Decentralized autonomous organization

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A decentralized autonomous organization (DAO), sometimes called a decentralized autonomous corporation (DAC), [a] [1] is an organization managed in whole or in part by decentralized computer program, with voting and finances handled through a blockchain. [2] [3] [4] In general terms, DAOs are member-owned communities without centralized leadership. [5] [6] The precise legal status of this type of business organization is unclear. [7] [8]

Contents

A well-known example, intended for venture capital funding, was The DAO, which amassed 3.6 million ether (ETH)—Ethereum's mining reward—then worth more than US$70 million in May 2016, and was hacked and drained of US$50 million in cryptocurrency weeks later. [9] The hack was reversed in the following weeks, and the money restored, via a hard fork of the Ethereum blockchain. Most Ethereum miners and clients switched to the new fork while the original chain became Ethereum Classic.

The governance of DAOs is subject to controversy. As these typically allocate and distribute tokens that grant voting rights, their accumulation may lead to concentration of power. [10]

Background

Although the term may be traced back to the 1990s, it was not until 2013 that it became more widely adopted. [1] Although some argue that Bitcoin was the first DAO, the term is only understood today as organizations deployed as smart contracts on top of an existing blockchain network. [1]

Decentralized autonomous organizations are typified by the use of blockchain technology to provide a secure digital ledger to track digital interactions across the internet, hardened against forgery by trusted timestamping and dissemination of a distributed database. [2] [3] [11] This approach eliminates the need to involve a mutually acceptable trusted third party in any decentralized digital interaction or cryptocurrency transaction. [3] The costs of a blockchain-enabled transaction and of the associated data reporting may be substantially offset by the elimination of both the trusted third party and of the need for 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. [2] : 42  [3] In theory, a blockchain approach allows multiple cloud computing users to enter a loosely coupled peer-to-peer smart contract collaboration. [2] : 42  [12]

Vitalik Buterin proposed that after a DAO is launched, it might be organized to run without human managerial interactivity, provided the smart contracts are supported by a Turing-complete platform. Ethereum, built on a blockchain and launched in 2015, has been described as meeting that Turing threshold, thus enabling such DAOs. [2] [13] [14] Decentralized autonomous organizations aim to be open platforms through which individuals control their identities and their personal data. [15]

Governance

DAO governance is coordinated using tokens or NFTs that grant voting powers. Admission to a DAO is limited to people who have a confirmed ownership of these governance tokens in a cryptocurrency wallet, and membership may be exchanged. Governance is conducted through a series of proposals that members vote on through the blockchain, [16] and the possession of more governance tokens often translates to greater voting power. [10] Contributions from members towards the organizational goals of a DAO can sometimes be tracked and internally compensated. Inactive holders of governance tokens can be a major obstacle for DAO governance, [4] which has led to implementations allowing voting power to be delegated to other parties.

Issues

Social

Tokens that grant voting powers are often not used to vote. [10] Inactive or non-voting shareholders in DAOs often disrupt the organization's possible functionality. [4]

Another risk is the concentration of power in the case that individuals accumulate large amounts of tokens that grant voting power. Concentration of these tokens defeats the ambitions to distribute governance power. In a study of decentralized finance DAOs, the distribution of tokens was shown to be highly concentrated among a small population of holders. [10]

The precise legal status of this type of business organization is generally unclear, [11] and may vary by jurisdiction. On 1 July 2021, Wyoming became the first US state to recognize DAOs as a legal entity. [17] American CryptoFed DAO became the first business entity so recognized. [18] Some previous approaches to blockchain based companies have been regarded by the U.S. Securities and Exchange Commission as illegal offers of unregistered securities. [7] [19] Although often of uncertain legal standing, a DAO may functionally be a corporation without legal status as a corporation: a general partnership. [20] Known participants, or those at the interface between a DAO and regulated financial systems, may be targets of regulatory enforcement or civil actions if they are out of compliance with the law. [20]

Security

A DAO's code is difficult to alter once the system is up and running, including bug fixes that would be otherwise trivial in centralized code. Corrections to a DAO require writing new code and 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. [21]

In 2016, a specific DAO, "The DAO", set a record for the largest crowdfunding campaign to date. [22] [23] Researchers pointed out multiple problems with The DAO's code. The DAO's operational procedure allowed investors to withdraw at will any money that had not yet been committed to a project; the funds could thus deplete quickly. [4] Although safeguards aimed to prevent gaming shareholders' votes to win investments, [7] there were a "number of security vulnerabilities". [24] These enabled an attempted large withdrawal of funds from The DAO to be initiated in mid-June 2016. [25] [26] On 20 July 2016, the Ethereum blockchain was forked to bail out the original contract.

