan, Usman W. (2024). Decentralized Autonomous Organizations: Innovation and Vulnerability in the Digital Economy. London: Routledge. ISBN 9781032583228.
• Liebau, Daniel; Oh, Sandy (2024). Decentralized Autonomous Organizations: How Finance can Interact with Blockchain-based DAOs. Singapore: World Scientific. doi:10.1142/13918. ISBN 978-981-12-9578-2.

External links

• Learning materials related to Decentralized autonomous organization at Wikiversity

• Application layer protocols
• Applications of cryptography
• Blockchains
• Computer law
• Computer networking
• Distributed computing
• Distributed data storage
• Network protocols
• Peer-to-peer computing
• Production economics
• Government by algorithm