What exactly is a DAO? A complete interpretation from autonomous mechanisms to future forms

Question

Decentralized Autonomous Organizations (DAOs) represent a new organizational paradigm. They operate autonomously under preset rules, without relying on any individual or soft regulations, or political-like coordination processes—this is the core promise of DAOs. However, in reality, few people truly understand how DAOs function, their value proposition, or how they are transforming traditional organizational models.

The Essence of DAO: From Concept to Practice

Understanding the Three Dimensions of DAOs

Decentralization means power and decision-making are distributed across multiple parties rather than concentrated in a single entity. However, decentralization is not an absolute binary; it exists on a spectrum. Many DAO organizations, especially in their early stages, rely more or less on centralization to initiate or maintain operations. A more accurate understanding is that they exhibit clear decentralization features and degrees of freedom.

Autonomy is the most commonly misunderstood concept in DAOs. The term originates from ancient Greek “Auto” (self) and “Normos” (law), originally referring to city-states self-determining without control from higher authorities. In modern contexts, autonomy has evolved from individual self-governance to machines operating automatically without human intervention. In the context of DAOs, autonomy refers both to rules that self-execute and to the community’s ability to coordinate independently.

Organization is the true value of DAO. DAOs can be not only decentralized companies but also any collective form requiring human participation—cooperatives, communities, creative collectives. This flexibility extends DAO applications far beyond traditional corporate frameworks.

Why Do DAOs Emerge?

Traditional companies face core issues of information asymmetry and incentive misalignment. In a mature large enterprise, only a few core managers act with an ownership mindset, while other employees function like well-planned parts, completing their tasks on time and as assigned. The root cause is a fractured incentive mechanism—clear boundaries between employee and company interests lead to a lack of initiative.

DAOs aim to break this pattern. Through token incentives, code constraints, and transparent information, each participant becomes both laborer and owner, turning consensus-building and rule enforcement into automated processes. Imagine a DAO with 1,000 members, where each actively contributes time and resources to the community—this energy release is unimaginable in traditional organizations.

Fundamental Differences Between DAOs and Traditional Enterprises

Shift in Trust Mechanisms

Companies rely on legal contracts and organizational structures, whereas the core framework of DAOs is rooted in “community.” This subtle difference is profound.

In traditional enterprises, trust is built through complex legal systems, third-party endorsements, and intermediaries. DAOs, on the other hand, use “code as law”—rules encoded into smart contracts deployed on blockchains. This eliminates many barriers and middlemen involved in trust-building, allowing strangers worldwide to collaborate under programmatic constraints, greatly reducing organizational costs.

Redistribution of Ownership and Profits

In traditional companies, the actual owners are investors. Successful firms often restrict early investor participation, and once profitable, all value accrues to investors, with employees receiving limited compensation.

In DAOs, each member is both a worker and an owner. Participants not only earn wages but also share in the economic benefits of organizational growth. This alignment of interests further consolidates organizational consensus. Under the condition of token ownership, this model can be seen as a more anti-capitalist organizational form.

Liquidity and Screening Mechanisms

DAO members and resources are highly fluid—users can join or leave at any time. This liquidity itself acts as a filtering process, continuously strengthening DAO consensus. Well-developed DAOs can attract ongoing contributions from top talent, often experiencing rapid growth.

Democratic Decision-Making

Traditional companies make decisions through CEOs and executives, while DAO decisions are made via community voting. The fundamental difference is: corporate operations aim to maximize shareholder profits, which can sometimes conflict with employee or management interests. DAOs rely on voluntary labor from members, collaborating based on consensus, leading to exponential improvements in workforce quality.

Characteristics of DAO Work and Participation Methods

Work Features Under Decentralization

In DAOs, there are no CEOs or traditional employees. Participants are " proposers" and “contributors”—voluntarily showcasing special skills and contributing to projects. This means no one will give you instructions; your work depends entirely on your initiative.

This creates an implicit entry barrier: personal interests must align closely with DAO goals. When “what you can do” overlaps with “what the DAO should do,” contributions are maximized.

Anonymity and Performance-Based Incentives

Another notable feature of DAOs is participation without identity verification. Age, gender, nationality are irrelevant; what matters is actual contribution. The old spirit of “showing loyalty by arriving early” or “being loyal to the boss” from pre-industrial times is now obsolete. Welcome to a flat, performance-based collaboration model.