DAOs can be subject to coups or hostile takeovers that upend its voting structures especially if the voting power is based upon the number of tokens one owns. An example of this occurred in 2022, when one individual collected enough tokens to give themselves voting control over Build Finance DAO, which they then used to drain the DAO of all its cryptocurrency. [27]

List of notable DAOs

This is a dynamic list and may never be able to satisfy particular standards for completeness. You can help by adding missing items with reliable sources.
NameTokenUse casesNetworkLaunchStatus
AssangeDAOJUSTICEPurchased Clock, an NFT artwork by Pak, to fund legal defense of WikiLeaks' founder Julian Assange Ethereum February 2022 [28] Operational
ConstitutionDAO PEOPLEPurchasing an original copy of the Constitution of the United States Ethereum November 2021 [29] Defunct [30]
Internet ComputerICPDecentralized Governance, Protocol Upgrades, Community control of software Internet Computer May 2021 [31] Operational
FreeRossDAO [32] FREEClemency for Ross Ulbricht, criminal justice reform advocacy organization Ethereum December 2021 [33] Defunct by May 2023 [34]
MakerDAO [35] MKR Dai (cryptocurrency) stablecoin maintainer and regulator, lender Ethereum December 2017Operational
MoonDAOMOONEYPurchasing two seats on a Blue Origin flight to space and funding research to accelerate lunar settlement. [36] Ethereum December 2021 [37] Operational
PleasrDAOPEEPSA group of art collectors who own the sole copy of the Wu Tang Clan album Once Upon a Time in Shaolin [38] Ethereum April 2021Operational
The DAO DAOVenture capital Ethereum April 2016Defunct late 2016 due to hack [39]
Uniswap UNI Decentralized exchange (DEX), Automated Market Making (AMM) Ethereum & CeloNovember 2018Operational

See also

Notes

  1. ↑ Depending on English dialect, it may also be spelled decentralised autonomous organisation. The terms decentralized autonomous company, distributed autonomous organization, etc., have also been used.

Related Research Articles

A smart contract is a computer program or a transaction protocol that is intended to automatically execute, control or document events and actions according to the terms of a contract or an agreement. The objectives of smart contracts are the reduction of need for trusted intermediators, arbitration costs, and fraud losses, as well as the reduction of malicious and accidental exceptions. Smart contracts are commonly associated with cryptocurrencies, and the smart contracts introduced by Ethereum are generally considered a fundamental building block for decentralized finance (DeFi) and non-fungible token (NFT) applications.

<span class="mw-page-title-main">Cryptocurrency</span> Digital currency not reliant on a central authority

A cryptocurrency, crypto-currency, or crypto is a digital currency designed to work through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it.

<span class="mw-page-title-main">Ethereum</span> Open-source blockchain computing platform

Ethereum is a decentralized blockchain with smart contract functionality. Ether is the native cryptocurrency of the platform. Among cryptocurrencies, ether is second only to bitcoin in market capitalization. It is open-source software.

A blockchain is a distributed ledger with growing lists of records (blocks) that are securely linked together via cryptographic hashes. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data. Since each block contains information about the previous block, they effectively form a chain, with each additional block linking to the ones before it. Consequently, blockchain transactions are resistant to alteration because, once recorded, the data in any given block cannot be changed retroactively without altering all subsequent blocks and obtaining network consensus to accept these changes. This protects blockchains against nefarious activities such as creating assets "out of thin air", double-spending, counterfeiting, fraud, and theft.

<span class="mw-page-title-main">The DAO</span> Early decentralized business based on the Ethereum blockchain

The DAO was a digital decentralized autonomous organization and a form of investor-directed venture capital fund. After launching in April 2016 via a token sale, it became one of the largest crowdfunding campaigns in history, but it ceased activity after much of its funds - in the form of US$ exchanged for "Ether-crypto coins" - were taken in a hack in June 2016.

A decentralised application is an application that can operate autonomously, typically through the use of smart contracts, that run on a decentralized computing, blockchain or other distributed ledger system. Like traditional applications, DApps provide some function or utility to its users. However, unlike traditional applications, DApps operate without human intervention and are not owned by any one entity, rather DApps distribute tokens that represent ownership. These tokens are distributed according to a programmed algorithm to the users of the system, diluting ownership and control of the DApp. Without any one entity controlling the system, the application is therefore decentralised.

<span class="mw-page-title-main">Ethereum Classic</span> Blockchain computing platform

Ethereum Classic is a blockchain-based distributed computing platform that offers smart contract (scripting) functionality. It is open source and supports a modified version of Nakamoto consensus via transaction-based state transitions executed on a public Ethereum Virtual Machine (EVM).

<span class="mw-page-title-main">Cardano (blockchain platform)</span> Public blockchain platform

Cardano is a public blockchain platform. It is open-source and decentralized, with consensus achieved using proof of stake. It can facilitate peer-to-peer transactions with its internal cryptocurrency, ADA.

