What is a DAO in crypto?

A DAO, or decentralized autonomous organization, is a group of people who pool money and make decisions together through a blockchain. Its rules are written into smart contracts, which are programs that run automatically, and its members vote using tokens. There is no chief executive or board in the usual sense.

How does a DAO work?

A DAO normally issues a governance token, a crypto token that carries voting rights. Its shared funds, called the treasury, sit in a smart contract or in a multisig wallet, which needs several keys to approve a payment.

Decisions follow a set routine:

1. A member posts a proposal, such as spending treasury funds or changing a fee.
2. Token holders vote during a fixed window. In most DAOs, one token equals one vote.
3. If the proposal passes the required threshold, the smart contract carries it out, or a group of signers does so on the members' behalf.

Many DAOs govern a DeFi service or another dapp.

What happened to The DAO in 2016?

The best-known example gave the idea its name. The DAO was an investment fund launched on Ethereum in 2016. It raised about 12 million ether, worth roughly $150 million at the time, according to a later report by the US Securities and Exchange Commission (SEC).

In June 2016 an attacker used a flaw in its code to divert about 3.6 million ether, around a third of the total. Ethereum's community responded in July 2016 with a hard fork, a change to the network's rules, which returned the funds to investors. People who rejected the change kept the original chain running as Ethereum Classic.

What are the criticisms?

Voting by token favors wealth. A few large holders can outvote thousands of small ones, and turnout is often low. Attackers have also borrowed or bought tokens to push through proposals that drained a treasury.

Are DAOs legal?

A DAO is not automatically a company, and the law is still catching up. In July 2017 the SEC concluded that The DAO's tokens were securities, meaning investments covered by federal securities law. In June 2023 a federal court ruled in a case brought by the Commodity Futures Trading Commission that a DAO called Ooki DAO was a "person" that could be held liable under commodities law, and it imposed a penalty of $643,542.

Without a legal wrapper, members may risk being treated as partners who are personally responsible for the group's debts. Some DAOs therefore set up a foundation or company alongside the token vote. Wyoming became the first US state to recognize DAOs as a form of limited liability company, under a law that took effect in July 2021. Rules differ by country and state and continue to change, so anyone with a specific question should check the official source or a qualified lawyer.