Age of Communities

In the previous lesson, you learned about Decentralized Finance, and you might have wondered, who manages these protocols and decides their future?

Almost all of the major DeFi applications, from Uniswap to Aave to MakerDAO, are governed by DAOs: Decentralized Autonomous Organizations.

A DAO is a community-led entity that uses Ethereum smart contracts to establish the foundational rules and execute the agreed upon decisions. DAOs use smart contracts to manage many of the same processes and responsibilities found in corporations or nonprofits. Members of DAOs use tokens to vote on the rules governing the protocols and systems for which their DAO is responsible. MakerDAO is one example, where holders of the MKR governance token vote on changes to the DAI stablecoin protocol.

Many of the five thousand DAOs in existence today use similar applications and voting frameworks to manage their collective $11 billion in treasuries.

Typically, anyone holding a defined minimum number of tokens can suggest changes to the underlying protocol. These proposals can be technical in nature, like deciding on reserve ratios for lending protocols, or even political, like removing a leader. After a proposal meets the requirement for a vote, the community of governance token holders vote on if they are “for” or “against” the proposal. Each DAO will have its own quorum requirements for a proposal to pass: and typically when that quorum is met, majority vote rules. Each DAO has some core differences, just like each democracy around the world varies in how they execute democratic principles. There are distinct levels of checks and balances within the different DAOs.

DAOs are not just limited to DeFi.

Media organizations like Bankless and public funding entities like Gitcoin all utilize DAOs to coordinate, govern, and manage their treasuries. There are now more than 4.5 million DAO token holders in Web3. One New York Times journalist quipped that DAOs are “chat rooms with bank accounts.” But an undeniable draw of Web3 is the way in which leaderless online groups of like-minded people can quickly gather, collectively pool capital, and make decisions. 

DAOs are also becoming more exciting.

If you join a DAO today, you typically are entering a Telegram or Discord channel with a bunch of internet strangers for a variety of reasons: deciding which project to fund; gaining access to an Erykah Badu concert; joining a residency program for artists and developers; collectively buying the only copy of Wu-Tang Clan’s 2015 album Once Upon a Time in Shaolin; or even team up to bid on a copy of the U.S. Constitution.