What's a DAO? Your jargon-free beginners guide to crypto’s new way of working

The recent explosion of DAOs, and companies-turned-DAOs, has been called everything from the wild west, to a Cambrian explosion, to the new Silicon Valley. Sounds pretty exciting, right? But at their core, DAOs are just organizational units that help people across the world get work done. Their purpose is simple, but their methods of working can be complex.

Key Difference 1: Token voting with smart contracts

Key Difference 2: Non-hierarchical structures

Key Difference 3: Remote, non-linear, fluid working habits

Key Difference 4: Multinational and multilingual—and not in the corporate way

DAO (pronounced “Dow” like “the Dow Jones”) stands for Decentralized Autonomous Organization. That’s quite a mouthful to say all at once, which is why crypto-natives almost always say just simply “DAO.”

Let’s break down every word.

Decentralized simply means “not centralized.” So, there’s no single individual or executive board that holds the keys to the entire castle. Instead, power is split and shared amongst contributors, token holders, and the community. The word “decentralized” is notoriously difficult to define, so every DAO interprets it slightly differently. Regardless of the varying interpretations and degrees of centralization within DAOs, the ethos remains the same: no single person or group should be able to direct the course of the DAO unchecked. Some DAOs have consensus-based decision-making baked into every new initiative, but others just have many separate pods or teams all working on their own and making decisions separately. Both methods remove the centralized decision-making body we see in most traditional companies today.

A brief note on how power is shared: there are many layers of “members” of a DAO. “Contributors” refers to anyone who works in the DAO. Those individuals are generally token holders, meaning they have an economic interest in the success of the DAO and they work in the DAO like an employee. “Token holders” refers to anyone who holds the token. Some token holders might not work in the DAO like an employee, but they have some economic interest in the DAO because they would like the token to increase in value. “Community” refers to anyone who keeps up with the DAO, even if they don’t have an economic stake in its success. Twitter followers, Discord members, and forum participants all make up the community.

Autonomous means “having the right or power of self government,” according to Merriam-Webster. This definition is important to understand because many people confuse “autonomous” with “automated.” While they do have some overlap, autonomous defines a small nation governing itself, whereas automated is when processes are done automatically with no outside intervention. DAOs are autonomous because they write their own rulebook. They’re not governed within the bounds of a nation or a massive corporation. Instead, they craft their own governance methods, similar to how a nation might do so. Some of those governance methods may be automated, but they’re always autonomous.

“Organization” is a catch-all term that refers to the group of people in the DAO. DAOs can be so much more than just a traditional company reimagined—they’re social clubs, nonprofits, startups, and committees. DAOs, at their core, are organizations of people united around a common goal.

So, if traditional companies took power away from the CEO and the people started governing themselves like a small nation, they’d be a DAO? Not so fast. There are four other key differences between DAOs and traditional companies. Let’s dive in.

Arguably the most important distinction between DAOs and legacy organizations is that DAO contributors (“contributor” is the word for “employee” in DAOs) vote on key decisions in their organization. We’ll get to how one joins a DAO in a moment.

First, you may ask, isn’t that like shareholders voting? Sort of, but DAOs take the voting one step further by putting their votes “on-chain,” meaning their votes are recorded on the blockchain. This separates DAOs from earlier decentralized governance models, which we'll talk more about later.

Contributors vote on key issues in the DAO by acquiring cryptocurrencies which are specific to the DAO. These are called governance tokens. Contributors can earn these tokens by working in the DAO or buying them on a decentralized exchange (DEX) because governance tokens typically have too small of a market-cap to be listed on a centralized exchange like Coinbase or Binance. In other words, governance tokens are typically niche currencies. You need to jump through a few extra hoops to buy them and they are held only by people in or interested in the DAO.

The more governance tokens you hold, the more voting power you have. So someone with 10 governance tokens wouldn’t have as much power as someone with 100. This is because the final results of the vote are determined based on the number of tokens cast rather than the number of people who cast votes. So a result of a vote may look like: 5,000 tokens in favor, 2,000 tokens not in favor. It’s all about the tokens you hold, not your unique identity.

