Decentralized Autonomous Organizations

This is a chapter from the book Token Economy (Third Edition) by Shermin Voshmgir. Paper & audio formats are available on Amazon and other bookstores. Find copyright information at the end of the page.

</aside>

Since the advent of the Internet, numerous distributed online communities have formed around specific goals such as social media, e-commerce, or knowledge sharing. These communities can be viewed as modern Internet-based tribes, coordinating around shared purposes and values with the aid of increasingly sophisticated computer algorithms. In Web2, these tribes have generally been managed by private entities, with exceptions like community-governed networks such as Wikipedia or free and open-source software initiatives. In many cases, the operators of Web2-based platforms have disproportionate power over the fate of the communities contributing to and using their platforms. Web3 networks introduce a new type of Internet-based institutional infrastructure that can be collectively governed, allowing distributed Internet tribes to self-organize and coordinate in a more autonomous way.

Blockchain networks introduce a new type of Internet-based operating system that enables non-territorial coordination among people and institutions who may not know or trust each other. They facilitate the collaborative maintenance of public infrastructure without the need for traditional intermediaries or bilateral agreements. Property rights, access rights, management rights, information rights, or voting rights are enforced computationally through publicly verifiable, semi-automated mechanisms rather than traditional legal or management systems. Contributions to these networks are incentivized through purpose-driven tokens designed to steer collective action. Any type of organization—with any economic, political, or social purpose—can form on top of this infrastructure. Compared to traditional organizations, Web3-based organizations offer greater transparency regarding the flow of funds or governance processes. They are collectively managed with distinct ownership and collaboration structures. Proposals to change network rules can typically be made by any participant and are subject to voting, with rules for decision-making varying by DAO.

Since the advent of the Bitcoin network, this model of distributed organization has been described with terms such as “Digital Nations,” “Decentralized Corporations,” “Decentralized Autonomous Organizations,” “Decentralized Organizations,” “Network States,” “Coordi-Nations,” “Digital Cooperatives,” or “Infrastructure Networks.” For consistency, this book will primarily use the term DAO, while acknowledging that the degree of decentralization and autonomy varies widely, making the term "Decentralized Organization" more appropriate in many cases.

In theory, DAOs can replace the hierarchical structures of state-of-the-art institutions with more distributed and autonomous institutional structures. Governance rules are formalized through blockchain protocols or smart contracts, regulating the actions of network participants, which is why DAO protocols have also been referred to as "unstoppable code." However, even in their most autonomous form, DAOs require some human intervention for conflict resolution, handling unforeseen events, and evolving protocols.

History of DAOs

The Bitcoin network can be considered the first Decentralized Autonomous Organization, though the term was not coined until later. The Bitcoin protocol provides a collectively maintained operating system for financial networks, removing the need for traditional banks and managers. Governance is tied to the network token, BTC, which is minted and distributed as a reward for contributors through the Proof-of-Work consensus mechanism. The network operates without a central coordinator, allowing anyone to join or leave as a user or contributor without requiring permission from a centralized authority.

The open-source nature of Bitcoin's protocol enabled others to copy and modify its governance rules to create their own decentralized networks. The emergence of the Ethereum network revolutionized this process by moving the capacity to create a decentralized organization from the protocol level to the application level. Ethereum's smart contracts made it possible to program decentralized organizations with minimal code, eliminating the need to set up a dedicated blockchain infrastructure. This innovation broadened the scope of DAOs, enabling diverse use cases to be modeled and incentivized. Addressing economic, political, ethical, and legal considerations in the design of DAOs and the tokens that steer them remains an ongoing challenge.

The concept of DAOs, while popularized by the crypto community, has deeper roots in political philosophy and cybernetics. Ideas of autonomy and decentralized organizational structures predate Web3, emphasizing the distribution of rights and powers among participants of internet-based organizations. Dan Larimer and Vitalik Buterin were among the early influential voices exploring the economic and organizational potential of Bitcoin and the governance infrastructure it inspired. The terms Decentralized Autonomous Organization (DAO), Decentralized Autonomous Cooperation (DAC), and Decentralized Organization (DO) and related concepts emerged from broader discussions within the crypto community, with these figures helping to popularize and refine the terminology. While automation is often stressed and plays a significant role, the true value of DAOs lies in their ability to enable collective control or collective autonomy, a principle often summarized as “decentralization.”

