DAOs Explained: How Decentralized Organizations Actually Work

60 DAY WEB3 JOURNEY (Day 16)

Previous: Ethereum vs Solana: Consensus in Action

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Introduction

Yesterday, you learned that Ethereum prioritizes decentralization while Solana prioritizes speed.

Today, you'll see decentralization in action through DAOs (Decentralized Autonomous Organizations).

A DAO is an organization with no CEO. No board of directors. No central authority. Instead, it's governed by code and community voting. Sounds utopian, right? "Everyone votes, everyone decides!"
But here's the reality: DAOs are messy, imperfect, and often fail. Yet they're still one of the most important experiments in Web3.

Today, you'll understand what DAOs actually are, how they work, and why they matter.

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What Is a DAO?

Simple Definition

A DAO is an organization run by smart contracts instead of people.

Traditional Company:
Board of Directors → CEO → Decisions → Implementation

DAO:

Key Characteristics

1. Decentralized — No single person controls it
2. Autonomous — Runs on code, not managers
3. Transparent — All decisions are on-chain and visible
4. Community-Governed — Token holders make decisions via voting

Why DAOs Matter

Imagine a company where:

• You own a piece of it (governance token)
• You vote on major decisions
• Profits are shared with token holders
• No middleman takes a cut
• Everything is transparent and verifiable

That's the DAO promise.

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How DAOs Work: The Mechanics

Step 1: Governance Tokens

Every DAO has a governance token (like UNI for Uniswap, MKR for MakerDAO).

What they do:

• 1 token = 1 vote (usually)
• Hold tokens to participate in governance
• Can be earned, bought, or distributed

Example:
You buy 100 UNI tokens.
Uniswap DAO has a vote on fee structure.
You can vote with your 100 UNI.

Step 2: Proposal Creation

Anyone with enough tokens can create a proposal:

"I propose that Uniswap reduces trading fees from 0.3% to 0.25%"

Other community members can:

• Support the proposal
• Propose amendments
• Discuss implications

Step 3: Voting Period

The community votes for a set time (usually 3-7 days):

Voting options:
✓ YES (approve the proposal)
✗ NO (reject the proposal)
~ ABSTAIN (no opinion)

Result: If YES votes > NO votes, proposal passes

Step 4: Execution

If a proposal passes, a smart contract automatically executes it:

Smart contract receives voting result
↓
IF votes_yes > votes_no:
Execute the proposed change
ELSE:
Reject and log the result

All verifiable on-chain

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Real Example: Uniswap DAO

Proposal UNI-7 (Oct 2021): Reduce Uniswap fee tier from 1% to 0.5% for certain token pairs

Process:

1. Proposer submits: "Reduce fee to 0.5%"
2. Community discusses for days
3. Voting starts: 18 million UNI holders can vote
4. Result: 71% voted YES
5. Execution: Smart contract automatically updated fees

Outcome: Uniswap became more competitive for low-risk trading pairs.

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Real-World DAOs: How They Actually Govern

Uniswap DAO

What it governs:

• Trading fees on the Uniswap protocol
• Treasury allocation (millions in ETH/UNI)
• Protocol upgrades and new features

Token: UNI
Treasury: $5B+ in assets
Voting threshold: 65 million UNI votes needed to pass proposals

How it works:

• Anyone can propose (if they have 65K UNI delegates)
• 7-day voting period
• If approved, changes execute automatically

Real decision: In 2023, Uniswap voted to deploy on Arbitrum (Layer 2), which reduced fees for users by 100x.

MakerDAO

What it governs:

• DAI stablecoin stability (target price: $1)
• Collateral types and risk parameters
• Stability fees (interest rates)

Token: MKR
Treasury: $2B+ in ETH collateral
Type of DAO: More technical than Uniswap

How it works:

• Governance is more complex (not just 1 MKR = 1 vote)
• Uses "Governance Risk Framework"
• Decisions involve adjusting interest rates, collateral ratios, etc.

Real decision: MakerDAO approved PSM (Peg Stability Module) to better defend DAI's $1 peg during market volatility.

Aave DAO

What it governs:

• Which tokens can be used as collateral
• Interest rates on lending/borrowing
• Risk parameters for the protocol

Token: AAVE
Treasury: $10B+ in TVL
Type: Community votes on risk management

How it works:

• AAVE token holders vote
• Shorter voting periods (2-3 days)
• Focus on protocol safety and risk

Real decision: Aave voted to add Ethereum to collateral options, increasing borrowing capacity.

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DAO Governance Models: Different Approaches

Model 1: Simple Majority (1 Token = 1 Vote)

How it works:

• Each token = one vote
• 51% of votes wins
• Simple and transparent

Example: Uniswap uses this

Pros:

• Easy to understand
• Truly democratic

Cons:

• Whale problem (1 person with 10M tokens dominates)
• Voter apathy (why vote if your 100 tokens don't matter?)

