DAO is a revolution in decentralized governance: A comprehensive guide with practical examples

DAO — a decentralized autonomous organization that represents a new model of governance and funding based on smart contracts. Today, DAOs are not just a theoretical concept but a functioning system that is changing how people organize, invest, and make collective decisions in the digital world. Since 2020, when the first DAOs gained widespread recognition, this revolutionary organizational form has become one of the most commonly used terms in the crypto community, attracting attention from both retail investors and large institutions.

What really makes DAO revolutionary?

Unlike traditional organizations where power is concentrated in management and the board of directors, a DAO is a model where every community member has voting rights and influence over decisions. Billionaire Mark Cuban called the DAO concept “the perfect blend of capitalism and progressivism,” emphasizing that it uses a fully transparent and decentralized approach that does not require trust in a central authority.

DAOs operate on the basis of smart contracts — automated programs on the blockchain that execute community decisions without human intervention. Token holders gain voting rights over how funds are used, which projects are funded, and how the platform develops. This makes DAOs especially attractive for those looking to pool capital to support blockchain projects and innovations while avoiding traditional corporate structures.

How decentralized organizations are transforming the financial industry

Unlike venture funds, where investment decisions are made by a few experienced investors, DAOs allow control to be distributed among a larger community. Developers create DAOs to give true control to users after project launch, ensuring decentralization of governance over various dApps — from decentralized exchanges to lending platforms and gaming.

DAO members can submit proposals, which are then put to a vote during a specified period. Every vote counts, decisions are made collectively, and the process is fully transparent. The built-in treasury is managed by the community through voting, ensuring transparency of expenses and fair resource allocation. This removes intermediaries and shifts the power balance in favor of the majority.

How DAOs work in practice: from Uniswap to Decentraland

Uniswap, the largest decentralized exchange on the Ethereum network, demonstrates how a DAO functions in reality. Its native token UNI (current price: $3.41, down 0.08% in the last 24 hours) was launched in September 2020. Developers issued 1 billion UNI tokens, of which 60% were distributed among community members, 21.266% to the team and future employees, 18.044% to investors, and 0.69% to advisors.

UNI holders gained real power. They can vote on infrastructure development, protocol fee changes, and other key decisions. Recently, the Uniswap community voted to integrate the DEX into the Polygon ecosystem, allowing the platform to overcome high Ethereum fees that have been hindering users.

Decentraland DAO has a similar structure but operates within the context of a virtual world. The MANA token (current price: $0.10, down 0.33% in the last 24 hours) is stored in the DAO treasury, which controls LAND contracts, decides which NFTs can be listed on the marketplace, and manages land auctions. The community has real authority over the development of the virtual world.

Aave, one of the largest DeFi protocols, uses a similar model. AAVE tokens (current price: $124.96, up 1.92% in the last 24 hours) give holders voting rights and the ability to propose platform developments. Notably, Aave introduced the concept of flash loans — unsecured loans that are repaid within a single blockchain transaction. This became possible thanks to decentralized governance and transparent smart contracts.

Types of DAOs: what varieties exist and how do they differ?

DAO is not a one-size-fits-all system — there are several main types of organizations with different goals and governance structures.

Protocol DAOs

Protocol DAOs are the largest category. They manage large-scale DeFi platforms like Uniswap, Maker, and Aave. These DAOs use decentralization to own and operate their platforms, increasing fairness in the financial sector.

Venture DAOs

Venture DAOs pool capital from many users for collective investment in new projects. Unlike traditional venture funds, where decisions are made by a few experts, venture DAOs allow the broader community to vote on which projects to fund. This gives retail investors a real opportunity to participate early in promising startups.

Grant DAOs

Grant DAOs provide funding to innovative DeFi projects and applications. Unlike venture DAOs, grant organizations focus on supporting the development of ideas and technologies. They offer developers a reliable way to raise funds for their initiatives through a decentralized review and voting process.

Social DAOs

DAOs are not just about finance. Social DAOs use decentralized principles to create virtual social communities. Members can join by paying an entrance fee, often used to acquire native DAO tokens. One of the most famous examples is Bored Ape Yacht Club, which only admits NFT owners from that collection.

Collectible DAOs

Collectible DAOs unite communities to purchase expensive digital assets — for example, high-value NFTs. Members pool funds to buy valuable artworks, which then become shared property of all participants. This allows retail investors to gain partial ownership of assets that would otherwise be inaccessible.