Rewards are typically in project-issued tokens. These are often governance tokens; the more you contribute, the more tokens you earn, and the greater your voting power in key decisions. This incentive design creates a new game mechanism—participants can receive immediate rewards while also benefiting from long-term growth.

Evolving Governance Models

Early DAOs often used off-chain governance, applying tools that exert weak constraints on project teams. Mature DAOs tend toward on-chain governance, where voting results are directly executed via smart contracts, achieving fully decentralized decision-making and implementation.

The core advantage of on-chain governance is transparency—every step from proposal submission to final execution is recorded on-chain and automatically enforced, making tampering impossible.

Advantages and Challenges of DAOs

Core Advantages

Transparent Governance: All proposals and votes are publicly visible; rules are encoded as smart contracts on the blockchain, breaking information asymmetry.
Broad Participation: Unlike traditional enterprises with decision-making by a few, DAOs enable most or all members to participate in decision-making, greatly increasing engagement and representation.
Precise Reward Alignment: Leveraging blockchain technology, members’ labor and rights are quantifiable, ensuring rewards closely match contributions.
Immutable Rules: Unless a majority votes to amend, established rules cannot be altered. This significantly reduces transaction and communication costs, as well as disputes.

Main Challenges Facing DAOs

Code Limitations: The complexity of real-world organizations far exceeds what smart contracts can handle. Relying solely on code to manage all organizational functions is impossible for a long time. Many decisions and executions involve complex, nuanced content that cannot be fully constrained by code.

Decision-Making Efficiency: One-token-one-vote seems democratic but is inefficient. It leads to three core issues: (1) low willingness to participate in each decision, as not all proposals concern individual interests; (2) lack of expertise among voters, with professional opinions drowned out by less-informed token holders; (3) increasing proposal volume, leaving members with insufficient time and energy to participate in every decision.

Technical Security Risks: Code vulnerabilities can cause severe losses. For example, in 2016, The DAO suffered a major hack due to security flaws, even triggering a hard fork of Ethereum.

Legal Ambiguity: The legal status of DAOs remains unclear. Questions include: who owns community wallets? How are taxes levied? These practical issues hinder development.

Tool Ecosystem Insufficiency: Although various tools are being developed, DAO participants may not fully utilize them. Implementing mechanisms like visualized contribution tracking and automatic token distribution is challenging; many projects still rely on centralized services like Discord or Google Docs.

High Knowledge Barrier: Participating in DAOs requires at least basic crypto literacy. For most, concepts like MetaMask, wallet management, and on-chain interactions are unfamiliar. This barrier blocks hundreds of millions of potential participants.

Talent Imbalance: Building DAOs requires not only technical talent but also economists, sociologists, political scientists. Currently, most DAO participants have technical backgrounds, leaving overall design and governance areas underdeveloped.

Oligarchic Risks: Many blockchain projects claim to be “decentralized,” but in reality, they are “decentralized from others’ centralization, while becoming new centers themselves.” Large holders (whales) control project governance, turning most users into speculators manipulated by insiders. Truly “de-oligarchizing” requires fairer economic models, more rational permission layers, and transparent financial flows—much more difficult than just shouting slogans.

Practical Approaches to Optimize DAO Governance

Incorporate Corporate Logic into DAO Operations

Many people have misconceptions about participating in DAOs: earning profits happily, losing money and swearing, ignoring DAO’s core values and indulging in speculation. This resembles gambling culture.

DAO governance should align more with corporate governance logic. Every healthy company has three integrated systems: business operations (core functions), decision management (guidance), and financial systems (resource management). No company can grow strong without all three.

Mapping these to DAO: business system → proposal system; decision system → voting system; financial system → treasury. Current mainstream solutions (Gnosis Safe + Snapshot) are evolving toward this model.

Harmonizing Vague and Clear Goals

A frequently overlooked issue is balancing vague goals with definitive objectives. For example, a top-level goal for an investment DAO might be “capture sector growth” (vague), which can be refined into “invest in NFT projects” (more concrete), and further into “evaluate specific NFT project investment value” (very specific).

Founders’ key responsibility is to clarify the DAO’s vague goals and steadfastly maintain this direction. The most common failure is founders’ overreach—micromanaging or excluding dissent—leading to DAO decline. The correct approach is to safeguard strategic direction without interfering in tactical execution.

