A Deep Dive Into DAO

Retweeted original title: Digging deeper, what exactly is DAO?

Friends who work in the Web2 companies often asked me what DAO is. I hear this concept every day and hope to find some comprehensive introduction to popularize it, so this research topic was born——

Question: What is DAO?

In the process of continuous digging, I found a large amount of article information from the Internet (special thanks to the authors of these articles), so I organized the information according to the structure.

I hope it will be useful to everyone. Also, by making a summary, it improves the learning effect.

1. What is DAO?

1.1. DAO definition

DAO stands for Decentralized Autonomous Organization, which means decentralized autonomous organization in Chinese. To understand this concept, we need to analyze it from its three components.

The first time DAO was proposed as a formal concept and clearly defined in the document was in the first edition of the Ethereum white paper. Vitalik classified decentralized organizations into two types in the white paper, DO (decentralized organization) and DAO (decentralized autonomous organization). Autonomous means that the organization completely relies on the code deployed in the smart contract to achieve continuous and autonomous operation without external interference.

In the future, more advanced mechanisms for organizational governance may be implemented; it is at this point that a decentralized organization (DO) can start to be described as a decentralized autonomous organization (DAO). The difference between a DO and a DAO is fuzzy, but the general dividing line is whether the governance is generally carried out via a political-like process or an “automatic” process.

Ethereum White Paper 2014.12 Version

1.1.1. Decentralized

Compared with the current common organizational management forms, DAO has obvious decentralization characteristics. However, centralization and decentralization are not mutually exclusive. Many DAO organizations also rely more or less on centralization to start or maintain, and have not achieved absolute decentralization. Therefore, it is more accurate to understand from the perspective of freedom, that is, to show organizations with obvious decentralization scale.

1.1.2. Autonomous

“Autonomous” is a very important word in my study and work in the past few years. It is the “A” in DAO，and the “A” in the concept of an autonomous world. It also represents people’s expectations for Artificial Intelligence - an Autonomous Agent.

As a new direction, everyone’s understanding of Autonomous naturally varies greatly. What exactly is Autonomous? Does Autonomous mean the same thing in different fields? Does the absolute sense of Autonomous exist?

Today I dare to break down the past and present life of this word.

Autonomous - Evolved from the combination of two Greek words, Auto and Normos. “Auto” in Greek means “self,” and “Normos” is derived from the Latin “Norma,” a carpenter’s square. In ancient Greece, the original meaning of “Autonomous” refers to having the right to self-rule, to make one’s own laws, and not to be controlled by a larger management organization.

Ancient Greece was not a unified nation like modern countries, it was made up of numerous polis, each of which was an independent political entity with its own governance structure, laws and customs. Different city-states had different forms of government, for example, Athens was a democracy, while Sparta was a mix of oligarchy and monarchy, and there was often competition or conflict between them. The word autonomy originated at this time, reflecting the desire of these city-states and their citizens to maintain their unique identity, governance structure and lifestyle in a dispersed and competitive environment.

Over time, the concept of autonomy began to be applied to individuals, referring to the ability of individuals to act autonomously according to their own principles or beliefs. The classic book “Sovereign Individual” revered by the crypto circle has deeply explored the topic of individual autonomy from perspectives such as economic autonomy and technological empowerment.

As technology continues to advance, the word “autonomy” has taken on a new meaning - “machines or systems that can operate without direct human intervention or external control”. Today, “autonomy” is often associated with technology, such as autonomous driving systems. These systems operate “autonomously”, they do not need continuous human supervision to operate. This modern interpretation still carries the core idea of “self-governance”, but its context is far beyond what the ancient Greeks could imagine.

The changing meanings of the word “autonomy” illustrate how culture, technology, and society shape and change popular perceptions.

1.1.3. Organization

Typically, a DAO is regarded as a decentralized company. Indeed, understanding DAO from the perspective of a company has more business and realistic significance, but we need to clarify that DAO is not a specific organization entity, but a general form of organization. DAO can not only be a company, but also any organization that requires human participation, such as cooperatives, online platforms, communities, etc.

1.2. Why does DAO appear?

The structure of the blue organization (see image below) is decentralized, characterized by self-organization and self-management, and small autonomous teams cooperate to achieve common organizational goals. At present, many companies are seeking development by transitioning to this new organizational structure.

1.2.1. Organizational paradigm development

Reactive - Infrared Paradigm: The initial stage, a single family, a few dozen people, a stage without formed self-consciousness, foraging and hunting, no division of labor, no leaders.

Magic - Magenta Paradigm: The conscious stage, small families, hundreds of members. The self differentiates, simple cause and effect relationships, cognition without abstraction and categorization, no concept of large numbers. Death is not real. No organization exists.

Impulsive - Red Paradigm: Tribes and embryonic empires, the emergence of organized life, self-consciousness is entirely vain, the self separates from the world of others. Death is real. The world is full of dangers, force, strength. Thinking is either black or white, strong or weak, you or me. Division of labor becomes possible, there are leaders, soldiers, efforts.

