What Is a DAO?
A shared treasury run by token votes. In November 2021 one raised roughly $47m in ether from over 17,000 strangers in under a week, then lost the auction it was built for.
TL;DR
- A DAO is a group that keeps a shared treasury on a blockchain and decides how to use it through token votes counted by smart contracts.
- Code holds the money and counts the votes, while people still write proposals, argue them out, sign multisig transactions and do anything offline.
- ConstitutionDAO raised roughly $47m in ether from over 17,000 people in November 2021, lost the Sotheby's auction, and gas fees ate into the refunds.
- In April 2022 an attacker used about $1bn in flash loans to win a Beanstalk vote and losses came to around $182m; counting votes from earlier snapshots is meant to stop that.
On the evening of 18 November 2021, a first printing of the US Constitution came up at Sotheby's in New York. One of the bidders fighting over it on the phones was not a collector or a museum. It was ConstitutionDAO, a crowd of more than 17,000 strangers who had pooled over 11,500 ether, roughly $47m at the time, in under a week.
They lost. Ken Griffin, chief executive of the hedge fund Citadel, won after an eight-minute bidding battle, paying $43.2m, and the group could not go higher without leaving too little to insure, store and move the document. Then came the refunds, and The Defiant estimated that gas fees cost donors about $60 to send their ether in and probably the same again to claim it back, against a median donation of $206.26.
That week is about the clearest picture there is of what a DAO, short for decentralised autonomous organisation, actually is. It is a group that keeps a shared pot of money on a blockchain and decides what to do with it by vote. Smart contracts hold the funds and count the ballots. There is no board. This is an educational explainer and none of it is financial advice.
What the code runs, and what people still do
Go back to the afternoon of the auction. ConstitutionDAO's ether sat in a multisig wallet that would only move money once 9 of its 13 signers approved, a number picked partly as a nod to the nine of 13 states it took to ratify the Constitution. With hours to spare, the core team were ringing family members and chasing signers through coffee shops and offices, because Sotheby's wanted proof of funds in dollars, so the ether had to be converted, and the wallet would not budge without them.
Code collected the ether. Getting it anywhere near the saleroom took nine human signatures.
Most DAOs split the same way, and two parts really are automated: the treasury, kept in a smart contract or shared wallet usually built so that no single person can empty it, and the vote count, run on-chain or through public voting tools where anyone can check the tally. In the more automated setups a proposal that passes can be executed on-chain by anyone once a waiting period, called a timelock, runs out.
The rest is people. Somebody drafts each proposal and argues for it on a forum or in a Discord server, well before any vote opens. Bidding at Sotheby's took a person on a telephone line, and so does any other job in the physical world. Developers write and upgrade the contracts, and most voters take that code on trust. ConstitutionDAO's donors got PEOPLE tokens for their ether, and those tokens were meant to carry votes on where and how the document would be shown, yet no vote could have moved a single coin without the signers.
How token voting works in practice
In June 2022 Chainalysis looked at ten major DAOs and found that fewer than 1% of holders had 90% of the voting power. By its count, one holder in somewhere between 10,000 and 30,000 owned enough tokens to pass a proposal alone. Decentralised is a matter of degree.
The arithmetic behind that is plain: most DAOs count one token as one vote, so a wallet with 1,000 governance tokens outweighs a wallet with one by a thousand to one, and that is the design doing what it was built to do. In the DAOs Chainalysis studied, submitting a proposal took between 0.1% and 1% of the token supply, and 1% to 4% was enough to pass one.
Votes also need a quorum, a minimum turnout, before they count at all, and some decisions need a supermajority. Holders who cannot follow every debate can delegate their voting power to someone else while the tokens stay in their own wallet. On systems built with OpenZeppelin's Governor contracts only delegated tokens vote, so a holder who wants a say has to delegate, even if only to themselves.
Two of the bigger experiments have their own guides here. Arbitrum's first governance proposal, AIP-1 in 2023, turned into a row when it emerged that the foundation was asking holders to approve 750 million ARB it already controlled, some of which had already moved, and the proposal was split up. Optimism went another way: OP holders and their delegates vote in a Token House, while a separate Citizens' House gives each of its members one vote.
