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DAO components

DAO components
Digital image of blocks
© RMIT 2023

The core components of a DAO are blockchain technology, smart contracts, a governance mechanism and treasury tools. The DAO may also produce its own token to assist in facilitating governance, membership and day-to-day operations.

Let’s explore each the features of each of these core components in more detail.

Blockchain features

A DAO seeks to achieve its goals through operating upon rules that are encoded in smart contracts on a blockchain. The role of blockchain technology in DAOs is to transparently and immutably record all actions of the DAO and provide both auditability and data security through its tamper resistance.

The distributed consensus protocols, governance models and a protocol’s tokenomics are used to realise the self-operation, self-governance, and self-evolution of a DAO.

Smart contract features

Smart contracts are the buidling blocks for a DAO. They record (in code) and automatically execute the decisions and processes of the DAO decisions through a programmed set of rules that are automatically executed if a set of conditions for execution are met. Smart contracts are the key to the autonomous aspects of DAOs – they faciltate automatic, autonomus implementation fo deceisions and they facilitate self-enforcement of the rules of teh DAO. As smart contracts are written and executed as computer code stored on a blockchain, at any point proposals, voting outcomes, and even the very code itself can be audited.

Decentralised governance mechanism features

In a DAO, organisational governance on the blockchain is required to implement voting decisions – decisions that set the parameters the autonomous smart contracts that execute when prescribed consitions have been met. These governance mechanisms of the DAO are typically agreed to by a majority of members (although certain DAOs can appoint key stakeholders to or even external parties to make certain decsions).

Depending on the DAO’s design, voting rights may be weighted according to agreed rules,for example, voting weight can be dependent on the ownership of tokens, the weight of which can be capped at certain levels or have complications to dilute voting power when a member’s token holdings exceed an agreed level (to avoid concentraton of voting power)

‘External’ governance is the reliance on nodes outside the DAO (e.g miners or appointed validators) for the technical functioning of the network and the processing of decision-making.External governance comes with the caveat that, in a similar way to token holding imbalances, actors can exert undue influence on decision-making if they control more nodes and server capacity.

The distributed consensus protocols, governance models and a protocol’s tokenomics are used to realise the self-operation, self-governance, and self-evolution of a DAO.

Token features

Token issuance and how it’s managed is a key component of DAO governance – token issuance establishes membership, voting power and proves equity in the organisation – holding equity acts as a motivating factor to ensure that the members actively work towards achieving the goals of the DAO.

Each DAO can issue its own token and set the circulation, lock-in period, distribution mode, and other elements of the token model, according to the project attributes. All of these aspects can be changed at any time as long as it is agreed upon by the DAO.

Whilst token production isn’t always crucial to a DAOs core operations it can be a useful tool when operating at scale to provide security, better governance mechanisms and incentivise participation in the DAO entity.

Treasury tool features

Treasuries are a vital component of a DAO. A DAO will use its treasury to fund its establishment and development, expand its network, acquire assets (if applicable), promote its values, and reward members and other contributors for their work in the DAO.

A DAO treasury is generally funded by issuing tokens, which users can purchase in exchange for membership and the right to vote on the project’s governance matters and operational decisions, including how treasury funds are used. Decisions are made collectively and payments are executed automatically once the decision has been approved via the voting system.

Most DAO treasuries are composed predominantly of native tokens that may acquire value depending on the project’s success or speculated success. Large amounts of funds in a treasury could tempt anyone, so DAOs that want to decrease the risk of unauthorised transactions or rug pulls may incorporate multiple signature wallets to approve every transaction.

Multisig wallets are often used for DAO treasury management to increase security by ensuring that the organisation’s funds are not controlled by a single member. As a result, DAOs must be careful in choosing who is a signatory on the funds, to protect the DAO from malicious colluding actors.

In conclusion

This step has given you an overview of the various components that make up a DAO. DAO components are typically designed to be composable and can be used in different ways to structure various types of organisations for different purposes. In the steps that follow we will take a look at a range of example DAOs that are for special purposes – such as investment, collector communities, protocol management and arbitration, and philanthropy.

© RMIT 2023
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Introduction to DAOs: Decentralised Autonomous Organisations

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