Conformist - Amber Paradigm: Agriculture, nation-states and civilization, institutions, hierarchies, and organized religions. Able to understand cause and effect relationships and grasp linear time, anticipate the future. Agricultural development, causing the transition from tribes to nation-states and civilizations. Perception of the feelings and ideas of others, Piaget. The development of self-discipline and self-control, moral development. Static worldview.

Achievement - Orange Paradigm: New look, effectiveness replaces duty as the rule of decision-making, standards of efficiency and effectiveness. Cognitive ability improvement, leading action. The Enlightenment movement, the Industrial Revolution, World War II. The development and enhancement of free will.

Pluralistic - Green Paradigm: The standard of “effective or ineffective” replaces the amber’s “right or wrong” absolute truth. Insists on fairness, equality, harmony, community, cooperation and consensus, sense of belonging. Breaks tradition, subverts caste, social rank, patriarchy, institutionalized religion, and structures that need to be dissolved. Even though orange still dominates in today’s business and politics, green is very prevalent among postmodern academic thinking, non-profit organizations, social workers, and community activists. People who act from a green perspective value relationships over results.

Evolutionary - Teal Paradigm: Characterized by self-organization and self-management, small autonomous teams collaborate to achieve common organizational goals. Tamed self-fear; Guided by inner legitimacy: The measure for decision-making has shifted from outside to inside; Life is a journey that gradually begins: There are ambitions, but not overly ambitious; Shedding social masks, growing towards one’s own truth, essence, and having internal motivation; Based on strengths: More gentle and practical attention to limitations and living peacefully with them, replacing judgment with empathy and appreciation, shifting from a problem-solving perspective to a potential-unleashing perspective; Facing adversity gracefully: Focusing on experience rather than mistakes, change becomes the tension of personal growth; Wisdom beyond rationality: Adopting regular practice to deepen the experience of various states; Pursuing integrity: Paying attention to the bigger picture, we are part of a larger whole; Toward the integrity of life and nature: Finding a more real and humble position for humans in the universe.

1.2.2. Paradigm organizational form

Red Organization: An upgraded version of the Impulsive - Magenta paradigm. Uses modern tools and thoughts. Continuously applies force, no formal registration within the organization, no job titles, not conducive to expansion. Strong yet fragile, with an absolute myth of leadership. Not good at planning and strategy, but reacts quickly to threats.

Amber Organization: Medium to long-term plans, stable and measurable organizational structure. Large systems emerge: large irrigation systems, pyramids, the Great Wall, etc. Colonial shipping, commercial houses and plantations developed, Catholicism appears. Industrial Revolution occurs. Government agencies, public schools, religious organizations, and armies developed. Processes, supply chains develop, planning is enhanced. Hierarchical system develops, global organizations appear, planning and execution are strictly separated, systems appear. Social area appears, identity roles enhance, as well as relativity.

Orange Organization: Religion, multinational companies – Walmart, Nike, Coca-Cola, are deeply influenced by the “Achievement - Orange” worldview from structure, practice to culture. Order of magnitude change, thanks to breakthroughs in innovation, responsibility, and elitism. The organization is a machine, orange also has a dark side – innovation and measurement standards (monetary and society).

Green Organization: Abolish power and hierarchical system. If power inequality always leads to the domination of the upper level over the grassroots, then let’s abolish the hierarchy and give everyone completely the same power. Let all employees hold the same proportion of company shares, all decisions must reach a consensus, no one is in the position of a leader (or, if necessary, leadership roles will rotate). On the Orange paradigm, it added three breakthroughs: empowerment, value-driven culture, and a compelling purpose, multi-stakeholder perspective (emphasis on social responsibility).

Teal Organization: Three major breakthroughs: self-management, wholeness, evolutionary purpose. Teal organizational model: Consortia, removing middle management (replaced with a coaching role), minimal cognitive departments, very few fox roles, team coordination and knowledge sharing. Self-management: The key to effective management is a system based on peer relationships, neither consensus nor hierarchy is needed. Wholeness: Teal organizations invite people to show their inner wholeness, to work with their “whole self”. Evolutionary purpose: Teal organizations are seen as having life and a sense of their own direction. Organizational members are invited to listen and understand what the organization wants to be and what purpose it serves, rather than trying to predict and control the future.

1.2.3. The unique characteristics of the teal organizational structure

• Self-managed Teams: Does this mean there are no managers? It could be a yes or a no. Teal organizations operate based on peer relationship principles. Each individual has decision-making power over their own work but also has the responsibility to collaborate with others to gain the support needed for success. Simply put, employees manage themselves, and there are no managers micromanaging their daily work.
• Open Dialogue: An environment is created where employees have the capacity and willingness to express themselves, thus bringing creativity, passion, and productivity.
• Evolutionary Organizational Purpose: Employees in teal organizations are dedicated to meeting the needs of end-users or customers. They prioritize and make decisions based on whether the results can help the company meet customer needs in the most effective way. Therefore, teal organizations are vibrant and constantly evolving, able to quickly respond to customer feedback in a rapidly changing market.