Beanstalk: when the vote is the attack
Token voting assumes that whoever holds the tokens when a vote is counted has a lasting stake in the outcome. Beanstalk, a decentralised finance project on Ethereum, found out on 17 April 2022 what happens when that assumption breaks.
Its rules let a proposal be pushed through by a two-thirds supermajority once it had been live for 24 hours, using an emergency function called emergencyCommit. The attacker submitted a proposal, BIP-18, written to hand the project's funds to them. A day later, inside a single transaction, they borrowed roughly $1bn, mostly in stablecoins, through flash loans, turned that into enough voting power to clear two-thirds, approved their own proposal, emptied the funds and repaid the loans before the transaction closed.
Losses were put at around $182m, the attacker kept about $76m, and $250,000 went to a donation address for Ukraine.
Nothing was broken into. Each step followed the rules as written, which is the uncomfortable part. One defence is to count voting power from a snapshot of balances taken before voting opens, so tokens borrowed for a few seconds carry no weight. OpenZeppelin's Governor contracts, for one, take voting power from past snapshots. Beanstalk was hardly the first DAO to be drained either: an attacker took 3.6 million ether from The DAO in June 2016.
Wrapping a DAO in a company
A pot of money run by token votes still has to sign contracts, pay people and deal with the offline world. Some DAOs handle that by registering a company around themselves.
Wyoming offered one route early. A state law that took effect on 1 July 2021 lets a DAO register as a limited liability company, as long as its name includes "DAO", "LAO" or "DAO LLC" and it keeps a registered agent in the state. As first passed, it recognised two types, member managed and algorithmically managed, and the second could only form if its smart contracts could be upgraded. A 2022 amendment went further: every smart contract a Wyoming DAO uses must now be capable of being updated or upgraded, so even the most automated version has to keep a way for people to change the code.
Questions to ask about any DAO
Strip away the vocabulary and a DAO comes down to a few checkable facts. Find out who holds the keys to the treasury and how many of them must sign. Look at what share of the tokens sits with the top handful of wallets, because that tells you who really decides. Check whether voting power is counted from a snapshot taken before each vote. Then ask which named humans carry out anything that happens offline.
Most of those answers can be checked, since multisig signers and token balances sit on the chain and voting rules are usually published. If they are vague anyway, the autonomous part of the name is doing a lot of work.
Frequently Asked Questions
DAO stands for decentralised autonomous organisation. In practice it is a group whose shared funds sit on a blockchain, in a smart contract or a multisig wallet, and whose decisions are taken by votes from holders of a governance token. The autonomous label oversells it, because people still propose, debate and carry out most of the actual work.
Usually one token counts as one vote. A proposal needs a minimum token holding before it can be submitted, enough participation to reach a quorum, and a majority to pass. Holders can delegate their voting power to another person and keep the tokens themselves. Better designs count balances from a snapshot taken before voting starts, so tokens borrowed after that point carry no weight.
That depends on the setup. Some treasuries are held by a governance contract that only pays out after a successful vote and a waiting period. Others use a multisig wallet that needs a fixed number of named keyholders to approve each payment. ConstitutionDAO used a 9 of 13 multisig, so nine individuals had to approve any movement of its ether.
It raised roughly $47m in ether from more than 17,000 contributors in November 2021 to bid for a first printing of the US Constitution. Ken Griffin outbid it at Sotheby's on 18 November, paying $43.2m. The group wound down later that month, and donors who reclaimed their ether paid gas fees that took a large bite out of small contributions.
Yes, if voting power is measured at the moment of the vote. On 17 April 2022 an attacker borrowed around $1bn through flash loans, gained a two-thirds supermajority in Beanstalk's governance, passed a proposal sending the funds to themselves and repaid the loans within the same transaction. Losses were put at about $182m.
About the author — Dan Clarke
Dan Clarke is the author of Bitcoin: The Complete Guide and a former content lead at Binance Academy, where he wrote crypto education for readers arriving with no background in the subject. He has worked in the cryptocurrency industry since 2017. His rule for these guides: plain language first, precision where it matters, no cheerleading.