Model 2: Quadratic Voting

How it works:

• Cost to vote scales quadratically
• 1st vote costs 1 token
• 2nd vote costs 4 tokens
• 3rd vote costs 9 tokens
• etc.

Why? Prevents wealthy people from dominating while still rewarding participation.

Example: Some experimental DAOs

Pros:

• Balances power between wealthy and average users
• Encourages thoughtful voting

Cons:

• Complex to implement and understand

Model 3: Delegated Governance

How it works:

• Token holders delegate voting power to trusted representatives
• Representatives vote on their behalf
• More like traditional voting

Example: Some portions of Compound DAO

Pros:

• Scalable (fewer active voters needed)
• Experts can specialize

Cons:

• Less directly democratic
• Can become centralized around popular delegates

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DAO Advantages: Why They're Revolutionary

✅ True ownership — Token holders actually own a piece

✅ Transparency — All decisions on-chain, auditable forever

✅ No single point of failure — Can't fire the CEO or shut it down

✅ Global participation — Anyone can vote from anywhere

✅ Alignment of incentives — Stakeholders make decisions

✅ Permissionless — No approval needed from anyone

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DAO Disadvantages: Why They're Messy

❌ Whale domination — Rich people hold most voting power

❌ Voter apathy — 95% of token holders don't vote

❌ Slow decision-making — Voting takes days; competitors move faster

❌ Irreversible mistakes — If community votes wrong, it's on-chain forever

❌ Governance attacks — Attackers can flash-loan tokens, vote, then sell

❌ Legal uncertainty — Are DAOs legally liable? Who's responsible if something breaks?

❌ Treasury management — Holding billions in a smart contract is risky

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Common DAO Failures

The Whale Problem

What happened: One investor holds 30% of DAO tokens, can dominate votes
Example: Early versions of some DAOs were controlled by early investors
Impact: Decisions favored wealthy members, not the community
Solution: Some DAOs now use quadratic voting or cap voting power

Voter Apathy

What happened: Only 1-2% of token holders actually vote
Example: Uniswap proposals get 18M eligible voters, but only 500K actually participate
Impact: Decisions made by tiny active minority, not true community
Solution: Better incentives for voting, simpler proposals, educational efforts

Governance Attacks

What happened: Attacker borrows massive tokens, votes on proposal, then sells tokens
Example: Flash loan attack on bZx DAO
Impact: Democracy manipulated by temporary token holder
Solution: Block voting power at specific block heights to prevent flash attacks

Bad Decisions

What happened: Community votes for something that damages the protocol
Example: Some DAOs voted for risky feature deployments that broke
Impact: Community has to vote to fix mistake, wasting time and resources
Solution: Some DAOs now have "veto" power for emergency situations

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DAOs vs Traditional Organizations

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The Reality Check

DAOs are not:

• Perfect alternatives to traditional organizations
• Immune to human problems
• Automatically better at decision-making

DAOs are:

• An experiment in decentralized governance
• Useful for certain types of organizations (protocols, treasuries)
• Still evolving and learning

The honest truth: Some DAOs work beautifully. Others are captured by whales, vote on nonsense, or get hacked.

Just like traditional organizations, DAOs are only as good as the people participating in them.

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Key Takeaways

• DAOs are organizations run by code and community voting instead of executives and boards
• Governance tokens give holders voting power and ownership
• Smart contracts automatically execute community decisions
• Real DAOs like Uniswap, MakerDAO, and Aave control billions in assets
• No perfect governance model exists — all have tradeoffs
• Whale problem is real — wealthy members can dominate voting
• DAOs solve the trust problem but create new coordination challenges
• Still an experiment — many DAOs will fail, but some will shape the future

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Questions to Explore

1. If you held 100,000 UNI tokens worth $1M, would you vote on every Uniswap proposal? Or would you delegate?
2. Is "1 token = 1 vote" actually fair? Or does wealth always win?
3. What happens if a DAO's community votes to do something illegal (in a particular country)?
4. Could a traditional company ever be governed as a DAO? Why or why not?
5. Are DAOs better for managing protocols than traditional companies?

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Resources & Further Reading

Official DAO Documentation:

Uniswap Governance: https://uniswap.org/governance — Voting portal and proposals
MakerDAO Governance: https://makerdao.com/governance — How MakerDAO votes
Aave Governance: https://aave.com/governance — Aave DAO portal

DAO Tools & Platforms:

Snapshot: https://snapshot.org/ — Off-chain voting platform for DAOs
Aragon: https://aragon.org/ — DAO creation and management tools

Educational:

"DAOs, WAOs, and the future of work" — A framework for understanding governance structures

Community:

Web3 for Humans Telegram: https://t.me/Web3ForHumans — Join daily discussions

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Series Navigation

60-Day Web3 Journey:

• Day 15: Ethereum vs Solana: Consensus in Action
• Day 16: DAOs Explained (Current)

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