Chapter 3: Decentralized autonomous organization

An organization that is controlled in whole or in part by decentralized computer programs is referred to as a decentralized autonomous organization (DAO), which is also often referred to as a decentralized autonomous corporation (DAC). Voting and financial matters are handled by a decentralized ledger technology such as a blockchain. Specifically, in order for an organization to be considered a decentralized autonomous organization (DAO), the processes that are managed by the decentralized programs must be central, long-lasting, and unique to the identity of the organization. In general, decentralized autonomous organizations (DAOs) are communities that are owned by their members and do not have a centralized leadership. There is a lack of clarity on the actual legal status of this kind of company organization.

The DAO is a well-known example that was intended for venture capital funding. In May of 2016, it gathered 3.6 million ether (ETH), which is Ethereum's native cryptocurrency. At the time, it was worth more than US$70 million. However, it was hacked and drained of US$50 million in cryptocurrency a few weeks later. Through a hard fork of the Ethereum blockchain, the hack was undone in the weeks that followed, and the money was brought back into circulation subsequently. During this time, the majority of Ethereum miners and clients made the transition to the new fork, while the original chain turned into Ethereum Classic.

The governance of decentralized autonomous organizations (DAOs) is a contentious issue. It is possible that the amassing of these tokens will lead to a concentration of power because they are often used to allocate and distribute tokens that grant voting rights.

In spite of the fact that the word can be dated back to the 1990s, it was not until 2013 that it became more generally used. The term "decentralized autonomous organization" (DAO) is only understood today as organizations that are deployed as smart contracts on top of an existing blockchain network. However, there are others who contend that Bitcoin was the first DAO.

The use of decentralized technologies, such as blockchain technology, to provide a secure digital ledger to track digital interactions across the internet is a defining characteristic of decentralized autonomous organizations. These organizations are protected from forgery through the use of trusted timestamping and the dissemination of a distributed database. By taking this method, it is no longer necessary to involve a trustworthy third party that is mutually accepted in any decentralized digital contact or bitcoin transaction. The elimination of the need for repetitive recording of contract exchanges in separate records and the elimination of the need for a trusted third party might potentially significantly offset the costs of a transaction that is allowed by blockchain technology as well as the accompanying data reporting is a potential benefit. As an illustration, the data stored on the blockchain has the potential to eventually replace public documents such as deeds and titles, provided that regulatory systems allow for this to occur. In theory, a blockchain approach makes it possible for several users of cloud computing to participate in a peer-to-peer smart contract cooperation that is loosely tied among themselves.

After a decentralized autonomous organization (DAO) has been formed, Vitalik Buterin suggested that it may be structured to operate without the involvement of human managerial personnel, provided that the smart contracts are supported by a platform that is Turing-complete. This Turing criterion has been reported as being met by Ethereum, which was constructed on a blockchain and introduced in 2015. This enables decentralized autonomous organizations (DAOs). Decentralized autonomous organizations have the goal of becoming open platforms that allow individuals to control their identities as well as the data that pertains to them personally.

Using tokens or non-fungible tokens (NFTs) that confer voting powers, governance of the DAO is organized. Individuals who have a confirmed ownership of these governance tokens in a cryptocurrency wallet are the only ones who are permitted to join a decentralized autonomous organization (DAO), and membership can be traded. The governance process is carried out by means of a series of proposals that are put to a vote by members through the blockchain. Therefore, the possession of a bigger number of governance tokens typically correlates to a greater voting power. It is occasionally possible to track and internally recompense members of a decentralized autonomous organization (DAO) for their contributions to the organization's aims. Inactive holders of governance tokens can be a significant barrier to the governance of a decentralized autonomous organization (DAO), which has resulted in the introduction of methods that enable voting power to be delegated to other parties.

The majority of the time, tokens that confer voting rights are not used to cast votes. DAOs frequently have disruptions to their potential functionality as a result of shareholders who are either inactive or non-voting.

One such potential danger is the accumulation of power, which might occur in the event that individuals amass a significant quantity of tokens that confer voting influence. In order to achieve the goals of distributing governance power, the concentration of these tokens is ineffective. A study of decentralized autonomous organizations (DAOs) in the field of finance revealed that the distribution of tokens was highly concentrated within a very small group of holders.

Under most circumstances, the specific legal status of this kind of business organization is not apparent, and it may differ from one jurisdiction to another. Wyoming was the first state in the United States to recognize decentralized autonomous organizations (DAOs) as a legal entity on July 1, 2021. As the first business entity to receive such recognition, the American CryptoFed DAO was established. The United States Securities and Exchange Commission has deemed certain past attempts to blockchain-based enterprises to be unlawful offers of unregistered securities. These methods were presented to the companies. A DAO may, in practice, be a corporation that does not have the legal position of a corporation; this is known as a general partnership. However, the legal standing of a DAO is sometimes uncertain. In the event that they are not in conformity with the law, known participants or individuals who are located at the interface between a decentralized autonomous organization (DAO) and regulated financial systems may be the targets of regulatory enforcement or civil actions.

Once the system is up and running, it is difficult to make changes to the code of a decentralized autonomous organization (DAO), even fixing bugs that might appear to be straightforward in centralized code. When a DAO needs to be corrected, new code must be written, and an agreement must be reached to move all of the funds. In spite of the fact that the code is accessible to everyone, it is difficult to fix, which means that known security flaws are potentially exploitable unless a moratorium is called in order to make it possible to address bugs.

In 2016, a particular decentralized autonomous organization (DAO) known as "The DAO" established a new benchmark for the largest crowdfunding campaign ever conducted. The code of The DAO was found to have several issues, as pointed out by researchers. The operational mechanism of the DAO permitted investors to withdraw any money that had not yet been committed to a project at their own discretion; as a result, the funds might be depleted in a short amount of time. A "number of security vulnerabilities" existed despite the fact that protections were put in place to prevent the gaming of shareholders' votes in order to obtain investments. Midway through the month of June in 2016, this made it possible to launch an attempt to withdraw a significant amount of money from The DAO. The Ethereum network underwent a fork on July 20, 2016, in order to resolve the issue with the initial contract.

Especially if the voting power is based on the quantity of tokens that an individual holds, decentralized autonomous organizations (DAOs) are susceptible to coups or hostile takeovers that can disrupt their voting structures. An instance of this occurred in the year 2022, when a single person amassed a sufficient number of tokens to provide oneself voting control over the Build Finance DAO. This individual then proceeded to deplete the DAO of all of its bitcoin after gaining this control.

In 2019, Wang, Shuai, Ding, Wenwen, Li, Juanjuan, Yuan, Yong, Ouyang, Liwei, and Wang, Fei-Yue were the authors of the study. "Decentralized Autonomous Organizations: Concept, Model, and Applications" . Pages 870-878 in the sixth issue of the IEEE Transactions on Computational Social Systems. 10.1109/TCSS.2019.2938190 is the citation.

Santana, Carlos, and Laura Albareda (2022) are our names. "Blockchain and the emergence of Decentralized Autonomous Organizations (DAOs): An integrative model and research agenda" . The Journal of Technological Forecasting and Social Change, Volume 182, Issue 121806, DOI: 10.1016/j.techfore.2022.122406.

Nils Augustin, Andreas Eckhardt, and Alexander Willem de Jong (2023) are the authors of the study. "Understanding decentralized autonomous organizations from the inside" . Electronic Markets, volume 33, issue 38,...