Understand how DAO works in one article: from principles to future prospects

In the Web3 era, a brand new organizational form is quietly emerging—DAO (Decentralized Autonomous Organization). Unlike traditional companies governed by boards and management, DAOs allow all participants to jointly govern the organization and set rules. So how exactly does a DAO operate? What are the fundamental differences between it and traditional organizations? How will it develop in the future? This article will answer these questions one by one.

Core Mechanism of DAO: How Decentralization Is Achieved

A DAO has no management layer or board of directors in the traditional sense. Instead, community members operate the entire organization through open and transparent smart contract code. As long as certain conditions are met, these codes execute automatically without human intervention.

Imagine a traditional company is run by a CEO and management team, while a DAO is more like a democratic system where all shareholders participate in decision-making. Each member holds shares of the organization, giving everyone a voice. Blockchain technology ensures the system’s transparency and immutability—every transaction and decision is recorded, and anyone can view and verify at any time.

The biggest feature of a DAO is “anyone can join.” Regardless of where you are in the world, as long as you agree to follow the rules set by the organization, you can become a member. This openness breaks geographical barriers and creates unprecedented possibilities for global collaboration.

From Code to Governance: Smart Contract-Driven Autonomous Organizations

To understand how a DAO works, first understand smart contracts. Smart contracts are self-executing programs—when predefined conditions are met, they execute automatically without waiting for instructions. Ethereum was the first blockchain to adopt smart contracts, laying the technical foundation for DAOs.

All rules of a DAO are written into the code of smart contracts. For example, if the rules specify “when more than 60% of members vote in favor, a proposal passes,” this logic is embedded in the smart contract. Once deployed on the blockchain, no one can change it—except through democratic voting.

Token ownership is the most common way to participate in a DAO. Members buy tokens, similar to purchasing stocks, with each token usually representing one vote. When a DAO needs to make major decisions, members can submit proposals and vote. This democratic governance ensures decentralization of power; no single individual can unilaterally control the organization.

The transparency of blockchain means: all DAO code is public, all transactions are traceable, and all decision records are documented. This high level of accountability and openness is unmatched by traditional organizations.

Brief History of DAO Development: From Theory to Practice Breakthroughs

The concept of DAO did not appear out of nowhere. As early as 1997, German computer scientist Werner Dilger defined the concept of “autonomous systems” in academic papers. But turning theory into practice had to wait until Bitcoin’s emergence.

With Bitcoin’s birth, the concept of “Decentralized Autonomous Companies” (DAC) gained popularity. Unlike traditional joint-stock companies, DACs allow anyone to become a shareholder by purchasing tokenized shares, with each shareholder sharing profits and participating in decision-making.

A turning point came in 2016. German company Slock.IT launched “The DAO” (also called Genesis DAO), the first venture capital DAO operated collectively by investors. Built on the Ethereum blockchain, investors could buy DAO tokens with Ether (ETH) and participate in voting to decide which projects to invest in. This project once raised a huge amount of funds and became a focal point in the crypto community.

However, a coding flaw led to The DAO being hacked, with $50 million worth of Ether stolen. This crisis forced the Ethereum community to perform a hard fork to rescue investors and prompted reflection on DAO security and legal status. Although this incident cast a shadow over DAOs, it also spurred improvements and thinking in DAO technology.

Three Core Stages of Building a DAO

Successfully establishing a DAO usually involves three steps, each crucial:

Step 1: Writing Smart Contracts
Developers must carefully write the contract code. Even a single error can cause system failure and huge economic losses. Once deployed, the contract can only be modified through democratic voting, so thorough testing to ensure correctness is essential.

Step 2: Fundraising and Governance Setup
A DAO needs to determine its fundraising method. Most DAOs raise funds by selling tokens, with token holders gaining voting rights. It’s similar to an IPO but more democratic and open.

Step 3: Deployment
Once everything is ready, the DAO is deployed on the blockchain. From that moment, the organization’s future is entirely decided by all members; founders and developers can no longer control its direction.

New Market Trends: Rise of NFT and Investment DAOs

With the maturity of blockchain technology, DAOs are experiencing a new development phase. Among them, the rise of Non-Fungible Tokens (NFTs) has had a profound impact on DAO governance.

In September 2021, venture capital giant Andreessen Horowitz funded an NFT community called “Friends with Benefits,” raising $5 million. The organization then restructured into a DAO and operated on platforms like Discord, successfully raising an additional $1 million. This demonstrates that online communities can gather impressive funding even without direct economic incentives.

Another significant trend is the rise of investment DAOs. These new DAOs allow Web3 natives to pool funds and make collective investment decisions, enabling ordinary investors to compete with large financial institutions. In other words, DAOs are democratizing the investment field, breaking down traditional financial barriers.

The topic and appeal of DAOs continue to grow. Some predict DAOs may experience explosive growth similar to NFTs in 2021, but all of this still requires time and practice to verify.

Future Development of DAOs: Challenges and Opportunities

DAOs represent a new organizational structure with transformative potential. As more DAOs flourish across various industries, some will persist and become important parts of society.

However, DAOs also face real challenges:

Technical Risks: Coding flaws can lead to catastrophic consequences, as seen in The DAO incident.

Legal Ambiguity: Most countries worldwide have not clearly defined the legal status of DAOs, limiting their global development.

Governance Complexity: Designing efficient voting mechanisms and preventing governance deadlocks remain unresolved issues.

Despite these challenges, DAOs leverage the revolutionary resources of cryptocurrencies to create a creative future. Current problems and concerns need continuous development and practice to be addressed. How DAOs operate will be refined over time, which is precisely what makes DAOs so exciting—they are redefining the very concept of organizational structure.