2. What is the difference between DAO and companies?

2.1. The difference between DAO and companies

2.1.1. Formation method

The biggest difference with companies is that DAO organizations are not organized together through law and contracts.

The core framework of DAO is based on the “community”. DAO itself generally does not have a formal leadership layer or hierarchy. Core decisions are made by community opinions through blockchain tools. Organization members more actively and voluntarily provide value in the community and receive incentives from the community token.

2.1.2. Trust method

The core advantage of DAO is that organizational rules are recorded and run by codes stored on the blockchain network, “Code is law’. On this basis, the threshold and process of establishing trust are eliminated, allowing organizational members around the world to be bound by the program Participate in the organization. “Building trust with technology” essentially greatly reduces the time and economic cost of establishing trust between organizational members and between members and the organization.

2.1.3. Information transparency

DAO’s information is transparent, most project codes are open source, and any user can obtain all the organization’s information. It can be said that compared to companies, DAO does not set information thresholds, which stimulates competition within the organization to the greatest extent. Competent and highly motivated members of the community will more easily gain community influence and support from community members and lead the development of business.

2.1.4. Goals, vision and participation

DAO is generally established with a certain purpose, but it does not necessarily focus on profit-making, which is completely different from a company. DAO is a free and open form. Users can join and leave at any time. At the same time, the identity boundary between participants and owners among DAO members disappears, and participants are generally also token holders. In addition to the rewards for participating in building projects, participants can also share the economic benefits brought by organizational development; and this unity of interests further strengthens organizational consensus.

This results in the fluidity of DAO personnel and resources being quite fast, but at the same time, the fluidity continuously screens members, strengthens the consensus of DAO itself, and develops well in this process. The growth rate of DAO is extremely fast, and participating members can get good economic benefits from the appreciation of the held tokens or the corresponding similar membership card NFT.

The essence of DAO lies in the new form of organization based on blockchain technology, incentivized by tokens, and quickly condenses and strengthens consensus through code. DAO’s efficiency improvement in organizational operation can be said to be revolutionary. Imagine a relatively mature company with 1,000 people, where possibly only a few core members and management will devote themselves to company operations with a master’s mentality, while other employees are more or less like a well-planned component, being able to complete their work on time and in quantity is already very good (this is related to the design of the company’s incentive mechanism, but the incentive mechanism itself is a cost); but for a DAO with a consensus, clear division of labor, and 1,000 stable members, everyone strives to actively contribute time, energy, and resources to the community, the vitality and ability that burst out can be unimaginable.

2.1.5. Organizational form

DAOs do not require a tight organizational structure, but instead make decisions in a decentralized manner. Unlike a company, DAO decisions are made collectively, not by the CEO or senior management, and rule changes and implementation are done in one step. In fact, members who own one or a predetermined number of DAO native tokens can propose changes to smart contracts, propose initiatives, investment ideas, etc. and vote on them, in ways that vary by specific DAO, thereby driving the development of the DAO.

We can see that no matter how flat the corporate governance structure is, the core purpose of corporate operations is still to maximize benefits for shareholders. To some extent, this inevitably leads to inconsistencies between the positions of employees and management, as well as inconsistencies in the subjective initiative of work investment. DAOs rely on the voluntary labor of their members based on a consensus, which leads to an exponential increase in the quality of labor.

Secondly, the actual owners of traditional companies are investors, and good companies often close the door to individual investors early on. If a company is successful, all value belongs to the investors, and workers can only get limited labor compensation. For DAOs, each member is both a worker and an owner of the institution. The distribution of benefits and value is guaranteed by code, and the decision-making and operation of the institution are completely transparent. In a sense, under the condition that tokens can be legally held, DAOs actually represent a more anti-capitalist organizational model.

2.2. Characteristics of DAO’s work

2.2.1. Voluntary commitment required

Since DAO stands for “Decentralized Autonomous Organization”, there is no specific authority. In a “company”, the “CEO” makes decisions and issues instructions to “employees”. In a “DAO”, there is no “CEO” in the first place. Of course, there is no concept of “employee” either. In a DAO, the pyramid structure is largely negated. The premise of working in a DAO is that “everyone actively shows their unique ability and contributes to the project”. You are always a “proposer” and “contributor”, and DAO needs your suggestions and contributions. It can be said that if you want to work in a DAO, there needs to be a high degree of fit between your project and your interests. When “what you can/do want to do” overlaps with “what DAO should do”, your contribution will be maximized. If you work for a DAO, no one will give you instructions. If you can contribute a lot, you will be recognized as a “core contributor”, and you will receive rewards and honors.

2.2.2. Pay based on performance regardless of age, gender or nationality

Another important characteristic of working in a DAO is that you can participate anonymously. In the past, when working for a company, it was necessary to verify one’s identity, but in DAO, this common sense is outdated. When you work for a DAO, there is no need to provide more personal information than necessary. Because DAO is anonymous, it is also pay-for-contribution. No matter your age, gender, or nationality, what matters is your contribution to the DAO. The prehistoric worker spirit, such as “going to work earlier than others, showing loyalty”, “being loyal to the boss”, has completely become a thing of the past. Welcome to a flat, performance-based society.

