Overview

A decentralized autonomous organization (DAO) is a software system for organization of other computer programs handled through a decentralized ledger technology like a blockchain. These systems are used most commonly to handle voting and finances, among other processes. The precise legal status of this type of organization system is unclear.

DAOs are closely associated with cryptocurrency and Web3. The name and concept originated with the 2016 launch of The DAO, a system built to manage an Ethereum-based venture capital fund amassing 3.6 million in ether cryptocurrency, then worth more than US$70 million. This system was later hacked and drained of US$50 million 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 often 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 often understood today as software & smart contracts on top of an existing blockchain network.

Decentralized autonomous organization systems are typified by the use of decentralized technologies, such as 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 can facilitate 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. Governance is conducted through a series of proposals that voting addresses vote on through the blockchain, and the possession of more governance tokens often translates to greater voting power. 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.

Social

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

Another risk is the concentration of power in the case that individual addresses accumulate large amounts of tokens that grant voting power. Concentration of these tokens may defeat ambitions to distribute governance power. In a study of a selected number of decentralized finance DAOs, the distribution of tokens was shown to be highly concentrated among a small number of addresses in the sample.

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.