How to join a DAO and participate in governance

If you’re interested in decentralized management, there are several ways to get involved in a DAO.

Joining an existing DAO:

Start by identifying your interests and goals. Then research DAOs that match your preferences, study their mission and principles. Usually, you can join the community on Discord before buying tokens to better understand the organization’s culture. The next step is to purchase DAO tokens through a cryptocurrency exchange. Once you own tokens, you gain voting rights and can participate in governance.

Creating your own DAO:

If you have a unique idea, you can create a DAO from scratch. This involves defining the organization’s purpose, finding like-minded people who share your vision, and launching a governance token. You set rules for voting, token distribution, rewards, and management mechanisms. Platforms like Aragon make the process of creating a DAO much more accessible.

Investing in DAO tokens:

If you prefer not to actively participate in governance, you can simply invest in DAO tokens as an asset. Popular DAO tokens like UNI, AAVE, and others are traded on major crypto exchanges and can be attractive for traders and investors.

Pros and cons: an honest assessment of DAOs

DAO offers revolutionary opportunities, but like any system, it has advantages and significant challenges.

Main advantages of DAOs

Ownership democratization: DAOs are primarily democratic tools. Every community member has a stake and voting rights. This means decisions are transparent, and every vote counts.

Operational transparency: Built on blockchain, DAOs display all operations and decisions transparently. Every member can see how others vote, how funds are spent, and how the organization develops. This visibility builds trust.

High security level: Everything within a DAO is protected by smart contracts and cryptography. Decisions are executed automatically, eliminating human error or malicious actions.

Enhanced community engagement: DAO members who are rewarded for participation are much more involved in the organization’s development. This creates a positive feedback loop, where increased engagement boosts token value and DAO potential.

Risk decentralization: Unlike traditional funds where risk is concentrated among a few investors, DAOs distribute risk among all participants. If an investment fails, losses are shared fairly.

Greater inclusivity: DAOs democratize financial access. Retail investors can now participate in early-stage investments, which was impossible in traditional finance where power is held by institutional investors and VCs.

Significant disadvantages of DAOs

Regulatory issues: The decentralized nature of DAOs creates challenges for regulators. Without a clear central authority, it’s difficult to hold anyone accountable for misconduct. Authorities often struggle to regulate DAOs, creating uncertainty.

Trust issues in early stages: In the early phases, when most tokens are held by developers, true decentralization can be an illusion. The core team may steer development until the community holds enough tokens to influence decisions.

Concentration of voting power: As DAOs grow, governance can become more complex. Some DAO models set minimum token thresholds for voting, which can lead to wealthier members holding disproportionate influence, undermining the idea of true decentralization.

Risk of poor code: DAOs rely on smart contracts. If the code contains vulnerabilities or is poorly implemented, the results can be disastrous. History has seen cases where bad code led to DAO hacks and huge losses for the community.

What does the future hold for decentralized organizations?

The future of DAOs looks promising, especially with the development of Web3 technologies. As more people understand the potential of decentralized systems, demand for truly autonomous organizations will grow. We can expect more innovation, solutions to current security and regulatory challenges, and the emergence of more resilient DAOs functioning as effective alternatives to traditional organizations.

Developers are already working on addressing key issues: improving voting mechanisms, expanding decentralization in early stages, and adapting to regulatory requirements. DAOs have the potential to revolutionize not only finance but many other sectors — from project management to scientific research.

Key takeaways

1. DAO is a revolutionary governance model that transfers control from a central authority directly to the community through voting and smart contracts.

2. Decentralization brings new fairness to financial transactions, enabling retail investors to participate in early-stage investments previously inaccessible to them.

3. There are many types of DAOs — from protocol and venture to social and collectible — each serving different purposes.

4. Examples like Uniswap, Aave, and Decentraland demonstrate the real potential of DAOs in building transparent and democratic platforms.

5. Joining a DAO can be done in three ways: by entering an existing community, creating a new DAO, or investing in tokens.

6. Advantages of DAOs include democratization, transparency, security, and inclusivity, but they also face regulatory challenges and risks of poor implementation.

7. The future of DAOs depends on whether developers can solve security, regulation, and true decentralization issues to make DAOs the primary organizational form in the digital economy.