How Does a DAO Operate?

@Aniketh Chedalla @Muskan Bhatla can y’all make the final edits on this?

So now that we know what DAOs are, let’s figure out how they even work?

Well, lucky for you, that’s where we come in to help!

We’re gonna gradually explain this concept to you guys by going through:

  • The tech behind DAOs and how it makes it unique
  • The balance of power through a voting mechanism
  • DAOs ability to pool together money through funding

So, let’s get started!

At the base of every organization are rules & systems that define & guide how they operate ~ ✨the smart contract ✨.

Smart Contracts


What is a Smart Contract?

Smart contracts” are pieces of computer code stored on a blockchain-based platform that automatically executes all or parts of an agreement. But you might be thinking, why do we need “smart” contract? Don’t we already have the contacts that we use on a daily basis to reach an agreement with multiple parties. Well, let’s take a little deeper dive into why they are necessary and how they work.

Why do they matter & how do they work?

Stored on a blockchain-based platform, smart contracts remain as the backbone of any DAO, and sticking with the fundamental purpose of smart contracts, DAO smart contracts are necessary to ensure that the automated processes run according to predefined rules.

As soon as the contract is constructed and finalized, no individual or entity can alter the contract unless it is through a vote. The DAO depends on smart contracts that automatically execute when the criterias in the smart contract are fulfilled. The concept that any individual or entity should be able to participate stimulates a more horizontal, transparent organizational structure.

Now let’s get back to the our original point-why do we even need them when we have ordinary contracts?

What sets smart contracts apart from standard contracts is their ability to automate the execution of an agreement so that all participants can be immediately certain of the outcome, without any intermediary’s involvement or time loss.

Now that we know more about smart contracts, let’s take a look into how voting works on a DAO.

Voting 👍

In order for voting on most DAOs to take place, members must pay a “gas fee”.

Gas Fees

A gas fee is a fee that is paid to the computers that do the work to run the blockchain. Users pay gas fees to complete a transaction. Since DAOs are run on blockchains, you have to pay a gas fee to complete DAO transactions. An Ethereum-based DAO member would need a certain amount of $ETH (Ethereum’s currency) to cast a vote. For example, if there’s a proposal to elect members to a council for a DAO, I would need to pay a certain amount of ETH in order to vote on which members I believe are the best to elect.

Ok, let’s take a step back. At its core, a gas fee is basically a tax for decision making in a DAO. These are the same gas fees that you would have to pay in order to complete a transaction. It is priced in Ether, due to most DAOs often being built on the Ethereum blockchain.

Gas fees pay for updating the Ethereum blockchain and the mining in order to verify transactions. Basically, transactions wouldn’t be able to be made if gas fees weren’t there to maintain the blockchain. If you’re interested in learning more about how gas fees work, here’s a link to a video that explains them more in-depth:

Deep dive on how gas fees vary

Let’s say you’re buying gas at a gas station. If there is a huge supply of gas, then the price per gallon won’t be as expensive. However, if there isn’t a large supply of gas, then the price per gallon will be more expensive, as there is less gas to buy. Gas fees work in exactly the same way. If there is an infinite amount of miners/validators in the DAO, then gas fees for transactions will be close to zero. However, if more miners tend to leave the DAO, then gas fees for transactions will rise. This means that a gas fee is often equal to the computational cost it takes to make a transaction.

However, not all voting requires that gas fees be paid. There are two types of voting that we need to understand more about.

On-Chain vs Off-Chain Voting ⛓️

On-chain vs. off-chain voting is exactly what it sounds like. On-chain voting means that a transaction made by someone in the DAO will be recorded on the blockchain, while off-chain voting means that it won’t be. On-chain voting is often more secure, but the advantage with off-chain voting is that there isn’t a need for gas fees with transactions. However, for off-chain voting, there is often a need for a third party to verify the transaction that is being made.

Enough talking about how DAOs work. Let’s actually experiment with one now!

Decentralized Voting Systems

If you click the link above, it will take you to a decentralized voting platform called Snapshot. On Snapshot, people can make proposals on their DAOs that other members of the DAO can vote on. Snapshot uses off-chain voting thanks to a decentralized storage network called IPFS. This means that when you vote on proposals using Snapshot, you don’t have to pay gas fees.

Let’s take a look at an example. In order to join a DAO on Snapshot, you must first connect your wallet to Snapshot. Once we have joined the DAO, we can take a look at all the proposals that people are voting on. For example, in CityDAO, there is a new proposal to form a CityDAO council and elect members to it. I can then vote based on how I feel on the proposal through a transaction.

Finally, let’s talk about how most of these DAOs are funded.

Funding 💰

In order to talk about funding, we need to understand what a DAO treasury is.

Treasuries 🔐

A DAO treasury usually consists of funds/assets that can be spent through various actions voted on in proposals. The members of the DAO collectively own the treasury.

The Cointelegraph article above gives us a sense of how DAO treasuries have been increasing rapidly in value in the past few years. According to the article, in 2021 alone, the total combined value of treasuries for DAOs increased about 40x its original value! Many venture capital firms are seeing the benefits that DAOs have to offer, and are investing in them accordingly.

Venture Capital

Just how popular are DAOs? Super popular! We can get an example by looking at a quote from this TIME article. The rest of the article’s pretty also pretty interesting if you want to read more! https://time.com/6154118/pussy-riot-unicorn-dao-nadya/

“Today, DAOs are big business. A DAO social club called Friends With Benefits was recently valued at $100 million by investors (including trend-setting venture capital firm Andreessen Horowitz). An investment bloc called ConstitutionDAO raised $17 million to bid on a copy of the U.S. Constitution. (Their bid failed, but their notoriety was secured.)” (Raisa Bruner, 2022)

The DAO called Friends with Benefits is currently valued at $100 million! And that’s just one example. The potential that VC firms see in DAOs today is undeniable. They’re aware of the many applications that DAOs can have in industries, which we will talk about in the next page.

Made by Muskan Bhatla & Aniketh Chedalla