DAOs rise in popularity in 2021 but have seen a decline since 2023. Old DAOs are fading, new capital is leaving. What has driven this shift? Why did DAOs thrive before, and what challenges are they facing now? Do DAOs have a future, and if so, what are the next steps?

In this article, we will explore 8 classic DAOs from history, examining the methodologies behind them, the challenges they've faced, and what the future may hold for DAOs.

If you're new to the space, this article will provide you with a comprehensive introduction. If you're a DAO builder, I'd love to engage in a discussion with you.

Before we define what a DAO is, let's first take a look at some classic examples.

 Classic Cases 

Investment DAO

In 2016,  "The DAO" raised over $150 million in ETH through crowdfunding.

The economics of The DAO were simple:

People contributed ETH to "The DAO" in exchange for DAO tokens, which gave them voting rights within the organization. And any token holder could propose projects for funding. Each token represented a vote, so the more tokens you had, the more influence you have.

If a proposal gets enough votes, the person behind it would gets the money they requested to build their project. If the project succeeds, they're supposed to share some of the profits with the DAO.

At its peak, The DAO attracted 15% of all ETH.

Besides crowdfunding, there are other ways to raise money:

Take BitDAO, for instance. It's backed by a CEX Bybit, contributes 2.5 basis points of its contract trading volume. This deal's been around for years, but now they're switching to buying back BitDAO tokens to help out the DAO.

Cult DAO is different, It take a bit off each transaction. Every time you buys, sells, stakes, or unstakes their token, 0.4% goes to the treasury. Once it get 15 Ether, they invest all mone based on what their members voted for.

Protocol DAOs

The first Protocol DAO you should know about is MakerDAO. Its main product is the stablecoin: DAI. When you stake ETH or other cryptocurrencies into MakerDAO's protocol, you can borrow DAI, which maintains a 1:1 peg with the USD.

Because the price of ETH fluctuates, MakerDAO requires more collateral to borrow DAI. For instance, if you want 100 DAI, you need to collateral $145 ETH. MakerDAO can change this ratio and add different collateral options, such as BTC, through proposals.

CurveDAO is the same. It's a DEX where members vote on parameter like trading fees and rewards for liquidity providers.

ARB DAO is a bit different. It's not just a single protocol; it governs the entire Arbitrum blockchain. As the leading Layer 2 chain by market share, Arbitrum moved to community governance after its initial token distribution and airdrop in 2023. Unlike single-protocol DAOs, Arbitrum’s complexity means its code can't be directly changed by proposals.

Proposals in ARB DAO are diverse. For example, on the forum, high-discussion post like "Arbitrum’s Short-Term Incentive Program," "Catalyze Gaming Ecosystem Growth on Arbitrum," The results can be seen on Snapshot.

Other proposals focus on governance and rules. For example, "Activate ARB Staking" aims to incentivize staking with 100 million ARB tokens, while "The Arbitrum Coalition" proposed using 2.2 million ARB to create an institution for technical reviews, risk assessments, and data-driven research on DAO proposals. However, the Coalition wasn't as appealing as the staking incentive, with 45% against and 31% in favor, the proposal ultimately failed.

Social and Community DAO

Similar to ARB DAO, Bankless DAO is a large community with a variety of proposals. This DAO grew out of a popular podcast and the ETH community. Their vision is getting more people into crypto world and challenge the traditional banking system. 

Bankless DAO's got its fingers in a lot of pies. They're running the Bankless Academy, making courses for crypto newbies. They're also throwing Web3 conference all over the world, and building DAO tools.

Ther structure is set up like a bunch of small teams, inclouding guilds and projects. Each guilds focusing on specific areas like content creation, marketing, development, and operations, with their own budgets and governance right. Projects within the DAO can be funded through guilds. Some of these guilds and projects can even grow up to be 'sub-DAOs'.

Another example is Nouns DAO. Every day, they generate a unique Nouns NFT and put it up for grabs in an auction. Whatever cash they make goes straight into the DAO's wallet, and use back to all sorts of community projects. Once you've got a Nouns, you've got a say. Want to pitch an idea? Go for it. 

And all of this auction and proposal systerm are open source, anyone can borrow their framework to run their own community.

Another intresting things is the fork mechanism. Before, if you wanted leave a DAO, you had two options: sell your token or use the 'Rage-quit' button (if the DAO had one) to grab your share and leave. NounsDAO doesn't have the rage-quit option, some one suggues but the proposal are not pass. But they have fork.

Here's how it works: If 20% of all token holders decide they've had enough and want to split, they can initiate a fork proposal, to split the DAO and it's tearsury into two parallel organization.

After that, it's decision time for everyone else. You can either jump in to the new DAO or stay with the Nouns. It's like choosing teams, but for DAOs.

This whole setup gives members more options than just 'love it or leave it'.

 The methodology behind 

Now we know a lot of DAOs, can we find some pattern or methodology behind these cases?

Some people think that DAOs are the a revolutionize, its about next paradigms of human organization, but I don't think so. If you want to have a meaningful discussion, we need to understand what DAOs can and can't do. What is the limitation behind the concept of DAO?