2.2.3. Rewards are usually tokens

Last but not least, the price of contribution is the “token issued by the project”. If you work for a company, we will “receive legal tender by bank transfer”. When working for a DAO, “receiving tokens in a cryptocurrency wallet” is common sense. Receiving legal tender as a reward can be considered a special case. The tokens received as a reward can be sold on the spot, or they can be held and managed as they are. If you think your project will grow, you might not sell it, but buy more instead. These tokens are usually so-called “governance (voting) tokens”. The more you contribute, the more governance tokens you get. You can reflect your intentions and interests in the important decisions of the project. Rewarding with tokens, creating a certain gameplay, is also an innovation point of DAO.

2.2.4. DAO governance model

Early DAOs generally carried out relatively centralized off-chain governance models, implementing weak constraints on the project team through tools; mature DAOs tend to on-chain governance, achieving completely decentralized voting and result execution.

On-chain governance implements decisions through smart contracts. The voting results of the community directly determine the direction of smart contract operation and are not affected by any subject.

The process of online governance can be understood as a series of code and smart contract execution processes that are on-chain, transparent, automatic, and cannot be edited, from the moment the proposal is uploaded to its implementation.

2.3. Summary of differences with companies

3. DAO real-world applications and challenges

3.1. Reality of DAO

If we go by the original definition in the Ethereum white paper, none of the DAOs today would count as a DAO.

The world is continuously evolving, and the term “Autonomous” has undergone a transformation from self-governance to autonomous operation (governance) in the real world, and it has undergone a reverse metamorphosis in the crypto world.

In reality, many DAO operators no longer insist on pursuing fully autonomous operation based on code, but instead leave more room for the social layer. The meaning of Autonomous has thus returned to the self-governance of the organization from automated governance. It may be because they feel that such non-automated DAOs are the mainstream that current technology can support. The Ethereum white paper also deleted the concept of DO in a subsequent update, further blurring the definition of Autonomous in DAO. With the popularity of the concept of network state in recent years, the Autonomous in DAO is increasingly returning to its meaning at the time of its birth in ancient Greece.

3.2. Advantages of DAO

• Open and transparent governance: DAO members vote on various proposals and encode the community governance rules derived from voting in the form of smart contracts on the blockchain. This is visible to all members, achieving open and transparent governance and breaking the information asymmetry between participants.
• Democratic, highly participatory voting: Traditional organizations generally make important decisions through the votes of a few people, while DAOs can allow all or most members to participate in some decisions and show the voting results to participants.
• Matching benefits based on the contributions of all participating parties: Relying on blockchain technology, members’ labor and rights and interests are accurately quantified and tracked, allowing members to obtain rights and interests that match their contributions.
• Rules are difficult to tamper with, reducing friction costs: As the saying goes, code is law. In DAO, unless the vast majority of members vote to change the rules, established rules cannot be tampered with. All parties should run the DAO according to the predetermined rules or the reached consensus. This not only reduces transaction costs and communication costs but also reduces the possibility of friction or disputes between members.

3.3. Challenges facing DAO

3.3.1. Challenge of “Code is Law”

The world is complex. Cryptographic technologies have brought more efficient and fair distribution of ownership and enhanced coordination capabilities. Communities of various cultures and interests have begun to use these technologies to organize and take collective action. Despite the widespread acceptance of the concept of “code is law” among participants in the crypto field, the world is too complex. How many business logics can run in smart contracts? Expecting a set of smart contract codes to handle all the work of an organization and continue to operate automatically is impossible for a long time. Many decisions and implementations in the community may be more complex and comprehensive, and cannot be fully constrained by code and smart contracts.

3.3.2. Inefficiency in decision-making

Members of DAOs are often distributed around the world, with wide timezone distribution and high degree of internationalization. If the community needs to make decisions quickly and execute them, the entire voting process plus the compilation and upload of executable code may take too long and be ineffective.

Currently, most DAOs adopt a one-coin-one-vote decision-making method, but this decision-making method usually requires each member to participate in every decision, which may make the entire decision-making process less efficient. In addition, the following problems also arise: (1) Members are less willing to participate in direct decision-making. Not all proposals are closely related to the interests of each member. Therefore, it is impossible to ensure that each member spends a lot of time to understand the proposals and make decisions; (2) The knowledge, social experience, and professional insights of the voting members may not be enough to support them in making correct votes, and the voices of professionals may also be drowned out because they hold fewer governance tokens; (3) A DAO may generate an increasing number of proposals during its operation, and members may not have the energy to participate in each decision-making process. To reduce members’ management burden and prevent them from feeling overwhelmed by the flow of information, it’s vital to categorize proposals by their field of specialization and urgency. This approach also helps to avoid the negative feelings associated with FOMO (Fear of Missing Out).

