Participative Ownership In Web3 Through DAOs - coto App

A peek into DAOs and the promise of participative ownership through this new version of community-building.

People the world over are riding the Web3 wave, of which DAOs make up the biggest swell. Standing for ‘Decentralized Autonomous Organizations’, they’re an integral aspect of Web3. Before we delve into the hows and whys, here are a few things that you should know.

Understanding DAOs

Think of a DAO as an organization native to a specific blockchain and existing exclusively in the virtual world. Moreover, it is devoid of any central controlling entity. All decisions are governed by stakeholders and investors who put out proposals to a vote, thus giving the control of the organization to its people. To understand the financial side of things, you can imagine a DAO to be a business that went public at the very moment it started functioning.

For example, we all know that Ethereum is the second-largest cryptocurrency in the world. Consequently, it is also the second-largest entity on Blockchain as well. The uniqueness of Ethereum lies in the fact that it lets users use this technology for things beyond monetary activities, while still holding on to the fundamental mantra of decentralized functioning.

Ethereum is a popular foundation upon which DAOs are created. Photo by Kanchanara on Unsplash

How Does A DAO Work?

This is where decentralized organizations come in. How do they do away with the middlemen? Mostly, it’s done with the help of smart contracts. These smart contracts are essentially rules that are embedded into the blockchain and activate certain protocols or actions when corresponding conditions are met.

Once a contract is live, it becomes immutable by virtue of being on a blockchain network. Moreover, if somebody tries to do something that isn’t covered by the logic of the contract’s code, it will fail. This will effectively lock all assets in the DAO’s treasury, making it impossible for anyone to use the DAO’s money without the majority’s approval. In this way, members remain assured that their DAO is secure from troublemakers, and their democracy prevails when someone tries to disrupt things.

So, yes, you can effectively remove all middlemen from an organization and completely automate its functioning as a DAO. The next big question is, is functioning as a DAO that much more beneficial than a traditional organization? Does it really have that many benefits? The simple answer is yes. It gives the founder of the organization (along with all investors) transparency and takes away the need to place blind faith in the other investors, placing it on the DAO’s code instead.

DAOs Vs. Traditional Organizations

Regardless of what business you start and how you start it, you will need capital to do so. More often than not, this capital is raised by multiple parties coming together. This means you need to be sure of the investors’ capital capacity as well as intention. This is much more of a gamble in traditional organizations, while DAOs ensure that everyone is compliant with the contracts.

Moreover, a traditional organization requires the founder to set up a hierarchical system for the functioning of the organization. DAOs, on the other hand, are flat and fully democratized. This makes it possible for the people to have a say in how the organization functions, instead of having a few head honchos calling the shots. All decisions, in the pursuit of being democratic, are taken by proposal and vote. Take, for instance this Time article by Andrew R. Chow on dOrg. One of the first DAOs that got legal recognition as an LLC in the US, dOrg doesn’t have any general management positions. Ori Shimony, co-creator of the company, describes his role as “helping with research and development.”

DAO LLCs don’t have a CEO or a boss, instead, members work as a team, as one collective. Photo by Hannah Busing on Unsplash

Lastly, and probably the best part of this whole deal, is that all activity in a DAO is open to the public and fully transparent, unlike a traditional organization.

One thing you need to know about DAOs is that ‘DAO’ only defines the nature of the functioning of an organization. It does not put any sort of a cap on what industry or business type it can belong to. So, you can step up and start pretty much any sort of a business as a DAO. It can be video sharing and streaming platforms, gaming platforms, trading sites, charities, VC firms, maybe even freelancer networks. As long as your business idea falls within the legality of everything, you can publish it on a blockchain network as a DAO.

How To Become A Member Of A DAO

What if instead of starting a DAO, you just want to become a member of one that already exists? There are multiple ways you can ‘sign up’ to one. However, they generally boil down to two models of membership. The membership itself will define how the democratic functioning behind every decision will work, along with other things like every member’s weightage, etc.

Token-Based Membership

The first type of membership for a DAO is token-based membership. This type of membership doesn’t have any sort of a procedure for joining, essentially making it permissionless. You can buy into the DAO, earn the native token by providing liquidity or showing some work that you have done for the platform, or simply trade the tokens on a decentralized exchange platform.

Share-Based Membership

The second type of membership is a little more permission-based. It requires every aspiring member to submit a proposal to join the DAO, on which the existing members will vote. They also have to offer some value to the DAO in the form of work or tokens. This will let you buy into the shares of the company, directly giving you a percent of the ownership as well as direct voting power. Having share-based membership also makes it very easy for the members to quit the DAO at any point in time.

The Then And Now Of DAOs

The thing is, even though DAOs are the loudest bang in the hype-market right now, there was an attempt at the idea once before, and it had its hurdles. In 2016, a group of developers took inspiration from Bitcoin and came up with the idea for a decentralized organization, which they named ‘The DAO’.

It was a venture-capital firm that was based on an open-source code on Ethereum Blockchain and was supposed to become completely decentralized as well as automated. This was to make sure that there was no governing entity, not even any government. After its launch in April 2016, The DAO raised around $150 million in a single month.

In the next couple of months, a few papers pointed out the security vulnerabilities in The DAO, and in June 2016, the company’s servers were hacked. The hackers gained access to about 3.6 million ETH, or $50 million; shortly after, The DAO was disbanded.

However, the whole process actually embodied the element of decentralization for a certain someone: Vitalik Buterin, creator of Ethereum, writes Andrew R. Chow for Time. Buterin was the one who reversed the hack using the hard fork maneuver, but only after the entire community voted in favor of it. According to Buterin, “Leadership has to rely much more on soft power and less on hard power, so leaders have to actually take into account the feelings of the community and treat them with respect”.

Since then, while a few of the vulnerabilities have been addressed, the security of blockchain networks is still debatable to some. Moreover, this space is still fairly new and might have to go through more rigorous legal and financial challenges and criticisms. But there’s no denying the potential that DAOs have and the opportunities they hold for communities in Web3. After all, as this Forbes article by Jeff Kauflin and Isabel Contreras rightly says, they’re a platform, not a fad.

FAQs On DAOs

What Are Examples Of DAOs?

Some good examples of DAOs include DASH, MakerDAO, and Augur. However, DAOs can be any sort of corporation. So, a quick Google search with (preferred industry) + DAO will give you precise information on the DAOs you would like to look at.

Can DAOs Own Real Estate?

Yes. DAOs can legally own real estate. However, creating a real estate DAO is a complicated process that starts with the tokenization of all underlying assets.

Can DAOs Make Money?

Yes. As an owner of DAO tokens, an individual could gain profits from the organization’s investments. These profits can be in the form of benefits of the appreciating price of the tokens or reaping dividends.

By Nandhini Gopal, Owner — Health & Wellness

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