A DAO (decentralised autonomous organisation) is an organisation whose rules and treasury are managed through smart contracts on a blockchain, and whose decisions are made by its members through voting. Instead of a board or management team, token holders or members submit proposals and vote on them; approved decisions, such as payments from the treasury or changes to a protocol, are executed on-chain. DAOs are used to govern DeFi protocols, manage shared funds, run investment clubs and coordinate online communities.
How does a DAO work?
- Membership: voting power usually comes from holding governance tokens or membership NFTs, sometimes with delegation to trusted representatives.
- Proposal: a member submits a proposal, for example to fund a project or change a parameter.
- Voting: members vote within a set period. Votes can be on-chain (in a governor contract) or off-chain (signed messages, for example via Snapshot), with quorum and majority rules.
- Execution: approved on-chain proposals are executed automatically, often after a timelock delay that gives members time to react.
- Treasury: funds are held in smart contracts or in a multisig wallet controlled by elected signers.
Advantages and challenges
Advantages: transparent decisions and finances, global participation, and rules that can't be changed by one person.
Challenges: low voter turnout, voting power concentrated among large token holders, slow decision-making, and governance attacks in which someone acquires enough tokens to push through a harmful proposal. The first major DAO, "The DAO" in 2016, lost a large part of its funds to a smart contract exploit, which made security a lasting concern.
Legal status
A DAO is not automatically a legal entity. In many countries, including the Netherlands, an unincorporated DAO risks being treated as a partnership, which can make members personally liable. Some jurisdictions offer specific legal wrappers, and many DAOs pair their on-chain governance with a foundation or company. Get legal advice before setting one up.
See our timelock contracts, multisig contracts and smart contract access control.
Frequently Asked Questions about DAOs
Who controls a DAO?
Its members, according to the rules in its smart contracts. In practice, influence is often concentrated among large token holders, delegates and the multisig signers who manage the treasury.
What is a governance token?
A token that gives voting rights in a DAO or protocol. Its voting weight usually scales with the number of tokens held or delegated.
What is the difference between on-chain and off-chain voting?
On-chain votes are cast in a smart contract and can execute decisions automatically, but cost gas. Off-chain votes are free signed messages whose result is then carried out by the multisig signers.
Can a DAO be hacked?
The smart contracts can have bugs, and governance can be attacked by someone who borrows or buys enough voting power. Audits, timelocks, quorum rules and vote delegation reduce these risks.