3.3.3. Security issues in technology

Code vulnerabilities can cause security issues, even resulting in huge losses for DAOs. In 2016, the famous The DAO project encountered a serious crisis before it even landed, causing the first large-scale governance of the Ethereum network, leading to a hard fork of Ethereum.

3.3.4. Unclear laws and regulations

From a practical perspective, there is still a problem, that is, where DAOs are legally applicable is not clear. For example, DAOs often create a “community wallet.” But the ownership of this wallet cannot be defined. When income accumulates in the community wallet, who should pay the taxes that should be levied? These are all inevitable topics in the development process of DAOs.

3.3.5. Insufficient tools for operating DAOs

By early 2022, when you really try to run a DAO, you will realize the challenge of a lack of tools.

Although various tools have been developed, the problem still lies in whether DAO participants can fully utilize these tools. For example, implementing mechanisms such as “visualizing the contributions of DAO members and automatically distributing tokens” might be a daunting task. Manpower or bottlenecks will inevitably appear, and we will abandon autonomy to decentralize. In addition, it is regrettable that many projects currently have to use centralized services such as Discord and Google Docs for communication.

3.3.6. Barriers to cryptographic knowledge and common sense

Minimum crypto-related knowledge is required to participate in the DAO. However, for most people, “Metamask” is an alien concept. Even if they are interested in a DAO, most users will be frustrated because they cannot fund Metamask and connect the funds to the required chain.

“Working in a DAO” is very different from “working in a company.” For those who are used to a pyramid-style common sense work style, this common sense will also become the main obstacle to participating in DAO. Therefore, it can be said that it is very difficult to create a DAO and Web3 startup from many countries.

3.3.7. Lack of relevant talents

The construction and development of DAO is not an exclusive stage for a few people (technical personnel). The design of the entire mechanism behind the operation of DAO also requires the support of professional knowledge in economics, sociology, political science and other related fields. At present, the main participants of DAO are still mainly based on technical background, the overall top-level design and detailed design still need to be improved. It cannot completely map all the existing functions and needs of the real society, nor can it completely solve the problems arising from the company’s decision-making mechanism.

3.3.8. Decentralization of oligarchy - can’t just shout slogans

Although traditional blockchain projects shout the slogan of “decentralization” every day, the end result is mostly “decentralize others, and make themselves the new center”. The appearance of “whales” means that the control of the project is firmly in the hands of a few people, and the majority of the public can only become “speculators” under the control of the dealer. Over time, the public loses interest in the project and becomes silent.

The emergence of DAO is intended to change this status quo, traditional industry projects need “chain reform”, and blockchain projects need “DAO reform”. The focus of this reform mainly lies in the need for a “fairer” economic model, a “more reasonable” control layer (Access Control Layer) logic, and a “more transparent” financial and decision-making process system.

“De-oligarch” if shouted as a slogan is pressure-free, but the “de-oligarch” behavior itself is even contrary to human nature, because “everyone hates oligarchy, and everyone wants to become an oligarch”. The real charm of DAO lies in unifying countless scattered individuals into a whole, thereby realizing organizational value. People in DAO organizations should “enjoy it” rather than “satisfy control desire”.

In the future DAO world, everyone’s life will be bound to a large number of DAO organizations. Who wants to live in a “dictatorship” society?

3.3.9. DAO governance must adopt company logic

When I see many people “complacently” making money while participating in DAO projects, “swearing” after losing money, ignoring the value concept of DAO itself and focusing on speculation, it reminds me of the lottery shop at my doorstep. As soon as evening came, it was crowded with people. Some were in high spirits, some were sighing. But none of them was unwilling to leave for a long time. It can be said that “Welfare Lottery” has similarities across the ages with many current DAO projects.

This is absurd, yet is reality. DAO provides more possibilities for the ecosystem and has real application value. Therefore, we cannot limit our vision to hype, in order to eventually get higher returns (of course, I don’t oppose speculation when the signal is clear, because in the early stage of a new track, there will be a lot of arbitrage space brought by cognition difference and information difference).

I believe that the governance of DAO should be more consistent with the logic of corporate governance rather than the logic of traditional blockchain projects. The huge difference between the two lies in the degree of refinement of the division of labor and the coordination of the organization.

I’m sure everyone has worked in a company or has set up their own company, then you must know that for a healthy company there will be three relatively complete systems: one is the business system, one is the decision management system, and the other is the financial system.

No company can grow and become stronger on the premise of missing these three points. This is because after the organization becomes larger, the friction costs of business, decision-making, and financial management will become very large. Once it exceeds the boundary, the efficiency will be quite low.

Among traditional blockchain projects, those that can become stronger are mainly divided into two categories. One is platform-based projects supported by actual companies. For example, Ethereum’s Ethereum Foundation and Polkadot’s Parity/Web3 Foundation; the other is a product that only focuses on a certain technology implementation or a specific function, such as Zcash. But in the field of blockchain, in the future we need an entity that is completely decentralized and autonomous and can carry huge value. This is DAO.