Why the emphasis on token holdings? Doesn’t that just favor people who have the funds to buy more? Token-voting is common because it’s assumed that people who hold more tokens have “more skin in the game.” Meaning, if the DAO succeeds or fails, a large holder is more affected because they hold more of the tokens related. Someone with fewer tokens might not care as much about what happens to the DAO, because their financial stake in the project is significantly less.

The “skin in the game” idea has been challenged recently, especially because contributors who pay for groceries and rent off the tokens they earn from working in the DAO arguably still have a high stake in the project’s success, even though they don’t hold as many tokens as others might. Many DAOs and thought-leaders are in the process of testing out different on-chain voting methods.

It will be a long time before DAOs settle on a single “best practice” for voting methods. Regardless of the type of voting they choose, it’s important that the voting is performed in a “trustless” manner. This doesn’t mean that you can’t or shouldn’t trust the system—it just means there’s no need to put any trust in people to do the right thing for the system to work. For example, a bank is a system that relies on trust, because people must trust the bank to hold their money for them. Bitcoin is a trustless system, because you don’t need to worry about anyone being a good actor for the system to work—it moves seamlessly on its own. This is slightly complex when it comes to voting, but here are the basics.

DAOs use computer programs called smart contracts to execute the results of the vote without requiring human intervention. Some DAOs use third-party voting software that connects to their wallets and hosts the voting. Voting with a bespoke smart contract means that contributors use an application built on the blockchain in which they vote by signing a transaction with their wallet.

Regardless of the type of voting mechanism they use, DAO votes are immutable. This means that once a vote happens, there’s no dispute, and there’s no going back. The smart contract automatically sends the funds—or doesn’t send the funds—based on the results. Many DAOs are too rudimentary to set up a smart contract function like this—they still rely on humans to make the transaction happen. But all DAOs are striving for the goal Vitalik Buterin, founder of Ethereum, wrote back in 2014 as, “automation at the center, humans at the edges.”

Next, let’s explore an example of how this would truly look in practice.

Let’s say that Jane works in the treasury committee of a DAO. Jane notices that the treasury is in need of another full-time member to help manage the DAO’s finances. So, she writes a proposal asking the DAO to create another full-time position and finance it. She needs 80,000 DAI (DAI, pronounced “die,” is a stablecoin pegged to the U.S. dollar) to pay a one-year salary of a treasury manager. She includes this number in the proposal she writes. The DAO likely has some processes set up for gaining consensus within its communication channels (Discord, Telegram) before moving the proposal up to vote on-chain. Once the proposal is ready for a vote, the smart contract holds the $80,000 DAI in escrow while the vote occurs. If the vote turns out in-favor of creating the role, the smart contract will automatically send the 80,000 DAI to the wallet address that Jane specified in her proposal. If the vote turns out not in-favor, the 80,000 DAI will be sent back to the DAO’s treasury. This is a “trustless” transaction, because no human intervention was required to send the 80,000 DAI where it needed to go. Instead, the computer code handled it all for them.

Whew! We’ve made it through all the technical parts that make a DAO a DAO. Now, we’re going to move into some more day-to-day, human-to-human differentiators of DAOs that reach beyond computer code.

One of the ways DAOs avoid centralization, and the pitfalls that come with it, is by moving away from traditional hierarchical structures. Instead of a pyramid-like, top-down management structure, DAOs use a more “flat” management system in which people don’t report directly to a “higher-up.” The way this takes shape on the day-to-day is different for every DAO. But overall, DAOs throw the middle-managers and bureaucratic red-tape out the window in favor of a simpler system. Contributors “manage” each other through consensus, voting, agreements, and more, and everyone has their hands in the work.

Removing hierarchies is surprisingly difficult, since nearly everyone on the planet was raised in hierarchical systems. However, DAOs are a major step into making truly flat organizations the norm.

