DAO (decentralized autonomous organization)

A DAO (decentralized autonomous organization) is a community whose rules and shared treasury live in smart contracts, with decisions made by token holders through voting.

How it works

Instead of a CEO and a board, a DAO has a smart contract with rules: who can make proposals, how many votes are needed and what happens after the vote. Votes usually come from a governance token: more tokens means more weight. The treasury sits in a contract or a multisig wallet and can only be spent after a vote.

For a proposal to pass you usually need two things: a quorum (a minimum number of tokens voting) and a majority in favour. Many DAOs add a delay (timelock) between the vote and execution so members have time to spot abuse.

Many DeFi protocols are governed through DAOs: they change fees, allocate the treasury and choose which assets to support. In practice only a small share of holders vote, and large holders can have more say than everyone else.

Example with numbers

There are 1,000,000 governance tokens and the quorum is 4%, so at least 40,000 votes are needed. 30,000 tokens vote to lower the fee and 15,000 vote against. That is 45,000 in total, the quorum is met and the majority is in favour, so the proposal passes. After a 2-day timelock the contract applies the new fee.

Common mistake

Do not assume a DAO is fair and decentralized by default. Check how many tokens the team and early investors hold, whether anyone has keys that can change the contract without a vote, and how many people actually vote. If a couple of wallets decide everything, it is a company with a token, not a community.

Questions and answers

What is a DAO in simple terms?

It is an organization with no boss, where the rules are written in code and token holders make decisions by voting.

How do you join a DAO?

Usually you buy or receive its governance token and connect your wallet to the voting page. You can often delegate your votes to another member.

Can you make money from a DAO?

Taking part does not guarantee any income. A governance token can rise or fall like any altcoin, and sometimes ends up worth nothing.

DAO (decentralized autonomous organization)

How it works

Questions and answers

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