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Marianne Beltran
4 min read

Crypto Glossary: What are DAOs?

A DAO or Decentralized Autonomous Organization is a community-governed entity that does not rely on a central authority.

Crypto Glossary: What are DAOs?

In 2021, one of the 13 surviving copies of the original United States Constitution was sold at an auction for $41 million.

Among the bidders were group of a 17,000+ individuals who shared one goal: To buy the original copy and put it on public display. Collectively known asConstitutionDAO, they managed to raise almost $47 million in ETH, but lost the auction for underbidding as it includes seller’s commission which was “10% of the hammer price” add on the taxes and ETH gas fees.

Despite this, the members have made their mark on becoming one of the largest crowdfunding initiative and eventually were able to receive a refund of their initial investment.

ConstitutionDAO is just one of the many DAOs that can be found within the larger crypto-economy.

But what exactly are DAOs aka Decentralized Autonomous Organization, and what role do they play in the grander crypto ecosystem?

The First-Ever DAO

The first DAO “The DAO” was launched in early 2016. It’s token sale raised roughly a $150 million USD worth of ETH from more than 11,000 members.

The idea behind the DAO is to allow anyone with a project to pitch their idea to the community and potentially receive funding.

In early 2016, the smart contract behind The DAO was built on the Ethereum blockchain, by the company Slock.It. By June 2016, The DAO was hacked due to vulnerabilities of their code and a portion of their funds were siphoned sway.

Although the error did not come from Ethereum itself, Ethereum was heavily affected by this. The event led to the hard fork of Ethereum blockchain in order to restore the stolen funds, creating two distinct networks: Ethereum and Ethereum Classic.

Regardless, The DAO paved the way for many more successful DAOs.

What is a DAO?

Imagine if your local grocery store ran itself — without a store manager or employees. You pay for items by at the self-checkout counter, and the store uses the funds to automatically re-stock inventory and pay rent.

As its name suggests, a DAO is an autonomous, transparent entity that is governed by its individual members rather than a central authority.  

Rules are written into the code of the organization through smart contracts — programs stored on the blockchain programs that run when certain criteria are met.

To keep these communities truly decentralised, members of DAOs can purchase governance tokens, which symbolise ownership in a decentralised protocol. These token give users the right to vote on decisions such as how the pool of money is spent, managed and allocated.

How does a DAO work?

The whole purpose of a DAO is to give power back to the people, by placing power in the hands of smart contracts instead of a central authority. This is thought to eliminate human error or manipulation of funds by ill-willed actors.

Since the organization is decentralized, where do the funds come from, and who determines the direction of the project?

Generally, DAOs attain funding and award governance through token issuance. The DAO sells tokens to raise funds, and in return, token holders are empowered to participate in the DAO by creating proposals for change and then casting their vote on which proposals are put into action.

In other words, purchasing these governance tokens allows the community to decide how the DAO’s funds will be used.

DAOs that focus on creating community-governed decentralized finance protocols also allow people to stake, lend, and borrow crypto assets.

Types of DAOs

There are various types of DAOs, but five main types of DAOs dominate the crypto landscape today — Protocol, Social, Service, Collector, and Grants.

MakerDAO: This is the protocol of the world’s oldest stablecoin, DAI, you can get involved in governance by voting on changes to the Maker protocol.

View DAI live prices 👉🏻

Uniswap: Uniswap is known for being the largest decentralized exchange (DEX) in the world.

View UNI live prices 👉🏻

Compound: Compound is a decentralized finance (DeFi) protocol that allows users to earn money by saving cryptocurrencies on the Compound app. Crypto assets that are locked on the Compound protocol can be taken out as loans by other users, and the owner of the funds will gain from interest rates over time.

View COMP live prices 👉🏻

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