Early projects like TheDAO in 2016, or MakerDAO and other DeFi DAOs later, showcased both the possibilities and challenges of DAOs. While they demonstrated the potential for decentralized governance and funding, they also exposed vulnerabilities, particularly around flawed assumptions regarding the willingness or practical feasibility of participation, as well as what can and cannot be automated. The often flawed design of early DAOs highlighted the need to account for issues such as voter apathy, free-rider problems, and bounded rationality when designing the rights and obligations associated with DAO tokens.

Rule of Law & Rule of Code

Our current social and economic institutions often rely on top-down structures and legal systems to enforce agreements. Constitutions, contracts, and trade rules all play a critical role in our legal system in providing social and economic security. They define the boundaries of social and economic interactions and prescribe sanctions for rule or contract violations. Blockchain networks complement the legal system with an internet-native governance layer that some refer to as “rule of code,” making breaches of contract economically infeasible using cryptography and financial disincentives.

Political institutions: Before formalized legal systems emerged, social norms were communicated and enforced through mythology and religious institutions. Over time, religious laws evolved into secular institutions, from Roman times to the Age of Enlightenment, which fostered an independent legal system and eventually separated church and state. The political principles behind legal systems can vary greatly. Liberal democracies generally grant more individual autonomy to their people than authoritarian regimes. In a democratic system, the rule of law promotes transparency, uniform application, and accountability, avoiding retroactive and contradictory rules, while also ensuring that rulers must abide by the law. Checks and balances, as well as constitutional protections, ensure that these systems can adapt to progress and resolve ambiguities. Rules in the form of new legislation are implemented through collective decision-making. Since direct participation has proven impractical in large societies, representative democracies have developed, delegating decision-making to elected officials. While efficient, such delegation often leads to principal-agent dilemmas and public disenchantment with the democratic process—a phenomenon described as "Post-Democracy." Alternative forms of democratic participation, like Liquid Democracy, propose flexible delegation of voting power, but practical challenges have hindered their adoption.
Economic institutions operate within these political systems and are regulated by the explicit or implicit rules of the social institutions they are part of. Participants in economic systems—generally referred to as “consumers” or “producers”—interact with each other, forming a market for goods and services that may be more or less regulated by the political institutions that govern them. The autonomy of market participants depends on the degree of explicit or implicit rules and regulations and is a product of market design. The larger a social group, the bigger its political institutions and generally also the body of laws that govern the market through laws and policies, ensuring property rights and economic stability. But there is a tradeoff: the larger the body of laws, bureaucracy, and norms, the less autonomy individual market participants have. Weak rule of law, on the other hand, fosters corruption, deterring investment and market activity. In recent decades, Web2 platforms have facilitated global market-making mechanisms at lower transaction costs, creating new organizational models. However, these platforms remain controlled by private companies that dictate the rules of the network and terms of participation while retaining ownership of user data.
Web3 protocols offer a technical operating system for a new type of socioeconomic institution that transcends the boundaries of nation-states and private corporations. Their rules are codified in computational constitutions of Web3 protocols (hence the term “rule of code”) and secured by cryptoeconomic mechanisms. Rights and obligations are enforced collectively by blockchain node operators, replacing reactive legal systems with proactive, automated mechanisms that make breaches of contract prohibitively expensive. While decentralized organizations can use the legal system for some protection of digital property rights, such usage is secondary to the preemptive security mechanisms that blockchain protocols and smart contracts can offer. However, this is only true for Web3-native digital assets. In the case of tokenized real-world assets, blockchain networks can only secure the tokenized digital certificates of the respective property rights. A physical management system of the physical asset and a functioning legal system will still be necessary to protect physical property and provide solutions that prevent and sanction physical theft or damage. Beyond property rights, tokens can also represent voting rights to participate in the governance process of creating and managing a Web3 network. The crypto community has experimented with a range of novel voting mechanisms, from delegated voting to quadratic voting, for steering the collective decision-making process. Given the nature of blockchain networks, forms of “Liquid Democracy” have also become much more feasible and have been implemented in the form of “delegated Proof-of-Stake” in some blockchain networks. However, decentralization through participation is not only a technical issue. It is also a social issue concerning how much users of a Web3 network are willing to participate, given actual time constraints and knowledge gaps that practically prohibit them from participating in the decision-making process.

“Traditional organizations vs DAOs” from Token Economy (Third Edition) 2025, Shermin Voshmgir

History of DAOs

Rule of Law & Rule of Code

DAOs as Internet-based Institutions