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Decentralized Autonomous Organizations (DAO), sometimes labeled decentralized autonomous corporations (DAC), are organizations represented by rules encoded as a computer program that is transparent, controlled by token holders, and not influenced by a central government. A DAO's financial transaction record and program rules are maintained on a blockchain. The precise legal status of this type of business organization is unclear.[1]
A well-known example, intended for venture capital funding, was The DAO, which launched with $150 million in crowdfunding in June 2016 and was immediately hacked and drained of US$50 million in cryptocurrency. This hack was reversed in the following weeks, and the money was restored, via a hard fork of the Ethereum blockchain. This bailout was made possible by the Ethereum miners and clients switching to the new fork.[3]
In July 2017, the Securities and Exchange Commission (SEC) issued a report, which determined that The DAO sold securities in the form of tokens on the Ethereum blockchain, violating portions of US securities law.[4]
Decentralized autonomous organizations are typified by the use of blockchain technology to provide a secure digital ledger to track financial 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 a financial transaction, thus simplifying the transaction. The costs of a blockchain-enabled transaction and the associated data reporting may be substantially offset by the elimination of both the trusted third party and the need for the 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.[1]
Daniel Larimer first proposed the concept of a "Decentralized Organized Company" in an article published on September 7, 2013, and implemented in Bitshares in 2014, and EcoinOS in 2018.[5]
Vitalik Buterin proposed that after a DAO was launched, it might be organized to run without human managerial interactivity, provided the smart contracts were supported by a Turing complete platform. Ethereum, built on a blockchain and launched in 2015, has been described as meeting the Turing threshold, thus enabling such DAOs.
Decentralized autonomous organizations aim to be open platforms where individuals control their identities and their personal data.[6]
A Grant DAO, or Grant-making DAO, is a type of DAO that is designed to distribute funds in the form of grants to support various projects, ideas, or individuals within a decentralized ecosystem. These organizations typically operate on blockchain platforms, leveraging smart contracts to automate the grant allocation process. Following are examples of Grant DAOs:
Protocol DAO is a type of DAO that governs the development and maintenance of a specific decentralized protocol. These protocols often underpin blockchain networks, defining the rules, consensus mechanisms, and functionalities of the network. The DAO's purpose is to enable decentralized decision-making and coordination among community members involved in the development and use of the protocol. Following are examples of Protocol DAOs.
Social DAOs aim to address social issues, foster community engagement, and support charitable or humanitarian causes. These DAOs operate on blockchain platforms, utilizing smart contracts and governance tokens to enable community members to collectively make decisions about funding, projects, and initiatives with a social impact. Following are examples of Social DAOs.
A DAO's main advantage is its decentralization, an essential characteristic. According to their basic design principles, DAOs aim to achieve the maximum level of decentralization. The concept of complete decentralization generally loses value in other endeavors. Decentralized organizations have the advantage of allowing members to decide the future of the organization. [8]
DAOs, or Decentralized Autonomous Organizations, offer communities around the world the opportunity to connect and work together on a promising future of the organization.
A sense of ownership is another characteristic of decentralized autonomous organizations. This can encourage members to innovate and establish new standards for receiving compensation in exchange for participation as a result.
Each member of a DAO has the power to influence the organization's future. All stakeholders of a DAO can provide proposals for protocol updates and improvements. DAOs don't limit decision-making to the C-level boardrooms which is a crucial benefit of a DAO. Thus, DAOs can provide innovative ideas to the organization by encouraging stakeholders and numerous participants from all over the world. [7]
A DAO is an organization where decisions are made from the bottom up; a collective of members owns the organization. There are many ways to take part in a DAO, it is usually through the ownership of a token.[4]
DAOs operate using smart contracts, which are bits of code that execute automatically whenever some criteria are met. Smart contracts are released on numerous blockchains nowadays, but Ethereum was the first to use them.[4]
These smart contracts establish the DAO’s rules. Individuals with a stake in a DAO get voting rights and influence how the organization operates by deciding on or creating new governance proposals.[3]
This method helps prevent DAOs from being spammed with proposals: A proposal will only pass if a majority of stakeholders approve it. How that majority is determined varies from DAO to DAO.[2]
DAOs are fully autonomous and nonambiguous. As they are built on open-source blockchains, anyone can view their code.[2]
Shareholder participation in DAOs can be problematic. For example, BitShares has seen a lack of voting participation, because it takes time and energy to consider proposals.
The precise legal status of this type of business organization is unclear; some similar approaches have been regarded by the U.S. Securities and Exchange Commission as illegal offers of unregistered securities. Although unclear, a DAO may functionally be a corporation without legal status as a corporation: a general partnership. This means potentially unlimited legal liability for participants, even if the smart contract code or the DAO's promoters say otherwise. Known participants, or those at the interface between a DAO and regulated financial systems, may be targets for regulatory enforcement or civil actions.[5]
One approach is to seek legal recognition for DAOs as a new type of entity, specifically designed for decentralized structures. This would require legislative action and could involve creating a regulatory sandbox where DAOs can operate under provisional rules until a more permanent legal framework is established.[10]
The code of a given DAO will be difficult to alter once the system is up and running, including bug fixes that would be otherwise trivial in centralized code. Corrections for a DAO would require writing new code and an agreement to migrate all the funds. Although the code is visible to all, it is hard to repair, thus leaving known security holes open to exploitation unless a moratorium is called to enable bug fixing.[6]
In 2016, a specific DAO, "The DAO", set a record for the largest crowdfunding campaign to date. Researchers pointed out multiple issues in the code of The DAO. The operational procedure for The DAO allowed investors to withdraw at will any money that had not yet been committed to a project; the funds could thus deplete quickly. Although safeguards aimed to prevent gaming the voting of shareholders to win investments, there were a "number of security vulnerabilities". These enabled an attempted large withdrawal of funds from The DAO to be initiated in mid-June 2016. On the 20th of July 2016, the Ethereum blockchain was forked to bail out the original contract.[5]
There are several projects that are pioneering further tooling and frameworks in this space, to eliminate problems thus far encountered. Examples are DaoStack, Aragon, Colony and the Economic Space Agency.[2]
There are commercially focused DAOs. Investment DAOs may see gains or losses in their portfolio. Collector DAOs may see the value of their art or NFT holdings appreciate. DAOs are likely to be treated as business entities for tax purposes, meaning that they may be subject to profits tax. DAO members may also have tax reporting or payment obligations. However, it may be difficult to determine their reportable income. DAO members may also be subject to tax if they engage in taxable transactions such as staking, lending or mining, and other types of disposition of tokens.[9]
As of January 2023, the total number of DAOs in existence reached 10992, which was three times the number recorded in 2022. And well over 13,000 DAOs in existence in May 2024 with a total treasury of US$24.4 billion. This includes 10.4 million token holders and 3.2 million active voters and proposal makers. Following are some of the major DAO projects.[11]
BrainDAO: BrainDAO is the governing DAO of the IQ ecosystem. BrainDAO's mission is to build a more intelligent future through the IQ token, which powers a knowledge ecosystem including applications such as IQ GPT, an AI agent for blockchain knowledge, IQ.wiki, the world's largest cryptocurrency and blockchain encyclopedia, IQ.social, an AI-powered social forum for crypto news and insights, and IQ Code, an upcoming AI product created to assist people in coding Solidity and Vyper sets. The DAO is collectively made up of all IQ token stakers and governs the token. [21]
The BrainDAO treasury portfolio of Ethereum, IQ tokens, stablecoins, blue chip NFTs, and other digital assets back the value of the IQ token. [20]
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