The business system, decision-making system, and financial system of traditional companies are benchmarked to DAO, which are the proposal system, voting system, and treasury, respectively. Currently, leading DAO solution providers such as Gnosis and Aragon are developing underlying solutions, and the most mainstream is the Gnosis Safe + Snapshot combination. Therefore, if some projects claim to become a huge decentralized organization and these business frameworks are not visible, then it is mostly a scam.

3.3.10. Coordination and unification of DAO’s vague goals

Before we start this discussion, we first need to define what is a vague goal and what is a definite goal. In fact, these two concepts are relative.

For example, when I want to eat a McDonald’s Filet-O-Fish burger, that’s a definite goal, while wanting to eat at McDonald’s is a vague goal (not knowing what to eat). When I want to eat at McDonald’s is a definite goal, then wanting to be full is a vague goal. The enlightenment brought by this dialectical relationship can interpret what is “DAOization”, that is, the vagueness of governance goals, and determine the degree of vagueness.

These two behaviors are equally crucial and determine how much benefit or hidden danger DAO can bring on the basis of the original mechanism, which is also the process of coordinating and unifying vague goals.

Take a specific example. If I want to establish an investment-type DAO organization, then the top layer of my vague goal is to obtain track dividends (that is, to make money). Although this vague goal has the strongest freedom, the difficulty of governance is the greatest. Only those with sufficient background can hold it (BITDAO is such an organization).

Therefore, I certainly can’t do it. So I can only lower the vague goal by one level, for example, I want to create a DAO that speculates on NFTs. Given my sufficient investment (being cut) experience, I think I can manage it well, so I have set my DAO’s vague goal.

After setting the vague goal, the more important point is that I have to resolutely maintain my vague goal (do not beat around the bush), and attract more like-minded people to participate. At the same time, I have to believe that the community can move towards this goal on its own.

Many DAO organizations start with good intentions, but due to the founder’s dominance and fondness for micromanagement (excluding dissidents), they eventually lead to the decline of DAO. Founders or teams only need to protect their directions and strategies, and not interfere with tactical matters. More than 70 years ago, we also had such a dear brother in China, who finally went to Taiwan.

When I first came into contact with DAO, I had a question. I think that a bunch of scattered individuals would find it difficult to coordinate and unify towards a definite goal, let alone an uncertain goal.

Later, I remembered some interesting stories mentioned in Kevin Kelly’s “Out of Control” that I read in college: For lower animals like bees or ants, they can show amazing consistency under the premise of scattered organizational coordination (signal transmission is point-to-point) and vague goals (get some honey or find something to eat). Although it is difficult for us to describe or deduce the inherent principle mathematically, it can indeed be achieved. Therefore, we should believe that under the governance of the vague goals of DAO organizations, consensus can eventually be reached and continue to develop towards the goal.

3.4. Legal Challenges of DAO

3.4.1. “Fully wrapped” DAO, also known as an automated company

A DAO that can be ‘fully wrapped’ is neither decentralized nor autonomous.

From a state perspective, any DAO that can be ‘fully wrapped’ by one or several legal entities is no different from traditional enterprises. By designing a comprehensive corporate structure, DAO subjects itself to state management. The state can decide to ignore (or revoke) the legal personality or pierce the corporate veil, making DAO contributors liable.

This is why all the carefully crafted DAO LLC laws from Wyoming to the Marshall Islands are doomed to fail. DAOs face legal risks because they are incompatible with the national governance protocols behind today’s legal and financial systems. DAO is not backwards compatible. Legislative patches may fix some fragmentation issues, but any solution that relies on centralized state actors will inevitably sacrifice the values ​​that decentralization and autonomy represent.

To be clear: there’s nothing wrong with traditional companies, or with building your company on traditional legal financial protocols! Not all companies should become DAOs. In terms of executing vision, bringing products to market, and coordinating complex actions across time and space, hierarchical command structures may be far more effective than democratic communities. Delaware’s corporate law, honed over decades, has become one of the best corporate regulatory systems in the world, enabling the most successful economy in history. There’s no shame in playing this game.

Some traditional businesses call themselves DAOs because they automate their administrative and governance intelligence through tokenization and smart contracts. When a manufacturing company automates its assembly line by replacing workers with robots, this in itself does not constitute a reason to modify the company’s organizational structure. The same logic applies to software companies trying to automate their work by replacing lawyers and accountants with smart contracts. Because these companies are neither decentralized nor autonomous in nature, I prefer to call them automated companies (this is consistent with the decentralized organization Vitalik once described, and in most cases can be called “traditional companies in the guise of decentralized applications”). However, no matter how they are referred to, they do not give rise to fundamentally new legal issues, and existing corporate law can solve everything.

Therefore, fully wrapping a DAO in one or more entity structures may be the best way for key contributors (such as founders, CEOs, or high-profile main developers) to maintain effective control over the protocol or finances, or to interact with the outside world on behalf of the DAO by acquiring assets or hiring employees. Proven corporate entity structures provide the best protection against attempts to hold these key contributors personally liable for the DAO’s actions.

