Where in the world did DAOs come from?

Since the inception of the concept — Decentralization; DAOs have gained incredible adoption in the Web3 space. Reports from Deep Dao prove that there are over 4,000 DAOs with $9.3 billion locked in treasury.

Considering the vast popularity of DAOs and their influence on DeFi, it is prior to understand what DAOs are, but more importantly, what brought about the birth of DAOs.

Just like every other revolutionary invention, there is always a catalyst behind it. Taking Bitcoin as an example, the 2007–2008 Great Financial Crisis was an event that led to the creation of the deflationary cryptocurrency.

The advent of Bitcoin moulded an alternative route to carrying out financial transactions without the involvement of banks or third parties.

Likewise, DAOs were not just created from thin air. There was a problem, and only DAOs could fix it. But where did all these start?

Let’s dive in!

The Origin of DAOs

The concept of DAOs can be traced back to the emergence of DACs — Decentralized Autonomous Corporations, which surfaced during the era of Bitcoin. This was a model adopted by early crypto enthusiasts.

In 2013 Daniel Larimer (aka Bytemaster) in his article “Distributed Autonomous Corporations”, explains that a DAC functions as an entity that runs without human involvement. A DAC is controlled by a set of incorruptible business rules, distributed amongst tons of computers.

In a DAC, you become a stakeholder by buying “stock”. This stock entitles you to a share of the DAC’s profit and participation in the decision-making process.

In his “Let’s Talk Bitcoin”, Daniel Larimer went further to relate this concept to Bitcoin (which according to him was the first DAC). Just like every other traditional corporation, DACs have revenues, costs, shareholders, charters, employees, products, etc.

In his analogy, Larimer views Bitcoin as a company with 21 million shares owned by what can be referred to as “Bitcoin’s shareholders”. Bitcoin has a product (or in this case a service) which is a peer-to-peer payment service. It has revenues that it accrues via the fee charged for every transaction. Like any regular company, Bitcoin has employees, the miners who keep the network safe and facilitate transactions. Lastly, Bitcoin has its costs which are the rewards given to miners.

On a layman’s level, a DAC is a company that has its business rules across the computers of its stakeholders and gives stakeholders continuous rewards based on the success of the DAC.

Bitshares; The first company managed as a DAC

Bitshares is an entity that is somewhat not an easy concept. Daniel Larimer introduced Bitshares on June 2, 2013. Its first version was built off of some of the ideas of Bitcoin. Bitshares can be classified as an industrial-grade crypto-equity, peer-to-peer distributed ledger and network based on a DPoS.

BitShares gives its users access to a decentralized exchange and a utility token — BTS. Shareholders can use their BTS tokens to vote in four different elections. Elections for the delegates on the network, committee members, workers, and whether a proposal should receive funding or not from the BTS budget.

The “DAC” feature gives traditional business the platform to launch DACs which operates without human involvement. These DACs are governed by the protocols programmed into the network. Various DACs could trade their shares on BitShares DEX which entitles buyers to dividends and governance.

While the concept of DACs seemed to be a possible breakthrough in forging a decentralized economy, it wasn’t sufficient enough. For one, DACs were linked to a corporate governance model, which was seen as too restrictive.

In detail, most DACs had to deal with the following problems:

Automation VS Human Contribution

A corporation can be defined as a group of people working together as a single entity under a set of specific rules. A corporation could be built up for various purposes, with its stakeholders contributing individual resources to grow the entity. In the case of DACs, the question of “if the human effort is needed” arouse different speculations concerning the framework in which DACs were built.

For most, the “shareholders” were simply persons who provided liquidity to the DAC via purchasing of shares. When it comes to active contributions from members, not every DAC could have this.

Profit Orientated VS Community Orientated

Since DACs were built in the model of a company on the blockchain, it is fair to say that DACs were built solely to make profit. The blueprints of DACs simply reveal a system where people buy shares and get dividends as long as the DAC exists. But what about the community?

The involvement of a community goes beyond participating in governance which can be manipulated based on shares holdings. Also, the fact that DACs get its initial capital from shareholders proves that small contributors would not be given much prestige, considering they offer little value to the corporation.

Complexity VS Simplicity

The ideology of DACs was still one that was incomprehensible by most early adopters. For some, a DAC was simply an investment, where you buy shares and earn continual receipts. For others, the concept of DACs was seen as a means of IPOing their company to get cash flow.

Additionally, others saw the need for DACs to adopt a legal framework which would secure shareholder’s holdings.

The Solution; DAO

The complex framework of DACs lead to the concept being obsolete. At the most, it wasn’t a complete whole, DAO was.

The concept of DAO emerged in an article by Vitalik Buterin on May 6, 2014. In his report, the Ethereum co-founder resolved the misconception of DACs, stating that DACs are smaller topics and a subclass of DAOs.

He further explained that Bitcoin is more of a DAO than a DAC, pointing out that a bitcoin is not a share as it does not entitle its holders to any form of dividend or governance power.

Conclusively, all DACs are DAOs but not all DAOs are DACs.

What is A DAO

A DAO is an entity that lives on the internet and exists autonomously but heavily relies on humans to perform certain tasks that automation cannot do. In this context, DAOs are community orientated.

The first DAO — “The DAO” was ideated in July 2015 by a team called Slock.it. Launched on Ethereum in May 2016, The DAO was a crowdfunding smart contract that amassed a total of 12 million Ether. These were the early days of Ethereum and solidity was still a clumsy concept for most. Due to this issue, most smart contracts then were easily penetrable by third parties.

The DAO smart contract suffered an attack that led to the drainage of the contract’s funds. This type of attack is known as a “reentrancy exploit”.

Today, blockchain technology is a feasible concept and Ethereum is a much more reliable network.

What is the Future of DAOs

As the concept of Web3 continues to mature, birthing a DAO has become a popular option as it offers the opportunity to build and grow organizations in a decentralized way. Today, we see various kinds of DAOs emerging that serve different purposes. Some of these are Protocol DAOs, Grant DAOs, Social DAOs and SubDAOs amongst others.

These records only prove that there is no shortage of DAO use cases. So, it’s not a question of “if” but when would the concept of DAOs colonize the framework of traditional companies?

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Where in the world did DAOs come from? was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.

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