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What are DAOs and How Do they Work?

The advent of blockchain technology saw the blossoming of decentralized platforms, from DApps for DeFi (Decentralized Finance) and DEXes (Decentralized Exchanges), to play-to-earn blockchain games. In a nutshell, decentralized entities distribute power and control over a particular network amongst its participants as opposed to being controlled by a single entity, such as in the case of Bitcoin’s Proof-of-Work consensus algorithm, wherein no one party truly holds unilateral control over the entire organization. 

Instead, all participants have equal access to the network, and may participate in the validation and verification of on-chain transactions and data via the rules established by the consensus algorithm. As a key feature of blockchain technology, many Web3 organizations are rapidly placing decentralization at the forefront of their developmental roadmap, which begs the question: how do entities retain decentralization while still ensuring a minimally coherent organizational structure? 

Enter DAOs, or Decentralized Autonomous Organization. 

What is a DAO? 

A DAOs is a type of organization that runs on a blockchain network, and is governed by a set of smart contracts, rather than being controlled by a centralized authority or management team. In a DAO, decision-making power is distributed among its members or stakeholders, who can propose, vote on, and implement changes to the organization’s rules and operations using a consensus-based system.

DAOs, popularized by cryptocurrency enthusiasts, enable a decentralized decision-making process that promotes democracy in organizational governance. By granting each member an equal voice in the management of the organization, a DAO can provide its members with the authority to collaboratively shape the entity’s future. This is in stark contrast with traditional corporate organizations where executive members and significant shareholders often hold majority control.

DAOs can be used for a variety of purposes, such as creating decentralized financial systems, managing digital assets, facilitating decentralized governance of online communities, pooling funds from members for investments, and many more. They have gained popularity in recent years due to their ability to offer a more democratic and transparent approach to organizational management, as well as their potential to reduce costs and eliminate the need for intermediaries. In fact, Bitcoin is also often accredited as being the first decentralized autonomous organization. 

How does a DAO work? 

In a DAO, decisions are made collectively by its members, who hold tokens that represent their ownership and voting rights. Anyone can become a member of a DAO by acquiring these tokens through a process such as an initial coin offering (ICO) or by earning them through participation in the organization’s activities.

Tokens distributed by a DAO empower users to participate in decision-making processes initiated by other members of the DAO via voting. These proposals can range from simple administrative tasks to major changes in the organization’s direction or strategy.

Once a proposal is submitted, it is evaluated by the members according to the rules encoded in the DAO’s smart contracts. The proposal is usually subject to a voting period during which members can cast their vote. Once the voting period is over, the results are tallied, and the proposal is either approved or rejected, based on the outcome of the vote.

If a proposal is approved, the smart contracts automatically execute the actions required to implement the proposal. For example, if the proposal involves the allocation of funds to a specific project, the smart contract will transfer the funds to the designated address. This automation ensures that the organization is transparent and operates efficiently, without the need for intermediaries or central authorities.

What’s important to note here, however, is that the voting power held by members of any DAO may not be equal, as they are often contingent on the number of tokens held by the member. For instance, a member holding 200 tokens will have double the voting power over a member who only holds 100 tokens. The ethos behind this is such that members who are more financially invested in the institution ought to have more say than those who are less financially invested. Additionally, having greater investments in the DAO also suggests that the members will be more inclined to act in the best interest of the DAO. 

Benefits of a DAO 

There are several benefits of having a DAO as an organizational structure, as opposed to traditional corporate governance. 


As DAOs are by nature decentralized, it does not have a central point of control, as power to participate in DAO votes are distributed among the DAO members, therefore significantly reducing the potential of a single-point of failure.


Operating on the public blockchain network means that transactions, processes, and decision-making conducted on a DAO is made visible to everyone, thereby again reducing the risk of corruption simply by having more eyes on the processes. 


DAOs generally operate via smart contracts, which are automated and self-executing by nature. This removes the need for intermediaries, such as relying on external services for bookkeeping and other administrative work, streamlining the process and cutting down on cost and time needed to carry out activities over the DAO. 

Problems with a DAO 

However, this by no means suggests that DAOs are infalliable. In fact, there have been historical examples of DAOs that have suffered from hostile takeovers and have failed. In February 2022, for instance, the Build Finance DAO was the target of such a hostile takeover. 

One particular DAO member was able to pass a proposal that handed over the Build token contract, which was a type of smart contract on the Build Finance DAO that gave the owner the ability to create or burn tokens as they wished. For some reason, either by technical oversight or security lapse, the proposal was not picked up by Build Finance’s Discord bot to alert voters, and it passed unnoticed. The DAO member also took control of the project’s minting keys, governance contract, and treasury. 

This hostile takeover has caused BUILD, the project’s native token, to plummet in value and has also disempowered all other DAO members of the project at the same time. 

Security lapses aside, however, DAOs have also been criticized to be largely undemocratic as well, as it disproportionately benefits members who hold more tokens in the community, meaning that the “one man one vote” principle simply does not apply in most DAO organizations. In a way, this is counterintuitive to the supposed purpose of a DAO, which is to serve as an decentralized organizational structure. Suppose a member holds a large percentage of the total number of DAO tokens in circulation, that would automatically give his vote far greater credence than any other member who holds lesser tokens by comparison. For many, this is just another example of power consolidation and concentration, making DAOs merely a replication of incumbent power structures anyway. 

Even if this was the case however, complete structures of decentralization may not be ideal for every type of organization, depending on the activity to be carried out. Some operations actually benefit from a higher point of centralization as compared to a completely decentralized governing structure, as that may impede operational efficiency. For instance, where quick and expedient decisions have to be made, the case could be made that an organization with a higher point of centralization may in fact be more ideal. 


Overall, DAOs offer an innovative approach to organizational governance, but they also come with unique challenges and risks that need to be carefully considered and managed. Further, DAOs in their current state have also shown to still require a level of human involvement to ensure full operationality, which suggests that there is still a long road ahead before we may begin to see DAOs being implemented en masse. 

Interested in DAO projects? Head over to your Bitget Wallet (Previously Bitget Wallet (Previously BitKeep)) Wallet‘s DApp browser and explore the various DAO-based DeFi projects available! 

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