Complete Guide to DAOs: From Basic Concepts to Future Trends

DAOs have become the most prominent development direction in the blockchain ecosystem. These decentralized autonomous organizations are changing our understanding of traditional corporate structures, enabling strangers with similar ideals to collaborate online. So what exactly are DAOs? How do they operate? What new trends are emerging in the market? Today, we will answer these questions one by one.

The Core Essence of DAOs: A New Organizational Form of Decentralized Autonomy

DAOs do not have traditional central leadership but are operated collectively by community members through open and transparent computer programs and coded rules, completely unaffected by any central authority. In simple terms, DAOs are a group of people with shared ideals reaching a consensus—they agree to follow specific rules to achieve a common goal.

Traditional companies are led by CEOs or boards of directors, but DAOs are different. In DAOs, no individual owns or controls the entire organization; each member holds a stake in the organization. Anyone can join DAOs, regardless of where they come from or what industry they are in. What truly matters is whether you agree with the organization’s philosophy and mission.

DAOs operate entirely online, relying on blockchain technology as a distributed ledger to record all group activities—including fund flows and administrative decisions. This transparency ensures that every member can oversee the organization’s operations.

How DAOs Operate: Smart Contracts and Governance Mechanisms

The Role of Smart Contracts

The entire functionality framework of DAOs is built on smart contracts. Smart contracts utilize blockchain technology to automatically execute code when certain conditions are met, without human intervention. Ethereum was the first blockchain to use smart contracts, and many other blockchains now also employ this technology.

The key point is that all content and records on the blockchain are open and transparent, making verification easy. This means that any member interested in joining can see the exact operation of the protocol at each stage. All rules set by the DAO community are executed by smart contracts—once the code is officially launched, it can only be changed through voting by the group members.

Governance and Financing Mechanisms

Once the rules are recorded on the blockchain, DAOs need to determine their funding methods and governance structures. A typical approach is to raise funds by selling tokens, which are stored in the DAO’s treasury. Token holders exchange fiat currency for tokens and gain corresponding voting rights.

In DAOs, token ownership is the most common way to participate. Members holding organizational shares can vote on major issues or propose new governance suggestions. To prevent proposal spamming, most stakeholders must support a proposal for it to become an official rule. How to determine the majority support in DAOs varies depending on the organization, and these details are specified in the smart contracts.

It is worth noting that DAOs are community-managed but open to the public. Open-source blockchains allow anyone to view the code, and anyone can read related information. Since blockchain records every fund transaction, anyone can review the treasury records.

Three Key Stages in Building DAOs

Development of Smart Contracts

First, the smart contracts of DAOs must be written by one or more developers. Once deployed, only the governance system can modify the contract terms. That’s why developers must thoroughly test the contracts to ensure no critical details are missed. A single coding error could cause the entire program to crash, resulting in significant financial losses.

Fundraising and Governance Establishment

DAOs need to determine how to raise funds and implement the governance framework after developing the smart contracts. In most cases, the community will sell tokens to raise capital, with token holders gaining voting rights. This stage requires careful planning of voting mechanisms and decision-making processes.

Official Deployment and Launch

When everything is ready, DAOs are officially launched on the blockchain. From this moment on, the future of the organization is entirely decided by stakeholders. Developers (including the organization’s creators) can no longer influence proposals or interfere with operations—this is true decentralization.

The Development of DAOs: From The DAO Incident to Today

The concept of DAOs did not appear out of nowhere. In 1997, German computer science professor Werner Dilger defined self-sufficient autonomous systems in a paper. After Bitcoin’s emergence, the term “Decentralized Autonomous Corporation” (DAC) began to appear frequently, defined as autonomous companies that distribute dividends using tokenized tradable shares. Anyone can become a shareholder by purchasing DAC stock or receiving stock compensation, and share profits, participate in development, and express opinions.

Some believe Bitcoin itself is the first DAO, but this view is controversial—Bitcoin’s design does not include the fundamental governance mechanisms that DAOs possess. Therefore, today, the term “DAOs” specifically refers to decentralized autonomous organizations built on existing blockchain platforms and utilizing smart contracts, rather than blockchain itself.

In 2016, German company Slock.IT launched Genesis DAO (also known as “The DAO”), the first DAO in the form of a venture capital enterprise operated collectively by investors. The DAO was built on the Ethereum blockchain, with its code framework designed as a smart contract. Investors could purchase DAO tokens with Ether (ETH) during a token sale and gain management voting rights. By voting to support different projects, DAO members could share in the project’s profits.

However, due to coding flaws, The DAO was attacked, resulting in the theft of $50 million worth of Ether. Subsequently, the community conducted a hard fork of Ethereum, allowing token holders to remove tokens from the Ethereum network, helping community members recover funds more quickly. This incident made DAOs a controversial topic and prompted reflection on their advantages and disadvantages.

New Trends in DAOs: NFT Governance and Investment Waves

As blockchain technology matures and becomes more widespread, DAOs are becoming increasingly popular. The rise of non-fungible tokens (NFTs) plays a key role in DAO governance, determining who can participate in governance.

A notable example is Friends with Benefits. In September 2021, venture capital firm Andreessen Horowitz invested $5 million in Friends with Benefits, a community on Discord composed of crypto enthusiasts, artists, and NFT lovers. Subsequently, the community decided to operate as a DAO on platforms like Facebook and Telegram, raising an additional $1 million. This clearly demonstrates that even without economic incentives, online communities have immense fundraising capabilities.

DAO investments are another important trend, allowing Web3 natives to pool and deploy capital, enabling niche communities to compete with established financial institutions. DAOs have shown enormous appeal and buzz, and are expected to develop as fiercely as NFTs did in 2021. Of course, DAOs still face some concerns, but these issues can only be truly addressed through future practice.

The Future of DAOs: Opportunities and Challenges

DAOs represent a new organizational structure with the potential to fundamentally change how we operate businesses. As more DAOs flourish across various industries, it is believed that some will persist and become indispensable parts of society, which will be very exciting. After all, DAOs leverage the revolutionary resources of the cryptocurrency market to explore a creative future.

To operate DAOs effectively, they must be based on the two core principles of autonomy and decentralization. Thanks to the coding rules of smart contracts, DAOs can run autonomously without human involvement, and members can democratically decide regulations. This approach ensures high openness and accountability through open-source software. Additionally, the decentralization feature helps eliminate geographical limitations, providing services to DAOs working globally that were previously unavailable.

However, the development of DAOs is not without challenges. Developing DAOs and automating processes is time-consuming and complex. Even a single coding mistake can cause the entire program to crash, leading to huge economic losses. Moreover, the legal status of DAOs remains unclear, and lack of legal frameworks hampers global operations. These challenges require joint efforts from industry, governments, and communities to resolve.

But undoubtedly, DAOs have already become an important force in the blockchain ecosystem, and their future is full of imagination.