Let's compare DAOs with companies and society. It might help us make things more clearly.

Regular companies rely on laws to back up trust. If things go wrong, you can go to court. Daily trust builds up through working together, making deals, and coordination processes.

DAOs work differently. They use smart contracts to build trust. Contracts are automatically carry out agreements. Code is law, no need for people to step in. If you can code it, you can do it.

But here's the catch: DAOs can only do what on chain code can do. At least the core needs to built around the protocol. That's their big limit.

Groups that call themselves DAOs but work outside these limits aren't really DAOs. They might just like the idea of DAOs and making a dream to reinventing Organizations.

So, what can smart contracts actually executed in a DAO? 

First, they handle money and equity, distributing funds or tokens.

Second, they control the lifeblood of the DAO itself - deploying and upgrading the very contracts that run the organization.

Third, they manage membership and voting rights. Who's in, who's out, and who gets a say.

Next let's compare DAOs to traditional societies or states.

The key difference is Freedom of movement. With DAOs, you're not stuck. You can join 20 different DAOs and leave all of them overnight if you want. Mechanisms like rage quit, forking, and token selling protect your freedom and independence, on a scale we've never seen before. Different with the real world, where you can't choose where you're born, and changing citizenship is a nightmare.

And if a country goes failed, its people bear the burden for generations. But in the DAO, information are transparency, everything will show on the token price and treasury amount immediately. And people can vote by feet.

However , Sometimes a DAO can be fundamentally flawed, but only because the market takes off, the token price up and more people will come. But It might just be the last celebratin before it all comes crashing down.

What determines the success of a DAO's token? 

Most of the DAOs in history have already failed, but new ones keep emerging. Can we learn any thing from history? To undersdant what makes a DAO and its token success or fail?

In my opinion, the key questions are: How do you make more money, attract more attention, and keep people engaged?

If you have a good product or protocol, it's easier to answer these questions. Take MakerDAO for example. They don’t just rely on investments. Users pay borrow and stability fees with their token (MKR). Since the market needs DAI, users keep coming back.

Bankless DAO is a risk case. Look at its token price chart - only the first year was good, then it kept dropping. Why?

At first, they had good vision and influence, but didn't to do financing. Most of their work was meaningful but didn't make money. So BANK's price only went up by growing their reach and getting new members. That's shaky ground.

If their growth slowed or the crypto market dropped, BANK's price fell. Since they paid everyone in BANK, the increase in liquid tokens added more selling pressure. If some people lost confidence and left, the price would fall faster, creating a spiral drop .

Nouns DAO has a similar issue. They auction off membership NFTs daily. For the first six months, membership were rare. But as more NFTs were auctioned and people lost faith, selling increased. This caused prices to drop.

In both cases, the more tokens or NFTs that enter the market, the harder it is to keep prices up. It's a balancing act – you need new members and more contribution, but too many new tokens can hurt the price.

However, Nouns DAO's situation is much better than Bankless DAO's. Based on daily auctions, they still have 5000 ETH in their treasury as of August 2024. Now, you only need to pay 2 ETH for a membership. Nouns community is more cautious now; proposals 575 to 581 were all defeated by voting, which wasn't common in the past.

Some DeFi DAOs try to lock in liquidity with staking. You stake your tokens for ve-tokens to get voting rights. But I don't think this really helps. If a project is going to fail, this just hurts the loyal supporters more.

Other DAOs use point systems, promising future airdrops when they launch their token. Usually, this just shows the DAO didn't have enough money to pay salary, and migt jiust rug in one or two years.

So if your DAO only have a compelling narrative and a governance mechanism, leave it now. In this round, if a DAO doesn’t have a product or didn't making money, neither contributors nor investors will believe it can succeed.

It's differnet than 2021, in that time, even a PPT DAO can find some investment.

Why now?

The final question is, Why now?

Why so many DAO emerging in past 8 years and why so many communities strive to become DAOs, even they didn't have a contract yet.

Besides the development of blockchain technology, I think one important reason is that the internet has created digital nomads. These people can choose where to live and which groups to join. They don't want to be employed by one company for life, and DAOs offer a choise for free association of free individuals.

 Dark Side of DAOs 

We hope DAO can success but if you participate, you will find more ovbstacle lie ahead. I want share some story about the dark side of DAO.

Hacker Attack

The first story is about Security. Once we give the token and cordination prower to the smart contract, it means we turly trust it and if the Hacker find the vulnerability, he can take all mony to his own packet. This things already happened before. On June 17, 2016, a hacker found a flaw in The DAO's code, specifically in the recursive call function. This allowed the hacker to take nealy $60 million worth of Ether into a separate account.

After attack, the Ethereum community faced a tough choice: accept the loss and move on, or should they take a hard fork, rolled back to the block when money lost before? After much debate, they chose to implement a hard fork. 

While this decision successfully recovered the lost Ether, it also sparked controversy. The hard fork resulted in the created two separate blockchains: Ethereum (ETH) and Ethereum Classic (ETC). 

