What is a DAO?
March 06, 2023
Read Time 4 MIN
Please note that VanEck may have a position(s) in the digital asset(s) described below.
A decentralized autonomous organization, or DAO, is an organization run entirely by computer code and accessible to everyone. Being autonomous, smart contracts allow the majority of operations to function without the involvement of humans. A community creates and runs a DAO, managing its resources and initiatives as a whole.
The 2016 launch of Ethereum's venture capital fund "The DAO" helped DAOs gain popularity. Sadly, the project experienced an attack because of a flaw in the code three weeks into the token sale. A hard fork caused the cash to be later restored. Despite the early challenges, the DAO concept has improved over the years, and it is now one of the most popular governance models for decentralized finance (DeFi) projects.
Each DAO is unique, although the majority adhere to the same fundamental ideas. Each holder of the DAO's governance token has a certain number of votes, which is proportional to their token holdings. Holders may also suggest modifications to the DAO's operational procedures.
A DAO is a company administered by self-executing smart contracts that operate on a blockchain. The decisions made by DAO participants are then carried out using these smart contracts. In practice, a DAO can run continually and without human upkeep. Due to its immutable nature, the DAO's framework will continue to exist even if DAO members lose interest in or give up on the project.
Voting systems based on governance tokens are the most typical way that DAOs make decisions. You have more voting power the more of the governance token you own. In some DAOs, any member may submit a proposal, while this ability may only be granted to a select group in others. In the crypto industry, DAOs are frequently used to run DeFi initiatives, blockchains, and other protocols.
For example, an investment DAO often operates based on a broad objective or guiding idea. Some invest in specialized business sectors, such as GameFi or DeFi protocols. Using a proposal procedure, investment decisions are made following these predefined guidelines. Proposals can be made by holders of the governance token for the investment DAO. Some DAOs will restrict this to token holders who own a specific threshold of tokens or to some other segment of the population. This may be done to prevent spam or to restrict the ability to advise investment decisions to members with sufficient stakes.
Users can use their voting rights after the proposition has been made by either staking their tokens or through a Snapshot mechanism. Without locking the tokens, Snapshot divides voting rights based on the number of governance tokens in each wallet. This prevents users from influencing the vote by purchasing more tokens after seeing a proposal. After the voting is completed, the choice is made and put into effect.
Investment gains are distributed to governance token holders either through airdrops or a staking mechanism. They can then obtain a portion of the earnings from the smart contract by staking their governance token.
DAOs frequently host community channels on Telegram and Discord to help organize, inform, and facilitate their proposals. A DAO relies heavily on its community for success.
Types of DAOs
There are eight main types of DAOs:
- Protocol DAOs
- Grant DAOs
- Philanthropy DAOs
- Social DAOs
- Collector DAOs
- Venture/Investment DAOs
- Media DAOs
- SubDAOs
A DAO makes investments collectively. Anyone who holds the governance token for the investment DAO is eligible to vote. Investment DAOs raise money for their treasury by holding token sales, issuing NFTs, and providing services that generate income. The legality of investment DAOs is governed by local legal regulations.
How Do You Create a DAO?
You'll need a system for processing votes and proposals on the technical side. Other open-source options can be used. One well-liked option for the Ethereum blockchain is Aragon. Another that operates across many blockchains is Snapshot. However, the methods through which they each give that structure can vary. Some DAO systems use off-chain polling while others use on-chain polling. Your DAO's priorities will determine the specific option you should select.
How Do You Invest in DAOs?
You can invest in DAOs by investing in governance tokens, participating in governance and voting or lending crypto to the DAO. However, it is much easier to invest in platforms that allow DAOs to be created. This way, you can invest in the general trend of DAOs. At its core, DAOs are enabled by smart contracts, hence smart contract platforms are needed to support them. VanEck provides a straightforward, diversified and easy way to invest in a broad selection of smart contract platforms that support DAOs.
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Bitcoin (BTC) is a decentralized digital currency, without a central bank or single administrator, that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries. Beta of rig price is a measure of the price volatility of a mining rig compared to Bitcoin’s price.
Ethereum is a decentralized, open-source blockchain with smart contract functionality. Ether is the native cryptocurrency of the platform. Amongst cryptocurrencies, Ether is second only to Bitcoin in market capitalization.
Please note that VanEck may offer investments products that invest in the asset class(es) or industries included in this communication.
This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the cryptocurrencies mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Information provided by third-party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this communication and are subject to change without notice. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its employees.
