How does the DAO organization work? Typical case analysis

A DAO is a decentralized organization governed by smart contracts and community voting, ensuring transparency and collective decision-making.

Jun 20, 2025 at 02:56 am

What is a DAO?

A Decentralized Autonomous Organization (DAO) operates without centralized leadership, relying on smart contracts and community governance. These organizations are typically built on blockchain platforms like Ethereum, where rules are encoded into code. Members of a DAO usually hold tokens that grant them voting rights, allowing them to propose and vote on decisions. The structure eliminates hierarchical control, promoting transparency and inclusivity.

The core idea behind a DAO is that it functions based on consensus among its members. Every decision, from fund allocation to protocol upgrades, must be agreed upon through a decentralized voting mechanism. This ensures that no single entity can dictate the direction of the organization without community approval.

How Does a DAO Function?

DAOs operate primarily through smart contracts, which are self-executing agreements with terms directly written into code. Once deployed on a blockchain, these contracts govern the organization's operations automatically. When a proposal is submitted, token holders vote, and if it reaches a predetermined threshold, the contract executes the decision autonomously.

One critical aspect of DAO functionality is token-based governance. Token holders' influence often correlates with the number of tokens they own. However, some DAOs implement alternative mechanisms, such as quadratic voting or delegated voting, to prevent wealth concentration from dominating outcomes.

Another essential feature is transparency. All actions, including proposals, votes, and financial transactions, are recorded on the blockchain. This openness allows any member to audit the organization’s activities at any time.

Governance Mechanisms in DAOs

Governance in DAOs involves several key components: proposal submission, voting periods, quorum requirements, and execution thresholds. Any member can submit a proposal, but it typically requires a minimum token stake to prevent spamming.

Once a proposal is live, there is a defined voting period during which members cast their votes. Some DAOs use time-locked voting, ensuring voters have enough time to review and deliberate. A quorum—a minimum number of participants or votes—is often required for a proposal to pass. If this threshold isn't met, the proposal fails, even if most voters approve.

Execution follows only after successful voting. Smart contracts handle implementation automatically, whether it's transferring funds, updating protocols, or modifying governance parameters.

Funding and Treasury Management

DAO treasuries are typically funded through token sales, grants, or revenue generated by the project itself. These funds are stored in a decentralized wallet, accessible only through approved governance proposals. No individual has unilateral control over the treasury, preventing misuse or misallocation.

Some DAOs employ multi-signature wallets for additional security layers, especially during early development stages. However, as trust in governance grows, control gradually shifts toward full decentralization.

Treasury management includes allocating resources for development, marketing, partnerships, and other operational needs. Budget proposals undergo rigorous scrutiny before approval, ensuring alignment with the DAO’s mission and long-term goals.

Challenges Faced by DAOs

Despite their innovative nature, DAOs encounter several challenges. One significant issue is legal ambiguity. Since DAOs lack a central legal entity, regulatory compliance remains uncertain in many jurisdictions. Legal frameworks struggle to categorize these structures, leading to potential liabilities for participants.

Another challenge is decision-making efficiency. While democratic participation is ideal, it can lead to slow decision-making processes. Proposals may take weeks or months to pass, delaying urgent actions. Additionally, voter apathy is common, with low turnout potentially skewing results.

Security vulnerabilities also pose risks. Smart contract bugs or exploits can result in substantial losses, as seen in infamous cases like The DAO hack in 2016. Continuous audits and robust security practices are crucial to mitigate such threats.

Case Study: ConstitutionDAO

ConstitutionDAO serves as a notable example of a DAO-driven initiative. In late 2021, a group of individuals formed a DAO with the goal of purchasing one of the remaining original copies of the U.S. Constitution at a Sotheby’s auction. Within days, thousands of contributors donated over $40 million worth of ETH to the cause.

The DAO issued a governance token called $PEOPLE, allowing contributors to vote on key decisions, including post-auction plans. Despite raising impressive funds, ConstitutionDAO ultimately lost the bid to billionaire Ken Griffin. However, the effort demonstrated the power of decentralized fundraising and collective action.

Following the loss, the DAO faced questions about what to do with the raised capital. Ultimately, they decided to refund contributors, showcasing how decentralized governance could manage large-scale financial decisions transparently.

Frequently Asked Questions

Q: Can anyone create a DAO?

Yes, technically anyone with knowledge of smart contracts can deploy a DAO. However, building an effective and secure DAO requires careful planning, legal considerations, and community engagement.

Q: Are DAOs legal?

The legality of DAOs varies by jurisdiction. Some countries recognize them under specific frameworks, while others treat them ambiguously due to their decentralized nature.

Q: How are disputes resolved in a DAO?

Disputes are typically addressed through governance votes. In some cases, arbitration mechanisms or external dispute resolution services may be integrated into the DAO’s framework.

Q: What happens if a DAO runs out of funds?

If a DAO depletes its treasury, it may seek new funding through token sales, partnerships, or donations. Alternatively, governance votes might decide to dissolve the organization or repurpose existing assets.