3.4.1. Ecosystem: Corporations as members of DAO

If these members, compared to other DAO members, do not enjoy any extra privileges or powers, then decentralized autonomous companies can welcome corporations to become their members without sacrificing decentralization or autonomy. From the perspective of DAO’s governance contract, company members are the same as other members. Drawing from the experience of C-Corps, I call these entities D-Corps (I welcome a better name).

The most common form of D-Corp is a DevCo company, that is, a development company that employs the core developer team. In fact, most DAOs that require professional developers to drive them do not start as a DAO, they usually originate from regular tech companies, and most tech companies are Delaware C Corporations or Limited Liability Companies.

Once the DAO architecture is built and DAO emerges, a key choice must be made: whether the development company will become the corporate wrapping layer of DAO.

If the answer is ‘yes’, you might have an automated company or the aforementioned traditional company.

If not, the development company should transfer governance responsibilities to the DAO from both a technical and legal perspective. The key steps are as follows: (1) isolate the assets of the development company from the DAO assets (2) cleanly transfer control of the DAO governance contract from the development company and its employees to the DAO and its members.

After these steps, the development company can (and often does) continue to provide services to the DAO as a primary service provider, with fees paid from the DAO treasury according to the contract provided by the DAO. Similarly, the DAO can also welcome other companies to become members; we see cases of this where the DAO needs certain key services (such as legal entity structure), but individual operating members cannot provide this service independently. Therefore, they either bind with the corporate entity that employs them or form a D-Corp with branches of DAO members. In this way, the organic ecosystem of D-Corps can come and go as members without sacrificing decentralization and autonomy.

The ultimate goal is that each D-Corp is an alternative service provider to the DAO. To avoid centralization risks, well-designed architecture and governance structures are crucial here. If development companies continue to enjoy critical control over the DAO’s finances and de facto veto power over governance votes, then there will be no real DAO (which is good, of course, but it should be a decision made with eyes wide open).

Bridge-Corps are another type of DAO member, they are called bridge corporations because they allow DAOs to connect to traditional lawful financial protocols, thus fully utilizing traditional applications that cannot be found on-chain. They serve a very narrow, limited purpose and can be dissolved at any time when no longer needed. Unlike corporate DAO members, these entities are legally independent, although in practice they are subject to a series of binding DAO voting obligations related to their own limited tasks.

Very few DAOs start as decentralized organizations, let alone true autonomy. Usually, starting with centralization and going through a process of decentralization is easier. Bridge corporations are key to effective decentralization, during this transition stage, corporations need to take on tasks such as opening bank accounts, signing contracts, hiring employees, paying taxes, going to court (and many other functions). Early on, a single entity can run all the above functions, but the requirements of decentralization mean that this can only be a stopgap measure. By distributing assets and risks to multiple entities through a series of bridge corporations, and ensuring that there is no place for malicious actors to act. As on-chain solutions appear and are adopted by the DAO to solve the same problems, bridge corporations can retire after accomplishing their mission.

Foundation companies are the most common tool for bridge companies and are the most barebone legal entity that DAO can use to open accounts and sign service contracts. Other entities are also gaining traction, such as Guernsey Purpose Trust companies, which hold assets such as intellectual property, and British Virgin Islands Limited companies, which can issue tokens.

3.4.1. De-corporation: the “true” DAO

The purest and most legally risky entity structure for a DAO is to have no corporate structure at all.

DAO is inherently an anarchic concept. The “autonomous” in DAO does not mean “automated,” but literally “autonomous”. Autonomy is an anarchic term and concept, as seen in the “autonomous zones” established by anarchists in the Pacific Northwest in the summer of 2020, Hakim Bey’s “temporary autonomous zones,” and similar uses of the concept. A true DAO does not depend on state charters or adhere to a specific set of narrow legal definitions. A true DAO should not dissolve just because the Secretary of State of Wyoming thinks it should. —— Gabe Shapiro | Wyoming’s Legal DAO-saster

The formless DAO is the ultimate ideal state in a permissionless order, a distributed enterprise coordinated by incentive mechanisms. In terms of scale, DAOs of DAOs provide stability through composability, avoiding the risk of organizational rigidity. Contributors and organizations can seamlessly shift resources and talent where needed.

This is the promise of a mature DAO: to form a stable, legitimate order without the need for a coercive intermediary.

Today, few DAOs can achieve this ideal state. Almost all formless DAOs will be wrapped or ecosystem-based as a temporary protection mechanism against legal risks. There is little legal precedent for formless DAOs. A truly decentralized and truly autonomous organization will not have its destiny strangled by the throat. No person or entity will be coerced, and there will be no obvious channels for outsiders to command and control the resources of the DAO. In other words, centralization and governance behaviors themselves are the most significant sources of legal risks for DAOs that cannot be ignored, leaving a clear target for coercive market actors such as litigators, regulators, and banks.