Interestingly, animals like bees and ants can exhibit remarkable coordination under scattered organization and vague goals. This offers insight: under governance with vague objectives, DAOs can also achieve internal consensus and progress toward goals.

The Legal Status and Future Forms of DAOs

Three Legal Frameworks for DAOs

First: Fully Wrapped DAO (Wrapped DAO)

These DAOs are entirely enclosed within one or more legal entities, essentially similar to traditional companies. Legally, governments can hold accountable by ignoring or revoking corporate status. This may be the best way for key contributors to maintain control and reduces personal legal risks. However, it sacrifices DAO’s decentralization essence—merely a traditional company in a smart contract disguise.

Second: Ecosystem DAOs (with D-Corps)

Many DAOs require corporate entities to perform specific functions. The key is ensuring these D-Corps (like development companies) and DAO members have equal rights, without extra authority from corporate status. Common examples include DevCo—hiring core developers, which can continue to receive compensation from DAO treasury but does not control governance. Bridge-Corps are another important role, connecting DAOs to traditional finance. Foundations are typical tools for opening accounts and legal contracts. As on-chain solutions improve, these bridge entities may eventually phase out.

Third: Formless DAO (No formal structure)

This is the purest and most legally risky form—no corporate structure at all. Truly decentralized autonomous organizations should not dissolve because of jurisdictional orders or government enforcement. They operate under permissionless rules, fully coordinated by incentives, without privileged individuals. Unfortunately, few DAOs today reach this ideal. Most adopt wrapped or ecosystem structures temporarily to mitigate legal risks.

Some projects are experimenting with “de-gov” models (e.g., Reflexer), automatically removing human discretion to reduce legal exposure. These experiments are closely watched by legal experts.

Emerging Trends in Legal Decentralization

A consensus is forming around “legal decentralization”—distributing rights and automating the removal of human discretion to lower legal risks. Even with full decentralization, tax issues remain. The good news is that communities are rapidly iterating solutions to protect contributors, especially those choosing fully formless architectures.

The Future of DAOs: From Ideals to Reality

Diverging Evolution Paths

The original ideal of DAO—fully autonomous operation under preset rules—represents a technological empowerment aspiration. In practice, two distinct paths have emerged.

One is existing community DAOs: they compensate for technical rigidity with cultural cohesion. By aligning shared values, they create stronger coordination, incentives, and ownership distribution, leading to innovative models and achievements.

The other is a more autonomous, “self-governing” DAO: closer to the original ideal, operating entirely under preset rules without human intervention.

These two paths will not merge but will develop along separate trajectories. The former’s value creation always involves individual community members—people are always central. The latter starts from a different premise.

The New Paradigm of Autonomous Worlds

Autonomous Worlds, first proposed by 0xPARC in 2022, do not refer to our physical universe but to a container for rules and narratives. Examples include worlds in “Three-Body Problem,” “Lord of the Rings,” or even chemical systems—each with its own rule set.

The core of Autonomous Worlds is having a “blockchain-based universe” with three features:

Strict narrative boundaries: a fixed, immutable set of baseline rules providing stability.
Formalized entry rules: clear, fixed procedures for entering and participating, including how to become a participant and interact.
No privileged individuals needed for existence: the world sustains itself solely through predefined rules and code.

From this perspective, DAOs are a form of Autonomous World. Their appeal lies in their objectivity—like physical laws, they exist independently of any individual, maintained by rules. Participants influence and affect this world only by agreeing to its rules, and their influence becomes an objective part of the world.

From Technical Dependence to Human-Centric Design

Early on, many expected DAOs to gradually reduce reliance on humans. As infrastructure improves, automation would progressively replace human roles—managing treasuries via multi-sig, automating proposals and treasury interactions, and eventually automating key permissions.

However, practical experience over recent years shows this linear evolution is a fantasy. Community DAOs require human participation, decision-making, and creativity—not due to technical limitations but because this is the essence of DAO. As organizational development theory suggests, organizations tend toward a “blue paradigm”—self-organizing, self-managing, small autonomous teams working toward shared goals. This is rooted in human nature.

In the future DAO ecosystem, everyone’s life will be intertwined with numerous DAOs. In this decentralized environment, who would prefer to live under authoritarian control? The answer is obvious.

The true charm of DAOs is uniting countless scattered individuals into a cohesive whole, realizing organizational value, and allowing people to find joy in the process—rather than satisfying control desires. This is the ultimate future DAOs aim to achieve.