What Is a Decentralized Autonomous Organization (DAO)? How Is It Run and Who Controls It?
A decentralized autonomous organization (DAO) is a community that runs a project or shared money through rules written in smart contracts instead of a traditional board. Decisions are made by a vote of governance token holders.
How does it work?
- The core rules are written in a smart contract on a blockchain.
- The organization owns a treasury that is spent only by member decision.
- Members submit proposals, then vote in proportion to the governance tokens they hold.
- When quorum is met the decision is executed automatically or by signers.
What is it used for?
Some DeFi protocols manage changes to their fees and rules through a DAO, investment groups use the format to pool money, and there are communities for fundraising or buying shared assets.
How is it different from a traditional company?
Transparency is higher because votes and the treasury are visible on-chain, and participation is in theory open to everyone. But that does not mean there is no power: whoever holds more tokens has a bigger voice.
Risks
- Voting power concentrated in a few large holders.
- Smart contract bugs can allow the treasury to be stolen.
- Low participation lets a few decide for everyone.
- Legal uncertainty in many countries about members' liability.
Before you take part
Read the governance document, look at token distribution, and check that contracts were audited. Do not treat a governance token as a guaranteed investment. See also what is DeFi.