If governance is a source of risk, then abolishing governance can reduce risk. Several projects are adopting this approach, such as Reflexer (see their ‘de-governance’ process, and their view as ‘ungoverned’ from the start). These project experiments are of great interest to lawyers, who are hoping to generalize from these experiences.

For fully wrapped DAOs, corporate law can almost completely solve their legal problems. For DAOs without a legal entity, the situation is exactly the opposite. We still have a long way to go, but what is increasingly clear is that dispersing rights to DAO resources, automatically eliminating human discretion, remains one of the best ways for DAOs to achieve autonomy. A consensus is forming around ‘legal decentralization’, an emerging legal practice that helps DAOs reduce legal risks and achieve these goals.

Even after achieving decentralization, autonomy, or ‘de-governance’, risks still exist. After all, the taxman must have his cut. Because a true DAO has natural immunity, the target may shift from the DAO to the DAO contributors themselves—bringing us back to the issue of limited liability discussed in the first part.

Fortunately, our community is rapidly iterating solutions to protect contributors who have not chosen wrappers, D-Crops, and bridge architectures.

4. DAO future prospects

The original definition of DAO represents an ideal, a hope for technology empowerment. Although it is not achievable at present, it is a beautiful and pure pursuit.

The hundreds of DAOs that have emerged now have sacrificed the robustness at the technological level and compensated with the cultural level, allowing community members with common values to organically unite. Through blockchain technology, they conduct more powerful coordination, incentives, and ownership distribution, thereby creating many modes and achievements that did not exist in this world before. This is also a blessing of the times.

My past view was that with the development of encryption technology and the improvement of infrastructure, DAO will gradually reduce its dependence on people. Perhaps today we are still using the manual multisignature method of gnosis to manage the community treasury. Tomorrow we may connect the proposal system and the treasury system to achieve the automation of allocating funds. The day after tomorrow, we may put the roles in DAO on the chain in some way to achieve the automation of key role permission allocation. The automated system gradually eats away at human roles, and eventually, at some point, DAO shifts from depending on people to run to relying entirely on code to run.

But as I observed more projects and the development and changes of different DAOs over a few years, I started to feel that the current community DAO and the envisaged automatically running DAO should be fundamentally different species. They will follow completely different paths in the future, rather than merging into one at some point.

Human-centric DAO indeed has a lot of space to improve automation to improve efficiency, coordination, and increase trust, but its value creation body is always the community, each different individual in the community. People are always important.

And the envisaged DAO that runs entirely on code, its starting point might be something else, like – Autonomous World

4.1. AW (Autonomous World)

The concept of “Autonomous World”, also often abbreviated as “AW”, was first proposed by 0xPARC in 2022. After a year of fermentation, it has begun to be discussed more and more. The autonomous world is a relatively complex concept. Many people regard it as a concept in the direction of the fully on-chain game, but I don’t think so. This is a crossroads of multiple fields such as technology, culture, politics, and philosophy.

In the concept of Autonomous World, the world does not specifically refer to the place where humans live, but a container, a place that contains rules and narratives. The world where humans live is of course a world, but “The Three Body Problem” is also a world, existing in books, Bilibili, Tencent videos, and people’s minds. “Legend of Sword and Fairy” and “Lord of the Rings” are also worlds. The world does not necessarily have to do with stories. For example, chemistry can also be considered a world. It also provides a container and has its own rules.

After briefly sorting out the concept of the world, let’s see what the autonomous world is. In definition, 0xParc believes that the autonomous world is a world “with a blockchain bottom layer”.

4.2. Rules

Autonomous Worlds have hard diegetic boundaries, formalized introduction rules, and no need for privileged individuals to keep the World alive.

This sentence describes three core characteristics of an “autonomous world”:

1. Hard narrative boundaries: This means that this world has a set of fixed and immutable benchmark rules. They do not change with time or circumstances, providing a kind of stability for the world.

2. Formalized introduction rules: This indicates that there are clear and fixed rules for entering and participating in this world. These rules include how to become a part of this world and how to interact within it.

3. No need for privileged individuals to maintain its existence: This world is self-sustaining, not dependent on any specific individual or organization for maintenance or management.

From this perspective, the Autonomous World is closer to the original definition of DAO - it runs autonomously under preset rules, does not depend on a certain individual, and does not depend on soft rules or similar political coordination processes. In other words, DAO itself is a form of Autonomous World.

What is the appeal of such an autonomous world? I think it is objectivity.

The real world we live in is objective, no one owns this world, and this world does not exist because of a certain person or organization. The basic laws that maintain the existence and operation of this world are the laws of physics. Everyone can exert influence on this world under the same physical laws, and make this influence become an objective fact in this world.

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1. This article is reprinted from [mirror], the original title is “Dig deep, what exactly is DAO?”, the copyright belongs to the original author [0x00pluto], if you have any objection to the reprint, please contact Gate Learn Team, the team will handle it as soon as possible according to relevant procedures.

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