A cryptocurrency wallet is a device, physical medium, program or an online service which stores the public and/or private keys for cryptocurrency transactions. In addition to this basic function of storing the keys, a cryptocurrency wallet more often offers the functionality of encrypting and/or signing information. Signing can for example result in executing a smart contract, a cryptocurrency transaction, identification, or legally signing a 'document'.

Cryptocurrency and crime describe notable examples of cybercrime related to theft of cryptocurrencies and some methods or security vulnerabilities commonly exploited. Cryptojacking is a form of cybercrime specific to cryptocurrencies used on websites to hijack a victim's resources and use them for hashing and mining cryptocurrency.

<span class="mw-page-title-main">Non-fungible token</span> Unique and non-interchangeable data

A non-fungible token (NFT) is a unique digital identifier that is recorded on a blockchain and is used to certify ownership and authenticity. It cannot be copied, substituted, or subdivided. The ownership of an NFT is recorded in the blockchain and can be transferred by the owner, allowing NFTs to be sold and traded. Initially pitched as a new class of investment asset, by September 2023, one report claimed that over 95% of NFT collections had zero monetary value.

<span class="mw-page-title-main">Tron (blockchain)</span> Blockchain computing platform

Tron is a decentralized, proof-of-stake blockchain with smart contract functionality. The cryptocurrency native to the blockchain is known as Tronix (TRX). It was founded in March 2014 by Justin Sun and since 2017 has been overseen and supervised by the TRON Foundation, a non-profit organization in Singapore, established in the same year. It is open-source software.

Decentralized finance provides financial instruments and services through smart contracts on a programmable, permissionless blockchain. This approach reduces the need for intermediaries such as brokerages, exchanges, or banks. DeFi platforms enable users to lend or borrow funds, speculate on asset price movements using derivatives, trade cryptocurrencies, insure against risks, and earn interest in savings-like accounts. The DeFi ecosystem is built on a layered architecture and highly composable building blocks. While some applications offer high interest rates, they carry high risks. Coding errors and hacks are a common challenge in DeFi.

<span class="mw-page-title-main">Dai (cryptocurrency)</span> Stablecoin cryptocurrency

DAI is a stablecoin token on the Ethereum blockchain which uses smart contracts designed to control supply to keep its value as close to one United States dollar as possible. DAI is maintained and regulated by MakerDAO, a decentralized autonomous organization composed of the owners of its governance token, MKR, who may propose and vote on changes to certain parameters in its smart contracts.

<span class="mw-page-title-main">Uniswap</span> Decentralized cryptocurrency exchange

Uniswap is a decentralized cryptocurrency exchange that uses a set of smart contracts to create liquidity pools for the execution of trades. It is an open source project and falls into the category of a DeFi product because it uses smart contracts to facilitate trades instead of a centralized exchange. The protocol facilitates automated transactions between cryptocurrency tokens on the Ethereum blockchain through the use of smart contracts. As of December 2024, Uniswap is estimated to be the second largest decentralized exchange and the seven-largest cryptocurrency exchange overall by daily trading volume.

<span class="mw-page-title-main">Solana (blockchain platform)</span> Public blockchain platform

Solana is a blockchain platform which uses a proof-of-stake mechanism to provide smart contract functionality. Its native cryptocurrency is SOL.

<span class="mw-page-title-main">Polygon (blockchain)</span> Blockchain and cryptocurrency

Polygon is a blockchain platform which aims to create a multi-chain blockchain system compatible with Ethereum. As with Ethereum, it uses a proof of stake consensus mechanism for processing transactions on-chain. Polygon's native token is POL, an ERC-20 token which allows for compatibility with other Ethereum cryptocurrencies. It is operated by Polygon Labs.

Tokenomics is a term that refers to the study and analysis of the economic aspects of a cryptocurrency or blockchain project, with a particular focus on the design and distribution of its native digital tokens. The term is a portmanteau of words token and economics.

The Build Finance DAO was a decentralized autonomous organization (DAO), a venture based on blockchain technology. It was the subject of a 2022 hostile takeover by a member who amassed enough votes to pass a motion that allowed them to liquidate the DAO's cryptocurrency holdings and flood the market with new tokens.

Aave, formerly known as ETHLend, is an open-source decentralized finance (DeFi) protocol which was initially built on the Ethereum blockchain and released in 2020. It is one of the largest cryptocurrency liquidity protocols. The Aave Protocol uses smart contracts to automate processes, including distributing funds and handling collateral.

References

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  19. ↑ "SEC Charges Bitcoin Entrepreneur With Offering Unregistered Securities". US Securities and Exchange Commission. 2014-06-03.
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