As the crypto and blockchain industry continues to evolve, we come across new concepts and terminologies. DAO (Decentralized Autonomous Organization) is one such concept, that has been getting a lot of attention off-late. The increasing popularity of DAOs has attracted massive investments into the sector. As of January 2022, the total market cap of all DAO tokens stood at around $21 billion. More than 1.7 million investors hold governance tokens. Launching DAOs is getting extremely popular now. So for all the crypto geeks around, it is extremely important to learn about different types of DAOs and their functionalities.
What Is a DAO?
The crypto industry is focused on the decentralization of the global economy. In order to turn this vision into reality, the transformation must begin from within the industry. DAOs lead this transformation by democratizing the decision-making process for crypto startups. A DAO or Decentralized Autonomous Organization is a composition of distributed ledger technology (DLT) and blockchain-powered smart contracts. It is a fully autonomous and transparent entity without any central authority, enabling stakeholders to participate in the decision-making process or governance of a project. Crypto startups are bound by governance rules, and the DAO ecosystem democratized the process of framing these rules. There are different types of DAOs depending on the functionalities.
Understanding The Functioning Of DAOs
Smart contracts are the foundation of DAO rules. Community members have the authority to set these rules. The smart contracts are verifiable and open for public audit. Users can go through these smart contracts to understand a protocol and its functionalities completely.
After the creation of DAO rules and their formal inscription on the blockchain, the next step for the DAO is to secure financing. The most convenient way to secure funding is by issuing tokens. Investors who purchase these tokens receive voting rights. However, the voting rights are generally proportional to the token holdings of investors. After the accomplishment of funding, the deployment of DAO is completed.
The programming language used to create DAO code is called “Solidity.” After the creation of the code, it is deployed on the Ethereum blockchain for activation. After the deployment of the code, it is impossible to alter it without receiving a consensus through a vote by members. In a nutshell, it is the token holders who have the authority to decide on any changes in the code.
Different Types Of DAOs
- Protocol DAOs: Protocol DAOs are designed to govern a decentralized protocol, such as a dApp or a decentralized exchange. In a protocol DAO, tokens serve as a metric for implementing any changes in the protocol. MakerDAO, Uniswap, and Yearn Finance are some of the most notable examples of Protocol DAOs.
- Investment DAOs: Also known as Venture DAOs, Investment DAOs are completely transparent and open to literally anyone and everyone. These DAOs allow the pooling of capital to democratize investment in early-stage web3 startups and protocols. The bitDAO is one of the most popular venture DAOs.
- Collector DAOs: Collector DAOs empower the NFT community. Artists and creators using NFTs depend on collector DAOs to establish the ownership of their art. Collector DAOs enable the pooling of funds, allowing the community to invest in top NFTs and digital collectibles. Every investor gets a share proportional to their investment.
- Grant DAOs: Grant DAOs are used to fund innovative DeFi projects and Web3 projects. In a Grant DAO, the community has the voting power to decide on fund allocation and distribution. The highly popular Aave protocol is an example of Grant DAOs. Aave protocol uses the funds from the grant pool to grow the DeFi community.
- Media DAOs: Media DAOs aim to revolutionize the media and journalism industry by allowing readers to contribute to the ecosystem without the involvement of advertisers. Users get the native token as a reward for their contributions. BanklessDAO is one of the examples of Media DAO.
- Social DAOs: Also known as Creator DAOs, social DAOs are collaboration platforms for social networking within the crypto space. Social DAOs aim to bring together like-minded individuals like creators and artists and democratize the entire space. However, unlike other DAOs, social DAOs are not open to all. You need to own a specific number of tokens or NFTs or a personal invitation to participate in the decision-making process.
Conclusion
There are different types of DAOs in the crypto ecosystem, and each one of them has different usage. As the crypto industry evolves, we can see some more DAOs. A DAO is a revolutionary concept that aims to bring complete transparency and decentralization to the decision-making process in the industry. Any crypto startup can set up a DAO to democratize the governance of their protocol. However, it is important to understand the principles of different types of DAOs before setting up one.