Decentralized Autonomous Organization: The Essence, Advantages, and Challenges of DAO

In recent years, the innovative organizational form of DAO has sparked wave after wave of innovation in the Web3 field. It has not only reshaped our understanding of traditional organizations but has also given rise to heavyweight projects that change the industry landscape, such as Compound and MakerDAO. From project teams to investors and ordinary participants, all parties have high hopes for DAOs. However, when we try to give a precise definition to DAOs, we find that they present a varied appearance in different scenarios.

The full name of DAO is Decentralized Autonomous Organization ( Decentralized Autonomous Organization ). Organizations that possess the two characteristics of "Decentralization" and "Autonomy" can, in principle, be regarded as DAOs. Compared to traditional companies, DAOs have the following two core characteristics:

Decentralization Organization Structure

The DAO does not have a centralized decision-making management institution like traditional companies; instead, management decision-making power is collectively held by all members. The operational rules of the DAO are written into smart contracts and automatically executed on the blockchain, avoiding human intervention. All rules are open source and transparent on-chain, and anyone can query them. This architecture effectively mitigates the moral hazard issues associated with traditional companies.

Governance model of member autonomy

DAOs typically achieve decentralization through internal voting mechanisms. Members holding governance tokens can propose initiatives and participate in voting, with the entire process automated by smart contracts. Compared to the hierarchical structure of traditional companies, DAOs promote equal communication among members, fostering a community-like atmosphere. This mechanism avoids the drawbacks of "one-person dictatorship" and enhances member participation.

The two major characteristics of DAO complement each other. The decentralized architecture creates conditions for true member autonomy, while an effective autonomous mechanism is key to maintaining the normal operation of a decentralized organization.

From a deeper perspective, DAO subverts the paradigm of "organization vs. individual" in traditional companies, allowing organizational goals to return to individual needs rather than blindly pursuing profit and expansion. This is also one of the reasons why many Web3 practitioners believe in the DAO concept.

However, DAO also has some limitations:

1. The security risks of smart contracts. DAO contracts are open source and transparent, but they are also vulnerable to hacker attacks. The infamous "The DAO" incident is a典型案例.

2. Decision-making efficiency is relatively low. To ensure full participation, the voting process of a DAO is often lengthy, resulting in overall decision-making efficiency that is lower than that of traditional companies.

3. The legal status is unclear. Most countries and regions have not established a comprehensive regulatory framework for DAOs, which may face compliance risks in the real world.

Creation Process of DAO

Creating a DAO typically involves the following steps:

1. Establish the organization's purpose and operating rules
2. Write the rules into the smart contract
3. Conduct strict testing and auditing of the contract
4. Raise funds through methods such as issuing tokens.
5. Deploy the contract on the chain to officially establish the DAO.

It should be noted that "creating" here only refers to establishing a DAO on the blockchain, and is not equivalent to registering an entity with legal status under the real legal system.

Legal Regulation of DAOs in Various Countries

UAE

The "DAO Association Regulations" released by the RKA DAO Free Zone in the UAE provides a clear legal framework for DAOs.

• Clearly grant the DAO independent legal person status.
• Propose technical requirements for the DAO, such as being deployed on a permissionless distributed ledger.
• Establish registration officers and auditors to oversee the DAO

United States

Wyoming and Tennessee allow DAOs to be registered as limited liability companies (LLC), and make provisions for their establishment, operation, etc. However, the overall integrity of the regulations is not as comprehensive as that of the UAE.

The Feasibility of DAO as the Issuer of Tokens for RWA Projects

If the DAO is registered locally as an independent legal entity, it can, in principle, serve as the issuer of tokens as long as it meets the relevant financial compliance requirements.

If a DAO only exists on-chain, it cannot directly serve as the issuer of tokens and needs to be legally packaged. The specific approach is to establish entities such as LLCs or foundations, transferring some functions of the DAO to off-chain entities to complete the token issuance.

Overall, the innovative organizational form of DAO has relatively matured on-chain, but to further link to the real world, relevant laws, regulations, and regulatory frameworks still need to be improved. DAO project parties also need to pay more attention to compliance requirements in the real world.