Decentralized Autonomous Organization

A Decentralized Autonomous Organization is a group of people that operates without a management level. Instead of a management board, the group decides together, namely through votes. The rules for this are not written in a contract on paper, but in a computer program. This program runs on many computers at the same time, so that no one can change it alone. All votes and all payments are publicly visible. The English name is usually abbreviated to DAO and pronounced dee-ay-oh.

Why people build organizations without a boss

The basic idea is distrust of central administrators. Anyone who joins an association or a company has to trust that the board manages the treasury correctly. In a DAO, this trust is supposed to be unnecessary. Every transfer from the shared treasury requires a majority, and anyone can check the account balances.

This is particularly interesting for groups that form across national borders. A thousand people from thirty countries would find it hard to jointly found a German association. A DAO, by contrast, works anywhere there is internet access. Some DAOs manage considerable sums: individual projects reached balances worth several billion euros at their peak.

However, there is an unresolved problem: the legal situation. In many countries it is unclear who is liable if a DAO incurs debts or breaks the law. In the worst case, all members are considered personally liable. Some US states have therefore created their own legal forms for DAOs; in Germany, nothing like this exists yet.

Voting via token and smart contract

The core is a so-called smart contract. This is a program that resides on a blockchain. A blockchain, in turn, is a shared database that is maintained in parallel by thousands of computers. Entries in it can practically no longer be altered afterward. This means no one can secretly rewrite the DAO’s rules either.

Membership is usually obtained through tokens. A token is a digital marker that can be bought or received for contributing work. Whoever holds a hundred tokens often has a hundred votes. A proposal is submitted, followed by a voting period of, say, one week. If the proposal reaches the necessary majority, the smart contract executes it itself and transfers, for example, the approved funds.

A common misconception: autonomous here does not mean that an AI makes the decisions. Autonomous only means that the program executes what the vote decided without a human administrator. The decisions themselves are still made by people. And because votes are tied to tokens, a small group with a lot of money can also dominate a DAO.

From the crypto scene to the business news

DAOs are most commonly found in the context of cryptocurrencies. Many major crypto projects today are governed by a DAO that votes on software updates and funding grants. There are also DAOs that jointly buy art, distribute donations, or run computer games.

In the news, the term usually comes up on two occasions. First, when a DAO votes on something spectacular, such as the purchase of a rare object. Second, when something goes wrong. The case of the first major DAO became famous in 2016: a bug in the program code allowed an attacker to withdraw funds worth around 50 million dollars.

For your everyday life, this has had little relevance so far. What matters is the distinction: a DAO is not a company and not a registered association, even though it performs similar functions. When a text refers to a DAO, it is almost always about a group whose treasury and rules are openly recorded on a blockchain.