You know, I’ve been trying for a long time to explain to my friends what a DAO is, and every time it turned out to be cumbersome. But in reality, the idea is quite simple once you understand.

A DAO is essentially an organization without a boss. Imagine a company where there’s no director making decisions from the top of their office. Instead, all decisions are made from the bottom up, by the community of members. And the main thing — everything is managed through smart contracts directly on the blockchain.

It’s an internet organization jointly owned and managed by its members. They have a shared treasury, but access is only possible with the approval of the participants. Decisions are made through voting — someone proposes an idea, the group votes within a certain period, and if the majority agrees, the proposal passes.

What attracts me to this — a DAO can serve different purposes. These can be networks of freelancers pooling funds through contracts for subscription payments. These can be charitable organizations where members approve donations. Or venture funds owned by groups of investors.

But here’s an important point: it’s necessary to distinguish the concept of a DAO itself from The DAO — a specific project created in 2016. The DAO was one of the first attempts to implement this idea, but it ended tragically and led to a split in the Ethereum network. I’ll talk about that a bit later.

How does all this work in practice? A DAO is an organism built on smart contracts. Smart contracts are essentially blocks of code that automatically execute when certain conditions are met. Today, they are deployed on many blockchains, but Ethereum was the pioneer.

These contracts set the rules of the game. If you own tokens of a DAO, you gain voting rights and can influence how the organization operates. You can vote on decisions or create new proposals. The system is designed so that a DAO doesn’t get overwhelmed with proposals — they are accepted only if approved by the majority. How exactly the majority is calculated varies from DAO to DAO and is specified in the smart contract.

What impresses me — complete transparency. A DAO is an organization built on open-source blockchain code, so anyone can review its code. Anyone can verify the treasury because the blockchain records all financial transactions. No dark corners.

Launching a DAO usually happens in three stages. First, developers create a smart contract. They thoroughly test it because after launch, rules can only be changed through the governance system. Then comes funding — the DAO needs to determine how it will receive funds. Usually, tokens are sold to raise money, and these tokens give holders voting rights. Finally, the DAO is deployed on the blockchain, and from that moment, interested parties determine its future. The founders who wrote the smart contracts no longer have privileges over other participants.

Why are DAOs needed at all? The main advantage — no need to trust people. In traditional organizations, investors must trust the people in charge. With a DAO, you only need to trust the code. And this code is publicly accessible, it can be thoroughly tested before launch. Every action after launch must be approved by the community, fully transparent and verifiable.

The lack of hierarchy means that any participant can propose an innovative idea, and the whole team will consider it. Internal conflicts are often easily resolved through voting based on pre-written rules. Plus, a DAO is a way for investors to pool funds and invest in early-stage startups and decentralized projects, sharing both risk and potential profit.

There’s also a deeper aspect — solving the principal-agent dilemma. This is a conflict between those who want something (the principal) and those who do it (the agent). A classic example is the relationship between shareholders and the CEO. The CEO might act in their own interests rather than the company’s. Or a trader might take excessive risks knowing that the company will cover losses.

A DAO addresses this problem through community governance. Participants are not forced to join; they do so voluntarily, understanding the rules. They don’t need to trust some agent — they work as a team with aligned interests. If you have a stake in a DAO, you want it to succeed because it’s in your interest. Acting against that would be acting against yourself.

Now about The DAO — a specific project. It was an early version of the modern concept, created in 2016. It was conceived as an automated organization functioning as a venture fund. The owners of The DAO tokens could earn profits from investments, receiving dividends or benefiting from the increase in token prices.

The project was revolutionary and attracted $150 million in Ethereum in one of the largest crowdfunding campaigns of that time. The DAO launched on April 30, 2016, after Ethereum engineer Christoph Jentzsch published the open code. Investors bought tokens by transferring Ether into the smart contract.

But a few days after the sale started, developers noticed a problem — vulnerabilities in the smart contracts that allowed hackers to drain funds. Attackers exploited this and stole ETH worth over $60 million. That was about 14% of all ETH in circulation. The hack shook the entire DAO and the young Ethereum network.

Debates erupted in the community. Vitalik Buterin, co-founder of Ethereum, proposed a soft fork that would blacklist the hacker’s addresses. But the hacker (or someone impersonating them) responded that the funds were obtained “legally” according to the contract rules and threatened to go to court. They even threatened to bribe miners with stolen funds to prevent the soft fork.

Ultimately, the decision was a hard fork — rolling back Ethereum’s history to before the hack with redistribution of stolen funds. Those who disagreed with this rejected the fork and continued supporting the old version of the network, which became known as Ethereum Classic.

DAO is not an ideal technology. It’s entirely new, and critics point out issues with legality, security, and structure. MIT Technology Review already said in 2016 that leaving important financial decisions to the public is a bad idea. The hack of The DAO showed that flaws in smart contracts are hard to fix, even if they are discovered.

There are also legal issues. A DAO can be distributed across different countries, and there’s no unified legal framework. Any disputes require navigating multiple regional laws. In July 2017, the US Securities and Exchange Commission issued a report stating that The DAO violated securities laws by selling tokens without proper registration.

But despite the difficulties, DAO is a concept that has gained traction in recent years. It is fully integrated into many blockchain projects. DeFi actively uses DAOs to make applications fully decentralized.

Some argue that Bitcoin is the earliest example of a DAO. The network expands through social agreements, even if participants have never met. But by modern standards, Bitcoin is not considered a DAO.

The first true DAO by current standards is considered to be Dash, because the project has a governance mechanism allowing participants to vote on fund usage. More advanced DAOs built on Ethereum launch stablecoins backed by cryptocurrency. In some cases, organizations that initially launched these DAOs gradually relinquished control until they became obsolete. Token holders can vote on hiring new members, adding collateral, or adjusting parameters.

In 2020, DeFi lending protocols launched their governance tokens through liquidity mining. Essentially, anyone interacting with the protocol receives tokens as rewards. Other projects copied and adapted this model. Today, the list of DAOs is extensive and continues to grow.

DAO is a concept that is becoming increasingly popular and clearer. Some projects still aim for full decentralization via DAO, but it’s important to remember they are only a few years old and have not yet reached their ultimate goal.

As an internet organization, a DAO can revolutionize corporate governance. As the concept matures and legal gray areas are clarified, more organizations may adopt the DAO model to manage certain aspects of their operations. It’s an exciting experiment worth watching.