Cryptocurrency is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value, but it does not have legal tender status. Cryptocurrencies are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not generally backed or supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies. The value of cryptocurrency may be derived from the continued willingness of market participants to exchange fiat currency for cryptocurrency, which may result in the potential for permanent and total loss of value of a particular cryptocurrency should the market for that cryptocurrency disappear. Cryptocurrencies are not covered by either FDIC or SIPC insurance. Legislative and regulatory changes or actions at the state, federal, or international level may adversely affect the use, transfer, exchange, and value of cryptocurrency.
Investing in cryptocurrencies comes with a number of risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks. In addition, cryptocurrency markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing. There is no assurance that a person who accepts a cryptocurrency as payment today will continue to do so in the future.
Investors should conduct extensive research into the legitimacy of each individual cryptocurrency, including its platform, before investing. The features, functions, characteristics, operation, use and other properties of the specific cryptocurrency may be complex, technical, or difficult to understand or evaluate. The cryptocurrency may be vulnerable to attacks on the security, integrity or operation, including attacks using computing power sufficient to overwhelm the normal operation of the cryptocurrency’s blockchain or other underlying technology. Some cryptocurrency transactions will be deemed to be made when recorded on a public ledger, which is not necessarily the date or time that a transaction may have been initiated.
Investors must have the financial ability, sophistication and willingness to bear the risks of an investment and a potential total loss of their entire investment in cryptocurrency.
- An investment in cryptocurrency is not suitable or desirable for all investors.
- Cryptocurrency has limited operating history or performance.
- Fees and expenses associated with a cryptocurrency investment may be substantial.
There may be risks posed by the lack of regulation for cryptocurrencies and any future regulatory developments could affect the viability and expansion of the use of cryptocurrencies. Investors should conduct extensive research before investing in cryptocurrencies.
Information provided by Van Eck is not intended to be, nor should it be construed as financial, tax or legal advice. It is not a recommendation to buy or sell an interest in cryptocurrencies.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.
© 2023 Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.
Related Funds
DISCLOSURES
Definitions
Bitcoin (BTC) is a decentralized digital currency, without a central bank or single administrator, that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries. Beta of rig price is a measure of the price volatility of a mining rig compared to Bitcoin’s price.
Ethereum is a decentralized, open-source blockchain with smart contract functionality. Ether is the native cryptocurrency of the platform. Amongst cryptocurrencies, Ether is second only to Bitcoin in market capitalization.
Please note that VanEck may offer investments products that invest in the asset class(es) or industries included in this communication.
This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the cryptocurrencies mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Information provided by third-party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this communication and are subject to change without notice. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its employees.
Cryptocurrency is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value, but it does not have legal tender status. Cryptocurrencies are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not generally backed or supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies. The value of cryptocurrency may be derived from the continued willingness of market participants to exchange fiat currency for cryptocurrency, which may result in the potential for permanent and total loss of value of a particular cryptocurrency should the market for that cryptocurrency disappear. Cryptocurrencies are not covered by either FDIC or SIPC insurance. Legislative and regulatory changes or actions at the state, federal, or international level may adversely affect the use, transfer, exchange, and value of cryptocurrency.
Investing in cryptocurrencies comes with a number of risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks. In addition, cryptocurrency markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing. There is no assurance that a person who accepts a cryptocurrency as payment today will continue to do so in the future.
Investors should conduct extensive research into the legitimacy of each individual cryptocurrency, including its platform, before investing. The features, functions, characteristics, operation, use and other properties of the specific cryptocurrency may be complex, technical, or difficult to understand or evaluate. The cryptocurrency may be vulnerable to attacks on the security, integrity or operation, including attacks using computing power sufficient to overwhelm the normal operation of the cryptocurrency’s blockchain or other underlying technology. Some cryptocurrency transactions will be deemed to be made when recorded on a public ledger, which is not necessarily the date or time that a transaction may have been initiated.
Investors must have the financial ability, sophistication and willingness to bear the risks of an investment and a potential total loss of their entire investment in cryptocurrency.
- An investment in cryptocurrency is not suitable or desirable for all investors.
- Cryptocurrency has limited operating history or performance.
- Fees and expenses associated with a cryptocurrency investment may be substantial.
There may be risks posed by the lack of regulation for cryptocurrencies and any future regulatory developments could affect the viability and expansion of the use of cryptocurrencies. Investors should conduct extensive research before investing in cryptocurrencies.
Information provided by Van Eck is not intended to be, nor should it be construed as financial, tax or legal advice. It is not a recommendation to buy or sell an interest in cryptocurrencies.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.
© 2023 Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.