Decentralized Autonomous Organizations, or DAOs, essentially represent a tool for managing projects or communities by leveraging blockchain technology. These internet-native organizations are governed by code and community rather than a central authority. Here’s what you need to know in 2026.
How Does a DAO Work?
DOAs replace top-down decision management with collective decision-making They rely on smart contracts to function, as they establish the rules of the organization.
These rules can include things such as the rewards for users who stake a specific asset, the collateral ratio required for users to borrow against their holdings, or simply what assets the DAO will support in general. All rules outlined in the smart contracts are fixed unless a proposal changes them.
Any member of a DOA can propose a change to a rule, and the community will then vote to support or reject the proposal. If the majority approves, the change will be automatically implemented.
This structure allows organizations to operate autonomously and ensures they are led by the consensus of all their members rather than a central authority.
Advantages of DAOs
The main advantage of a DAO is that it is a publicly accessible set of rules created through smart contracts, which can be verified by reviewing code. This means that a DAO can be trusted as long as you can trust the code with which the DAO was created. You can do this before the DAO ever launches, allowing you to make an informed decision.
Then, once you’re within a DAO, you know there can be no change made to how it works without approval from the majority of the community. However, even if you’re a small fish in the DAO, you can make a proposal for the rest of the community to consider. If it’s a good idea, then it will get approved and implemented.
The Limitations of DAOs
The main limitation of a DAO is the number of members and their positions in terms of crypto assets. There isn’t much point to a DAO if there are one or two members with enough votes to make any of their proposals be approved. As with real-life organizations, centralization of power can be an issue, so it’s key for DAOs to try to keep assets well-distributed to avoid some sort of corruption/bad actor situation.
The other main issue with DAOs is that their members are likely to be located all over the world, with different legal jurisdictions and regulations. As such, should a legal issue arise within a DAO, it may be very difficult to solve, as there are so many laws to consider.
DAO Example: What was “The DAO”?
“The DAO” was one of the first attempts at a DAO as we now describe it. It launched in 2016 as a form of venture capital fund for its users who were using the Ethereum blockchain. It raised $150 million in Ether for development and launched in April 2016. Investors could buy DAO tokens by depositing Ether into the smart contracts.
However, as the code was open-source, users noticed a potential bug in the code that could allow funds to be drained from the smart contract. While a proposal to fix the bug was made, the funds were drained before it could be fixed, resulting in $60 million in Ethereum being stolen.
There was much debate within the Ethereum community as to what to do, but what ended up happening was a hard fork where two Ethereum blockchains resulted. One, now called Ethereum Classic (ETC), allowed the hack to exist, while the other, now called Ethereum (ETH), rolled the blockchain back to before the hack occurred.
“The DAO” now serves as a good example for all current and upcoming DAOs as to the importance of verifying a project’s code before investing money into it.
Decentralized Finance (DeFi) Stocks
These days, most DAOs are related to various DeFi projects on Ethereum and other platforms. For example, MKR is a governance token for the MakerDAO platform, which is used to create dollar-pegged ERC-20 tokens that are backed by collateral in the form of ETH and other tokens. Another example would be UNI, which is the governance token behind the Uniswap decentralized exchange.
While all of these DAO governance tokens behind DeFi projects are intended to grow in value as the DeFi apps increase in popularity, it’s important to look at the specific tokenomics behind each of these tokens. Bad tokenomics in some projects have led to situations where a decentralized app has become pretty heavily used without much additional value accruing down to the underlying token.
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