DAOs aren’t the first organization to try a non-hierarchical system—rather, they’re just following in the footsteps of others. Some models for flat organizations have been theorized by organizational experts of holacracy and sociocracy. Frederic Laloux coined the term “Teal Organization” to characterize fluid, pyramid-free organizations in which rigid reporting structures are done away with. Many DAOs are really just replicating this idea of a Teal Organization, with token voting as the base layer.

Like all aspects of decentralization, “flatness” of an organization is a sliding scale. Some DAOs have coordinators that work more like managers, whereas others have entirely fluid teams that work on completely equal footing. While the structures vary, the ethos of moving away from bureaucratic slush and toward a completely new type of organization holds strong throughout all DAOs.

DAOs don’t operate from nine-to-five, Monday through Friday. There’s no “office hours” for a DAO—people are scattered all over the world, so a set work day wouldn’t make sense, anyway. Instead, contributors work when, where, and how it fits their lifestyle. While this may sound like the work habits of tech-company employees who’ve been working from home since the pandemic started, the fluid working habits of DAO contributors are even more, well, fluid.

For example, it’s not uncommon for a contributor to be active in multiple DAOs at once, or to work 10 hours in the DAO one week, then 30 hours the next. Working habits—for better or for worse—are far more contributor-dependent than any traditional company culture could create.

Another aspect of DAOs’ fluid ways of working is that contributors aren’t typically siloed into rigid positions. Rather than having a title like “Senior Product Operations Manager,” someone might be a Logistics Lead in a product team, an advisor in a user experience research group, and a contributor to a product ideation group. There’s no single job description for someone working in a DAO—they can build their working life out of lots of different roles and responsibilities. This omnivorous working style helps contributors feed their interests and learn new skills. It can also help contributors stick around for longer, because they can continue learning and growing rather than being stuck in the job, having to leave the organization entirely when they want a new role.

Contributor working habits are also influenced by the tools they use. Discord, a more casual version of Slack, is a popular platform used by DAOs because of its flexibility and ease of integrating with other software. Telegram, an encrypted messaging service, is also popular. So, much of the day-to-day work in DAOs occurs within messaging channels and voice rooms, making it easy to contribute on-the-go, during off-hours, or whenever you’re most up to working. This is worlds away from the habits of people who work in a physical office, but more similar to people who have started working remotely since the pandemic.

DAOs have completely reinvented what it means to be a multinational organization. Rather than a traditional company with offices scattered in a couple major cities, DAOs are multinational organizations operating together in the “same room.” Contributors from all over the world work together in real time rather than being siloed based on the country they live in. While this creates quite the legal and regulatory gray area, it fosters a unique environment of camaraderie and collaboration between people who would have never met otherwise.

Part of the reason this multinational collaboration can work is because contributors are paid in coins that aren’t restricted by national borders. Instead of paying in your country’s fiat currency, DAOs pay in a variety of cryptocurrencies. These cryptocurrencies aren’t held in a bank, they’re in crypto wallets. In this way, there are truly no boundaries on who can get paid for getting work done, and multinational teams can blossom.

It’s also not uncommon for DAOs to have multiple language channels throughout their Discord. Instead of operating in only one language, the decentralized nature of DAOs means they can provide opportunities for contributors all over the globe. Imagine if your company had multiple language channels throughout Slack, with some teams operating solely in a different language. This means it’s even more critical that vision and values are aligned for the DAO, but it also means that the DAO can enter new markets and cater to a global audience with ease.

In their lifespan thus far, DAOs are still so early. They have a lot of room to grow, and the question of, “will DAOs eat corporations?” won’t be answered for many years. There are pros and cons to the ways DAOs are set up, and only time will tell if the cons are surmountable and the pros beat out traditional corporations. The best way to learn about and form your own opinions on a DAO is to join one! The fluid ways of working are a shock for many, but once you get used to the new structures, you may find that DAOs are right where you belong.