What are DAOs, or decentralised autonomous organisations?

SPICEDAO, A GROUP of crypto investors, has taken a ribbing recently for spending $3m on a 1970s sci-fi curio. SpiceDAO bought a rare book written by Alejandro Jodorowsky, a film-maker, containing his plans for “Dune”, an intergalactic epic that he never got to make (a subsequent adaptation was one of the biggest blockbusters of 2021). SpiceDAO said it intends to create an animated series based on the work. Critics sneered that the “cryptobros” had wasted their money, misunderstood copyright laws and had no right to adapt the book. (SpiceDAO, for its part, claimed it knew all along that it wasn’t buying the intellectual property.) But for most people the most baffling element of this story is not why a DAO, or “decentralised autonomous organisation”, bought an old book. It is: what on earth is a DAO in the first place?

Bitcoin and Ethereum, two blockchains, are not companies. They do not have chief executives to manage them or board members to oversee their running. Instead they are managed by consensus. Those that do the work of maintaining the Ethereum or Bitcoin blockchain—the “miners”—in effect vote on changes to how the network works by agreeing among themselves to alter the way they do things, typically with an update to their software. Getting consensus can take a long time, and developers do not always agree. If they cannot, the network “forks”: one group carries on with one version of the software and the ledger and the rest with another. Bitcoin has forked several times, creating alternative currencies called “bitcoin gold” or “bitcoin cash”.

In the decade plus since Bitcoin was created the complexity of the tasks developers are trying to do on blockchains has grown. Bitcoin is just a ledger keeping track of ownership and movements in holdings. More modern blockchains, such as Ethereum, host applications that carry out the functions of banks or exchanges, collectively known as “decentralised finance” or “DeFi” apps. With complexity comes a need for a nimbler method of organising consensus on how software should be developed. Enter DAOs, collectives that use automation and crowdsourcing to make decisions. They do not rely on a single central authority, like a boss. Instead members typically use cryptocurrency to buy tokens, granting them voting rights. Jonah Erlich, a member of ConstitutionDAO, which tried to buy one of the original copies of the US Constitution at auction, has likened a DAO to a group chat with a bank account. They use “smart contracts”, rules encoded in programs that execute themselves automatically under certain conditions, to carry out their business. Funds are only transferred, for example, if the majority of token-holders have digitally signed off on a transaction.

The first DAO to be known as such was created in 2016 by users on the Ethereum blockchain. It was intended to work like a venture-capital fund, allowing users to invest using cryptocurrency, pitch projects and potentially receive money, following a vote by its members. It quickly raised the equivalent of nearly $150m to invest in startups. But things turned sour. Barely two months after it launched, a hacker took advantage of a loophole in the code to steal 3.6m ether, then worth around $70m. That early mishap has not stopped DAOs from proliferating. Some DAOs control stablecoins, such as dai, which is pegged to the dollar and run by MakerDAO. Token-owners vote on how the mechanisms to vary interest rates work. These maintain the peg and fine-tune supply and demand. Some, such as SpiceDAO, buy up physical assets. Others speculate on cryptocurrencies and non-fungible tokens (NFTs). In December Andreessen Horowitz, a big Silicon Valley venture-capital firm, invested in PleasrDAO, which buys NFTs. Many DAOs seem to have been born to manage bets in an incorporeal casino. But DAOs are also fascinating experiments in the democratic governance of entities which oversee billions of dollars in trading and lending. Democracy works for nations. Time will tell if it can work for business too.

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