The Complete Guide to DAOs in Web3
DAOs have been key to the growth of DeFi, art and web3. What are they, how do they work, and could they take games to the next level?
MARCH 19, 2023. GUIDE. WRITTEN BY ROBERT BAGGS.
If you’ve been in the blockchain space for a while, you’ll no doubt have heard of DAOs: Decentralized Autonomous Organizations.
DAOs have played a significant role in the rise of web3, with high-profile successes and failures alike grabbing headlines. Their role isn’t limited to crowdfunding the purchase of a copy of the U.S constitution though – DAOs can be widely impactful in gaming, NFTs, and web3 communities alike.
Let’s dive into what a DAO is, and how they may impact and improve the web3 ecosystem.
What is a DAO?
A DAO is an organization run by code. Most of the tasks of a DAO aren’t performed by people, but by smart contracts. This makes much of its activity autonomous – though human interaction is still required.
Think of a DAO as a vending machine. A vending machine is, in essence, an autonomous shop. Instead of handing money to a cashier, pointing at a Kit Kat, and receiving the chocolate and your change from the friendly face in front of you, the vending machine takes the money, receives information on the item you want, dispenses that item and issues your change.
Despite the automation, vending machines still require human involvement. Items are restocked, money is collected, maintenance is performed, and so on.
How do humans interact with DAOs? Primarily, through proposals and votes.
What is a DAO proposal?
Membership to a DAO is usually granted to holders of a governance token, with the collective group acting like a board of directors.
Typically, a proposal is put forward by one member of a DAO to the rest of its members. This proposal is then voted on. If it passes, it’s executed – if it doesn’t, it isn’t.
As an example, a member could propose a new logo for the DAO. Members of the DAO vote on whether to change the logo or not, with the collection of votes and reading of the result being automated by smart contracts.
What are the Pros of DAOs?
The possibilities of DAOs are endless, but as an overview; the benefits of DAOs echo many of the benefits of blockchains themselves.
DAOs are trustless and transparent by nature, and cannot be changed, altered or shut down by any one person or authority.
Incidentally, this means governments and law enforcement cannot feasibly shut down a DAO, which raises many questions, and accounts for some of the discomfort towards them.
What are the Cons of DAOs?
Many of the cons of DAOs are the result of the very benefits that make them attractive.
For example, trustlessness and transparency are double-edged swords. Nothing in a DAO is private, which prevents businesses from working on projects in secret.
Furthermore, as is the case with many blockchain-based systems, DAOs are vulnerable to hacks. One prominent hack took place in June 2016, when The DAO saw a third of its ETH treasury – worth $70m at the time – stolen. This loss culminated in a hard-fork (when a blockchain splits in two), and the creation of Ethereum Classic.
What is the most prominent DAO?
MakerDAO are the creators of $DAI – what they say is the world’s first unbiased currency. $DAI is a stablecoin, intended to match 1:1 with the USD dollar, and MakerDAO allows users to take loans of $DAI – using Ethereum as collateral – at an exchange rate of 150%. For example, to borrow $150 of $DAI, you would need to lock-in $100 of ETH.
Decisions on how MakerDAO operates are proposed and voted on by holders of their governance token, $MKR. One such decision is the interest rate on loans (currently 1%), but more recently, MakerDAO held an emergency vote to limit their exposure to USDC, and voted to increase their investment in US Treasury bonds.
MakerDAO is a dry example of a dry concept – but it’s also one of the most successful DAOs to date, and a good example of the value of the DAO structure. They mix the best of individual intelligence, the wisdom of crowds, and automation through technology.
How can DAOs be used in gaming?
One interesting concept – which I haven’t seen discussed much to date – is game direction.
Picture your favorite video game. Then, imagine earning that game’s governance token whilst playing. The more you play, or the more successful you are, the more governance tokens you earn. This token grants you access to the game’s DAO, and allows you to vote on proposals from other players, or from the developers themselves.
Does the playerbase agree that a particular item is overpowered? A player can propose to nerf it, and the DAO can vote – without developer input. Let’s say the developers have three new map concepts, and can’t decide which to implement first – let the DAO vote. Enjoying a video game is changed from an experience that’s provided to you, to one you can shape and change with your fellow players.
Furthermore, DAOs can make in-game guilds more meaningful. Think of crucial guild decisions – such as treasury use, loot rules, PVP strategies and more – being proposed and voted on, with the outcomes enshrined in code. AlienWorlds, a leading game on WAX, have already integrated this idea with their Syndicate DAOs.
Could DAOs in gaming be a problem?
Although this sounds fantastic, I do have reservations.
The phrase “a camel is a horse designed by a committee” springs to mind. When too many people have a say, the original vision can be ruined, with the end-product becoming a mix of wildly different ideas that don’t work well together.
Blizzard held back calls for a World of Warcraft Classic release for years, but once live, it was widely praised. Harnessing a game’s community to direct development decisions could prove a powerful concept, and with the transparency that DAOs bring to the table, the ability for a web3 project to rug pull is severely diminished.
What is the future for DAOs?
DAOs can be overwhelming to grasp, but I hope this piece has helped to clarify what they are, why they’re a big deal, and their potential impact on web3.
These organisations have – and will continue to be – a fundamental part of the blockchain space. DAOs can elevate projects, communities and games in ways that have yet to be seen, and we’ve only just scratched the surface to date.
What does the future hold for DAOs? That’s a question for far more intelligent and visionary people than I, but I’m looking forward to discovering the answer!
Robert Baggs
Full-time professional crypto writer and Editor of Token Gamer. Obsessed with MMOs. London based.
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