What is a DAO and What is its Purpose?

Person using a laptop

The way of DAOs 

Decentralized Autonomous Organizations, or DAOs for short, are a new type of community, created out of the computer code that runs on blockchains. The concept can seem quite alien at first, with organizational structures that were not possible even a few years ago and use cases that are only beginning to be imagined. The sky is the limit, so read on to learn more and get a glimpse of the future.

 What the heck is a DAO?

At base, a DAO is a community formed by an agreement that has been reduced to computer code. Because the DAO members are agreeing to be bound by the computer code when they join the DAO, the code forms the ground rules for how the community will operate. 

You can think of the United States as an analogy. Everyone who becomes a citizen of the US, agrees to the governmental system defined by the United States Constitution. The Constitution sets up a government that is separated into three branches — Executive, Legislative and Judicial – each of which has its own function. These functions are carried out (or “executed”) by the government officials in each branch. The only actions the government officials are allowed to take are those that the Constitution specifies.

With a DAO, the computer code is both the Constitution and the government officials. The rules of the DAO are defined by the capabilities of the code: any function that the code can perform is within the rules, any function the code cannot perform is out of bounds. The code also carries out the rules automatically so, unlike with governments, there are no officials.  Because there are no officials, no one is in charge. The DAO is therefore decentralized and autonomous. 

What are DAOs good for?

The DAO structure can be used for anything that a centralized organization can be used for and potentially a whole lot more. For example, there is a DAO called Helium that provides internet access to people who buy the DAO’s token to pay for it. 

Each member of the DAO shares their home WiFi with the community by attaching a transmitter to their modem. Once a person joins the DAO they split the revenues of the Helium network by earning coins. Because this service is organized as a DAO, anyone can join and the code will ensure that they are fairly paid. 

Every DAO member benefits from this open arrangement because it expands the WiFi coverage and attracts more users. If a centralized corporation offered the same service, there would be needless expense and delays associate with on-boarding new members and additional costs to administer the payments. This new form of WiFi sharing came into being only because of the DAO.

Disrupting the typical corporate structure is just one example of a use case. DAOs have been organized as decentralized financial exchanges and decentralized venture capital funds where no one person or committee can control the investment decision. They have also been used as non-profit entities with charitable goals and as political action committees. These and other uses for the DAO are just getting started. 

How are DAOs created?

DAOs are formed out of computer code called “smart contracts”. The code runs on blockchains which means it is immutable: once the coder deploys the smart contract the code cannot be changed. As a result, no member of the DAO can change the rules, which means that everyone can rely on the rules being followed.

How does Jurat support DAOs?

Jurat helps DAOs in several ways.

First, Jurat can protect DAOs and DAO members from crime and fraud. You’ve probably heard about smart contract “exploits” where a hacker makes off with millions or even hundreds of millions of dollar’s worth of cryptocurrency. There are reports of such exploits almost weekly. 

An exploit happens because there are always “loopholes” in computer code – ways that the code can operate that defy the expectation of the coders and the intent of the people who join the DAO. One famous example involved a venture capital DAO where the hacker was able to steal the DAO’s funds by using a flaw in its voting system to “invest” the coins in his own account.

To protect against exploits, smart contract developers can include Jurat as a safety mechanism that lets courts take over the DAO if it is not functioning as intended. Any member of the DAO can go to court to ensure that the loopholes do not result in losses for the DAO.

Jurat also supports DAOs to be legally compliant so that their members do not end up on the wrong side of the law. For example, if a court finds that a corporation is violating a law, it can order the corporation’s president to change the way the corporation operates. Because the corporation itself can respond to the court, the law is willing to protect the shareholders – they do not get in trouble personally for the corporation’s actions. But with a DAO, there is no one in charge for the court to address. The DAO members have chosen to operate this way so they can be personally liable for any wrong that the DAO commits. 

Jurat puts the DAO in the same standing as the corporation, which is good for legal compliance and for the individuals in the DAO.

A third way DAOs can use Jurat is to help them govern themselves. Disputes about the meaning of agreements like the DAO are inevitable, just like disputes about the meaning of a contract. Although DAOs can include a governance function to make decisions, it is impossible to foresee every contingency which could arise. That’s why corporations can spend millions of dollars drafting contracts and still end up fighting in court.  

Jurat makes DAO governance comprehensive because any circumstance not covered by the code can be handled in court. DAO drafting becomes much simpler because there is no need to foresee every circumstance (which is impossible anyway) because DAO members can be heard in court and the judge will determine the intent of the DAO to decide the dispute. Incorporating Jurat functionality increases efficiency and makes DAO participation safer.