DAO: The power of revolutionary organizational structure

What is a Decentralized Autonomous Organization (DAO)?

The crypto community is witnessing a fundamental transformation in the way organizations operate. Decentralized Autonomous Organizations (DAO) are a typical representation of this change. Unlike traditional structures dominated by a single power center, DAOs allow community members to collectively manage the organization through smart contracts and token voting, achieving true democratic decision-making.

This organizational form originates from the innovative application of blockchain technology. The launch of the first DAO in 2016 heralded the beginning of a new era—members can collectively exercise decision-making power without relying on a central management agency. From financing investments to data verification, the application scenarios of DAO are continually expanding.

How DAO Solves Economic Problems

In economics, there is a long-standing problem known as the principal-agent dilemma. When one party (the agent) makes decisions on behalf of another party (the principal), the agent often prioritizes their own interests, while the principal is unable to effectively supervise due to information asymmetry. In reality, this issue exists among government officials, investment brokers, and corporate management.

DAO can partially solve this dilemma through the transparency features of blockchain. All transactions are recorded on the chain, completely transparent and resistant to fraud. When community interests are aligned and information is fully disclosed, the incentive mechanisms naturally align, significantly reducing the likelihood of agent betrayal. This is the core advantage of DAO compared to traditional organizations.

DAO's operational mechanism

DAO encodes its operational rules through smart contracts, which are self-executing programs that run automatically when predetermined conditions are met, ensuring that the organization operates according to consensus rules without the need for human intervention.

Decision-making Process: Members hold the organization's tokens or shares, and the number of tokens determines the voting weight. When a proposal needs to be approved or funds allocated, holders can vote using their tokens. Unlike traditional companies where executives and major shareholders hold power, every member here has a voice.

Fund Management: DAOs typically maintain a public treasury used to fund projects, invest in new enterprises, or support community initiatives. All funding usage proposals are decided by community votes, and once approved, smart contracts automatically execute transfers, token generation, and other operations.

Transparency and Accountability: All transactions and resolutions are permanently recorded on the blockchain, accessible for anyone to verify. This level of transparency compels members to act honestly and prevents actions that go against the interests of the community. Since DAOs operate on decentralized networks, they are inherently resistant to censorship and interference.

In a sense, a DAO is like a more decentralized company or national structure—rules are automatically executed by code rather than enforced by a single authority.

Core Advantages of DAO

True Decentralization: In traditional organizations, key decisions are made by a central authority. A DAO, on the other hand, is collectively decided by the entire community, where every member can propose ideas and participate in voting.

Full Transparency: Every transaction and every vote on the blockchain is publicly accessible. This transparency compels members to maintain integrity and self-discipline, and restrains inappropriate behavior through a decentralized supervision mechanism.

Global Community: DAO can bring together like-minded individuals from around the world to work towards a common goal. Compared to the closed structure of traditional enterprises, every participant has the opportunity to contribute ideas and influence the direction of the organization through decentralization governance mechanisms.

DAO in the Blockchain Ecosystem

MakerDAO: This is a DeFi project that issues the stablecoin DAI, which is backed by crypto assets and pegged to the US dollar, maintaining price stability through community governance.

Aave: A lending market built on Ethereum where users can borrow or lend various digital assets. AAVE holders decide on protocol upgrades and parameter adjustments through the DAO mechanism.

Uniswap: A Decentralization exchange (DEX) protocol that operates as a DAO, allowing users to exchange various crypto assets without intermediaries, with UNI token holders having governance rights.

Yearn.Finance: A DeFi platform for automated yield farming strategies, allowing community members to manage protocol updates and decision-making through a DAO structure.

Is Bitcoin a DAO?

Many people consider Bitcoin to be the first DAO. Its blockchain operates in a decentralized manner, coordinating through a consensus protocol rather than a hierarchical structure. The Bitcoin protocol defines the rules of the system, and BTC acts as an incentive mechanism to encourage users to secure the network. All participants collaborate with each other, making Bitcoin a decentralized autonomous network. Its ultimate goal is to achieve value storage and transfer without the coordination of a central authority.

It is important to note that there is no unified standard for the definition of DAO. Today, it typically refers to organizations built on existing blockchains and managed by the community through smart contracts. This definition distinguishes it from underlying protocols like Bitcoin.

Development Directions and Application Prospects of DAO

Complex DAO structures can be applied to various scenarios: decentralized venture capital funds, social networking platforms, etc. They can also coordinate the interaction of Internet of Things (IoT) devices.

A new emerging branch called Decentralized Autonomous Company (DAC) offers services similar to traditional companies—such as ride-sharing—but operates without the traditional corporate management structure. A self-owned car can autonomously provide sharing services within the DAC framework, operating automatically through transactions with humans and other intelligent devices. With the help of blockchain oracles, it can even independently execute smart contracts and specific tasks.

The DAO Incident: Historical Lessons

One of the earliest DAO projects was called “The DAO”, which consisted of complex smart contracts running on the Ethereum blockchain, enabling the functionality of a self-operating venture capital fund.

In May 2016, The DAO sold tokens through an Initial Coin Offering (ICO), granting investors ownership and voting rights. However, shortly after the project launched, one-third of the funds were lost due to the largest hack in cryptocurrency history.

This event led the Ethereum community to make a historic decision: to roll back the hacker transactions through a hard fork, making the attack as if it never happened. The network after this fork is today's Ethereum. Meanwhile, the other chain adhered to the “code is law” principle and left the hacker transactions unchanged. This chain is now known as Ethereum Classic.

Major Challenges Facing DAO

Legal and Regulatory Uncertainty: The legal environment surrounding DAOs remains extremely unclear. Most jurisdictions have yet to establish clear policies for these new types of organizations, and this legal vacuum poses a significant barrier to the widespread adoption of DAOs.

Security Risks: The core features of DAO (Decentralization, Immutability, Trustworthiness) pose security challenges. The DAO case demonstrates that poorly designed organizations can lead to serious risks.

Subtle Points of Centralization: Decentralization is not an absolute state, but rather a spectrum. Complete autonomy or total decentralization may not always be feasible or necessary. While DAOs can attract a broader range of participants, depending on their design, governance rules may become an invisible center of power.

Summary

DAO represents a new paradigm of organizational governance, creating inclusive, democratic, and transparent communities through blockchain technology. They liberate organizations from traditional hierarchies and rigid structures. Instead of being coordinated by a central authority, the rules of the DAO are executed by automated code, guiding participants toward optimal outcomes for the network.

The key to creating an effective DAO lies in designing a sophisticated set of consensus rules to address the complex issues of participant coordination. The real challenge may not be at the technical level, but at the social level—how to establish trust, stimulate participation, and maintain community cohesion; these are the keys to the success of a DAO.