DeFi & Web3Beginner

What is a decentralized autonomous organization?

A DAO is a member-owned crypto group where token holders vote on proposals that code executes. Some tokens may be securities; Wyoming allows DAO LLCs.

Vahe HakobyanEditor-in-chief Updated Oct 6, 20263 min readFact-checked

Illustration: World-Crypt

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How does a DAO work?What do people use DAOs for?What are the main DAO risks?How are DAOs treated legally?FAQ

Key takeaways

A DAO is a member-owned crypto group run by code and token votes.
Governance tokens give voting power on proposals that smart contracts execute.
Risks include code bugs, large token holders, and low voter turnout.

A decentralized autonomous organization is a member-owned crypto group that runs on code and token votes. It lets strangers pool money and decide without a central boss.

How does a DAO work?

Members hold governance tokens. A governance token is a crypto token that carries voting power. Someone writes a proposal, holders vote, and a smart contract carries out the result. A smart contract is a program on a blockchain that runs on its own. More tokens usually means more votes.

DAO decisions compared with a company
Criterion	DAO	Company
Control	Token holders	Shareholders and a board
Decisions	Proposals and votes	Board votes and management
Enforcement	Smart contracts	Contracts and courts

What do people use DAOs for?

People use DAOs to invest together, work on projects, vote, get grants, and share services.

Investment clubs that pool funds for crypto projects.
Work groups that pay contributors for tasks.
Grant programs that send money to builders.
Service groups that share tools or data.

What are the main DAO risks?

The main risks are bugs in smart contracts, large token holders, low voter turnout, and weak governance. A bug or exploit can drain funds, and code is hard to change once it is live. A few wallets with most tokens can control votes, so a DAO is not automatically democratic.

Before you join a DAO, check:

Check who holds the largest share of voting tokens.
Look at how many holders voted in past proposals.
See who can upgrade or pause the contracts.

How are DAOs treated legally?

US law may treat some DAO tokens as securities if buyers expect profits from a common enterprise. Members can also face partnership liability for the group's debts or legal problems.

Frequently asked questions

Most DAOs let you join by buying or receiving the group's governance token and connecting a wallet.

A governance token is a crypto token that gives voting power, and more tokens usually mean more votes.

The IRS treats cryptocurrency as property, so selling or swapping a governance token usually creates a taxable event.

Some DAOs hold real-world assets through a legal wrapper such as a Wyoming DAO LLC.

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Written byVahe HakobyanVahe Hakobyan is the editor-in-chief of World-Crypt. He covers bitcoin, markets and regulation, and leads the newsroom that fact-checks every story before it goes live.