Decentralized autonomous organizations explained

In September 2022, the US Commodity Futures Trading Commission sanctioned a decentralized autonomous organization (DAO) called Ooki DAO, alleging that it had illicitly offered digital asset trading, violated registration requirements, and failed to comply with the Bank Secrecy Act. The action was one of the first of its kind, and raised a host of questions including what, exactly, are DAOs? How do they function without traditional corporate management structures? How should a DAO’s legal status be defined? And who is responsible for the actions a DAO engages in?

Although DAOs today manage billions of dollars' worth of assets, engage millions of contributors, and operate across industries as diverse as finance and philanthropy, these basic questions – and more – are only just beginning to be addressed by policy-makers, regulators and entrepreneurs.

DAOs are systems that use blockchains, digital assets and associated technologies to allocate resources, manage activities and make decisions. Different types of DAOs, from investment to community to philanthropic, are disrupting many sectors.

For example, Uniswap, a DAO that provides liquidity for the exchange of crypto-assets, currently manages a treasury of more than two billion dollars and is governed by a network of holders of Uniswap governance tokens. A community DAO, Friends with Benefits, supports creatives in the development of projects, events, and more. DAOs are even developing new ways of funding the development of digital public goods. Gitcoin is a platform for directing resources to the creation of public tools including open-source software. So far, it has provided more than 40 million dollars in funding using novel mechanisms such as hackathons and decentralized crowdfunding.

Across these diverse applications, DAOs share an aim to reimagine how collaborative processes are governed and implemented. Using smart contracts, automatically executing software code, DAOs can immutably implement predetermined functions. With open-source software, blockchains, and programmable economic incentives, DAOs may be able to offer greater accountability and adaptability compared to traditional organizations.

DAOs may also be able to enhance equity by broadening governance participation to a variety of stakeholders and aligning incentives to effort and participation. DAOs can be understood as an experiment in governance, aiming to reimagine how we connect, collaborate, and create. Still, it is early days for this new organizational form and many challenges remain.

As global, digital organizations without a traditional, centralized management team, DAOs may struggle to manage operations and frequently encounter challenges of administration and coordination. Like the blockchains they operate on, DAOs may also face technical limitations and issues of cybersecurity. Seeking to balance utility and fairness, some DAOs may face challenges of governance such as low voter engagement.

Perhaps most seriously, DAOs operate within a fragmented and uneven landscape of law, policy and regulation. Without well-defined legal status, DAOs may not be able to benefit from legal frameworks, simplified tax arrangements and limited liability. A lack of legal and regulatory clarity regarding DAOs could endanger users, facilitate financial crime and stymie innovation. A variety of recent policy efforts have sought to remedy this, addressing open questions of DAO law and policy. Nonetheless, gaps remain.

As with much of blockchain and digital asset law, policy, and regulation, there is a need for clear, fit-for-purpose policy and oversight. As much of this innovation has been driven by the private sector, collaboration across industry and government is crucial to realizing the potential, and mitigating the risks, of these systems.

Over the past year, the Forum, in collaboration with the Wharton Blockchain and Digital Asset Project, has been working with a community of more than 100 experts on crypto governance to create policy analyses, governance strategies, and operational tools for DAOs. The DAO Toolkit, launched at the Forum’s Annual Meeting at Davos, aims to provide a resource for developers, policy-makers, and other stakeholders seeking to engage with the DAO ecosystem.

Only time will tell if, and if so how, DAOs will ultimately have their greatest impact. While DAO proponents evangelize the revolutionary potential of these systems, skeptics question their utility. As lawmakers develop policy and oversight mechanisms for the crypto ecosystem, there will be a continued need for cooperation across the public and private sectors to unlock the potential of responsible innovation.