What is a DAO? The Complete Beginner's Guide to Decentralized Autonomous Organizations

What is a DAO? In simple terms, it is an organizational structure without traditional bosses or central leadership, supported by blockchain technology and smart contracts, allowing strangers to collaborate based on shared ideals. Rather than being a company, it is a transparent rule system jointly decided and managed by all participants.

This new organizational structure is quietly changing our understanding of “companies.” Without the need for CEOs, boards of directors, or cumbersome administrative procedures, DAOs enable hundreds or even thousands of people to confidently entrust funds and decision-making power to a system entirely supported by code and democratic voting.

The Essence of DAO: How a Bossless Organization Operates

To understand what a DAO is, first set aside the concept of traditional organizations. In a conventional company, the boss or board of directors holds decision-making power; but in a DAO, these powers are completely dispersed among token holders.

DAOs have no centralized leadership but are operated collectively by community members through open and transparent blockchain rules. All organizational rules are encoded in smart contracts; once specific conditions are met, these rules execute automatically without human intervention. Blockchain technology ensures every member adheres to the rules, all financial transactions are traceable, and every decision has a record.

The biggest difference from traditional enterprises is: no individual owns or can control the DAO. Each participant holds a certain share, collectively owning the entire organization. Anyone can join, and what the DAO does is not necessarily important — it could be an investment fund, an art community, a gaming guild, or even a charity.

Smart Contracts and Tokens: The Two Pillars of DAO

The reason DAOs can operate automatically hinges on smart contracts. These are special pieces of code deployed on the blockchain that automatically execute predefined instructions when certain conditions are met. While Ethereum was the first blockchain to support smart contracts, many other blockchains now support this feature.

Because everything on the blockchain is open, transparent, and verifiable, anyone interested in joining a DAO can see how rules operate at each stage. This open-source nature ensures high accountability — no one can manipulate behind the scenes.

Another key element in a DAO is tokens. Members hold tokens issued by the organization, representing their shares and voting rights within the organization. Once a DAO raises funds (usually through token sales), it can officially go online. Token holders can:

• Vote on major decisions
• Propose new governance ideas
• Share in the organization’s profits
• Obtain corresponding voting weight

Importantly, proposals for changes by token holders require majority stakeholder support to become new rules. Each DAO details its decision-making process within its smart contracts.

Governance and Financing: How DAOs Make Decisions

The operation of a DAO relies on robust governance mechanisms and fundraising models. After establishing a DAO, the community needs to determine funding sources and decision-making methods.

Most DAOs raise funds by issuing tokens, which are stored in the organization’s treasury. Token holders purchase these tokens with fiat or cryptocurrencies and gain corresponding voting rights. Once funding is complete, the DAO can begin operations.

In terms of governance, DAOs adopt a democratic decision-making model. Since blockchain records every financial transaction, anyone can review the DAO’s treasury records. All expenses, income, and investment decisions are fully transparent and subject to public oversight. DAOs are entirely managed by the community but are also open to everyone — something traditional organizations find hard to achieve.

From Concept to Reality: 20 Years of DAO Evolution

To understand what a DAO is, it helps to see how it has evolved step by step.

The concept of DAO first appeared in 1997, defined by German computer science professor Werner Dilger as a “self-sufficient autonomous system.” With the advent of Bitcoin, the term “decentralized autonomous company” (DAC) began to appear frequently, referring to autonomous enterprises that distribute dividends using tokenized shares. Anyone could become a shareholder by purchasing or obtaining DAC stocks, enjoying profit sharing and decision-making rights.

Some consider Bitcoin itself to be the first DAO, but technically, Bitcoin’s design does not include the complete governance mechanisms required for a DAO. Therefore, today’s “DAO” specifically refers to decentralized autonomous organizations built on existing blockchains using smart contracts, not the blockchain itself.

A real turning point came in 2016. German company Slock.IT launched the “Genesis DAO” (also known as “The DAO”), the first investment DAO operated jointly by investors, built on the Ethereum blockchain. Investors could buy DAO tokens with Ether, and token holders had voting rights. The DAO attracted significant attention, but unfortunately, due to a coding flaw, it was attacked, resulting in the theft of $50 million worth of Ether. The community later performed a hard fork, allowing token holders to recover their funds.

Although this incident severely damaged the reputation of DAOs, it also prompted the community to deeply reflect on the strengths and weaknesses of DAOs, laying the foundation for subsequent development.

New Trends in DAOs in 2024: From NFT Communities to Investment Tools

As blockchain technology matures, DAOs are becoming more common and diverse. The rise of non-fungible tokens (NFT) has had a profound impact on DAO governance, enabling more creative participation methods — holding specific NFTs can grant different permissions within a DAO.

One of the most notable cases is in September 2021, when renowned venture capital firm Andreessen Horowitz invested $5 million into “Friends with Benefits” DAO. This DAO, composed of crypto enthusiasts, artists, and NFT lovers from Discord, later expanded operations across multiple platforms and raised an additional $1 million. This demonstrates that even without traditional economic incentives, online communities can generate strong fundraising capabilities.

DAO investing has become a new trend, allowing Web3 natives to pool funds and deploy capital collectively, enabling small investors to compete with institutional-grade funds. This not only changes the way fundraising is done but also who holds investment decision-making power.

DAOs now penetrate various fields: art collection, protocol governance, community building, open-source development, and even environmental projects. Each DAO is experimenting with different governance models and incentive mechanisms.

The Future Is Here: How DAOs Will Change Organizational Forms

Looking ahead, what DAOs might be has many more layers. DAOs represent a new organizational structure with the potential to fundamentally change how we operate businesses.

As more DAOs flourish across industries, some will inevitably grow and become indispensable parts of society. DAOs leverage the revolutionary resources of the cryptocurrency market to create a future with more decentralization, democratic decision-making, and higher participation.

However, DAOs still face challenges. Developing DAOs and automating processes require significant time; any coding errors could cause system failures and huge economic losses. Additionally, DAOs lack clear legal status worldwide, which hinders their international expansion.

Despite these issues, the appeal of DAOs is undeniable. They offer what previous structures could not: genuine decentralized governance, global collaboration, and transparent fund management. These features could lead DAOs to experience explosive growth, just like NFTs in 2021.

What a DAO is ultimately depends on the market and time. But one thing is certain: this organizational revolution has only just begun.

Disclaimer: This article reflects only the author’s personal opinions and does not represent any platform’s views or positions. All content and viewpoints are for reference only and do not constitute investment advice. Investors should make their own decisions and transactions; the author and related parties are not responsible for any direct or indirect losses resulting from investor transactions.