If you've lived on the internet for the last year or two, you've heard the term Decentralized Finance (DeFi). This post is the first in a series of posts I like to call "DeFi for Dummies" doing an exploration of various DeFi concepts. This week is all about Decentralized Autonomous Organizations, or DAOs.
DAOs are organizations that allow people to govern on the blockchain; an exercise in algocracy. It lets an organization make decentralized and asynchronous decisions. That can technically used for just about any organization that needs governance, but finance and investment is where DAOs have been most popular. Famous examples include The DAO - a decentralized VC firm running on ethereum.
The Basics
There are two types of DAOs - share based and token based. Here are some basics.
Token Based:
Open and permission-less - anyone can join by obtaining tokens
Can get tokens either through liquidity or other proof-of-work
Usually for anon finance collectives or investment collectives
Share based:
Permissioned, but usually still open.
Access requires an application to the council/collective that
Most enterprise blockchain applications are usually DAOs.
All DAOs work through smart contracts. The contracts encode the governance logic, and are usually protected from the contracts themselves changing without consensus.
Where Are They Going?
DAOs are the future of finance - sort of. I don't know that they're going to fully replace PE or massive investment institutions like JP Morgan, but they're going to play a massive role in democratizing more of the market.
The average investor right now is sort of stuck with investing in public companies or maybe markets through indexes on the market. But - they often don't have any sort of decision making power over those funds and are left at the mercy of fund managers. DAOs allow more people to invest in non-public entities like startups, or in industries and technologies while allowing them a voice in the strategy. It helps us march towards a future in finance where the at home investor will have access to some of the same opportunities as the hedge fund analyst.