How DAOs work – and why they matter

First came non-fungible
tokens

First came non-fungible
tokens^[1], then the metaverse^[2] and now another
head-scratching concept has arisen from the worlds of
cryptocurrency and coding: DAOs.

Decentralized autonomous organisations, or DAOs, are internet
communities of cryptocurrency aficionados who “set out to
accomplish certain goals like developing software, investing, or
community-building (and often all three)”, explained Fortune
magazine^[3]. These collectives have
been described by some as building blocks for “the future of
the internet”, as the world makes the shift to Web 3.0.

The potential purchasing power of DAOs was demonstrated
last month, when a collective known as PleasrDAO was revealed
to be the mystery buyer who snapped up a one-of-a-kind album
by the Wu-Tang Clan, Once Upon a Time in
Shaolin, for £4m this summer.

Over the past year, DAOs have also been generating “millions of
dollars’ worth of cryptocurrencies” on Ethereum, the
blockchain-based software platform with an associated
cryptocurrency called Ether, said Geoffrey Mak in The Guardian^[4]. 

But rather than just using Ether, some DAOs have established
their own cryptocurrencies.

Friends With Benefits

Trever McFedries founded the Friends With Benefits^[5] DAO last year
and established a publicly tradable crypto token called $FWB.
He minted just one million of these tokens, in order to “cap supply
and hype demand”, said The Guardian’s Mak. 

Prospective Friends With Benefits members must purchase 75 $FWB
to join the DAO collective. According to Mak, the value of this
membership has jumped from $350 earlier this year to highs of more
than $9,000.

Friends With Benefits now has more than 2,000 members globally
and describes itself as being “where crypto meets
culture”. 

For would-be community members unable to afford the
required 75 $FWB, McFedries offers cheaper alternatives. 

These includes access to the Friends With Benefits newsletter –
“the definitive voice on how Web3 is intersecting with the creative
class” – for 1 $FWB (which as of this week ^[7]to about $86), or access
to “a global roster of token-gated events” for 5 $FWB.

‘Everyone has a voice’

Advocates claim that the unique selling point
of DAOs is that they are democratic, with no hierarchy
and all members given a say. 

As CNBC^[8]’s money reporter Taylor
Locke wrote, DAOs “aren’t governed by one person or entity”,
which is why the D in DAO stands for decentralised.

Decision are made through proposals and votes, “to ensure
everyone in the organisation has a voice”, said ethereum.org^[9]. 

“There’s no CEO who can authorise spending based on their own
whims and no chance of a dodgy CFO manipulating the books,” the
site continued. “Everything is out in the open and the rules around
spending are baked into the DAO via its code.”

But The Guardian’s Mak warned that equally distributed
power is not guaranteed. Friends With Benefits, for
example, grants one vote per $FWB token, rather than one vote
per person – an arrangement that Mak labelled “profoundly
undemocratic”.

DAOs also typically require a number of internal staff to keep
operations running. Friends With Benefits is currently hiring for several part-time and full-time
roles^[10], including a
treasury lead and a curator, with compensation including $FWB
tokens.

Blockchain reliance 

Most DAOs rely on blockchain, the technology that underpins
bitcoin and other cryptocurrencies.

Blockchain enables “automated trusted transactions and value
exchanges”, said Cathy Hackl in Forbes^[11]. But “even so”,
she continued, “internet users around the world” want to
organise themselves in what the Etherium site described as a “safe
and effective way to work with like-minded folks” from across the
globe.

The rules and governance of each DAO is coded into something
called “smart contracts” on blockchain. Any changes to the
blockchain code will generally require an all-member
vote. 

Slock.it hacking of 2016

Even though the decentralised nature of blockchain means the
technology is fairly secure, DAOs are not invulnerable to hacking
attacks. In 2016, $50m of Ether was stolen in a hack of an early
DAO called Slock.it that was built on the Ethereum
platform. 

Wired^[12] reported that the
hacker was believed to have “transferred the stolen funds into a
clone of the DAO”. However, because each unit of Ether is “unique
and traceable”, said the magazine, “if the hacker tries to sell any
of the stolen ether in a cryptocurrency market, the system will
flag it”.

“It’s like stealing the Mona Lisa,” said Slock.it
founder Stephan Tual. “Great, congratulations, but what do you do
with it? You can’t sell it, it’s too big to be sold.”

All the same, “code was supposed to eliminate the need to trust
humans”, said Wired. “But humans, it turns out, are tough to take
out of the equation.” 

DAOs have made “great strides” in the five years since the
Slock.it, said CNBC’s Locke. But there “are still risks” associated
with investing money this way.

Web 3.0

To true believers, DAOs are the “institutional building blocks”
of Web 3.0, “the blockchain-grounded decentralised utopia promoted
as the future of the internet by a group of savvy investors,
artists, futurists, and developers”, said New York
Magazine^[13]’s Max Read.

Web 3.0 is “pitched as the David against the Goliath of Web
2.0”, added The Guardian’s Mak. In this utopia, the theory goes,
“monopolist platforms like Google, Facebook, and Amazon” will no
longer have all the power. 

But while even mainstream investors are starting to take notice
of DAOs, some experts believe that the whole concept of Web
3.0 is “at best a colossal waste of energy”, according
to Read.

And at worst, detractors argue, DAOs are “a pyramid scheme, a
vast, distributed, utterly transparent scam bent on suckering the
greedy and naive with promises of wealth and transformation”.