It also hurt Ethereum's reputation. The blockchain was supposed to be unchangeable and free from central control. This showed that in extreme cases, it could be altered after all.

Governance Attack

he second story is about sharing the wealth. When a DAO has big benefits, it's not just outsiders who want a piece of the cake – insiders want it too.

In January 2022, According to a blockchain research team, They noticed that someone – probably Justin Sun – borroweda large amount of $MKR from AAVE, a decentralized lending protocols, and  intention to create a DAI-TUSD pair to support TUSD as a collateral to borrow DAI..

Because the reputation of TUSD is in doubt, When the community caught wind of this and pushed back, the address gave up and returned the $MKR, instead of forcing a proposal.

It's easy for a community to co-against outsider, but the real trouble often comes from inside.

Take the ARB DAO, for example. In May 2024, they passed a proposal called "Catalyze Gaming Ecosystem Growth on Arbitrum." This plan set aside 250 million ARB tokens to invest in Arbitrum gaming projects over nest three years. At the time, that was worth about $250 million.

Once established,  this money could easily flow into the pockets of big institution. Some members tried to stop it, but they failed. 

Inherent flaw

The Next story is about the misguide orientation.

Most of DAOs, except DeFi DAO, focus on public goods, education, DAO tools, and project incubation. These things might bring attention, but they have a low chance of making money. And most DAO tool builder melancholy finding that the DAOs they served, didn't find the product market fit. So neither DAO or DAO tool are both struggling to earn money.

Back in 2021 and 2022,  you'd see a dozen of DAO tool get prize and funding at hackathon, but in 2024? It's pretty much dried up.

One reason is that most DAO governance structure is about how distribution money and token but not on how to make money or collect fees.  They assume their work or investments will bring more cash or attention to the DAO, but that's not really happening.

Let me share a personal experience. For the past two years, I've been part of a SeeDAO and we've done a lot: translating, educating and onboarding new people, organizing conferences, developing apps and operating systems, writing papers, and even drafting a constitution. But despite all this, our influence has been droped.

The funny thing is, our biggest profit came from something else entirely. We use half of our treasury to buy BTC in the lowerst market, now our treasury are become higher than 2 years ago.

This makes me wonder: Was all our hard work over the past two years really worth it? Would we have been better off just sitting back and investing in BTC? To be honest, I'm not sure."

You know, this really makes me stop and think: Was all our blood, sweat, and tears over the last couple of years actually worth it? I mean, would we have been better off just kicking back and throwing our money into Bitcoin?

 What is the Future?  

After knowing these, do you still want to join a DAO?

Maybe we should ask: Do DAOs  have a future?

Some people in Crypto industry think that expect Defi DAO, this orientation has been proven wrong. But in my opinion, there's still have some hope and direction for improvement.

Expanding the On-Chain Executable Boundary

According to our previous discussion, we know that one of DAOs limitition is the onchain execution scope. So, one way forward is to expand this, such as data.

Data is a big deal in today's digital world, and AI needs tons of it for training. Here's the thing: people might not want to share their personal data with a big company, but may would like to co-creat a DataSet in a Data DAO. In this way, we treat data like property.

By 2024, we're already seeing some Data DAOs pop up. Take r/datadao on Reddit, for example:

Reddit makes $60 million a year selling user posts to AI companies for training. But guess what? None of that money goes to the users.

So r/datadao came up with a plan. They're asking users to download their own Reddit data and upload it to a DAO database. Then, as a group, they vote on renting this data to AI companies and share the profits. Users can even earn governance token $RDAT based on how much data they contribute.

It's not just social media, either. Some genetic testing companies are helping users upload their DNA data to special privacy-protecting blockchains. 

Practice with Off-Chain Governance Situations

Another promising direction is Real World Assets. This could include things like local currencies, co-living and learning communities, foundations, and committees.

I know some people in America use smart contract to crowdfund  house, share income and living rights together. And in upscale neighborhoods and private schools, customers often want to be involved in the governance process, like by building a committee, due to the high costs and personal relevance. These situations have the potential to use smart contrat to run and become DAOs.

Small and Professional Grounp

Another good move is to break big communities into smaller ones.

Take small investment DAOs, for example. We're starting to see some patterns in how these work. Teacher Wang Chao noticed they often share some common features, like:

• Semi-closed structure, no external fundraising.

• Registered entities, some have bank accounts.

• Strong legal compliance.

• The member limit is 99, and usually is 20-40 expert inside

• No General Partner, no management fees, and no carried interest.

• DAO members must invest funds and undergo KYC and Accredited Investor certification.

• Without issuing assets, the rights of the DAO are allocated to each individual member through a legal structure.

Mr Wang are also run a 30 people investment DAO for Ai industury. By partnering with top players, they've landed some good deals.

Another smaller way is to cancel all complex governance and membership systerm, if you hold our token, you are a member,and you can make propoal. 

Just make it simple and open to all kinds of users, like we talk before, A chating group with a shared treasury.

That might be what mass adoption of DAOs looks like in the future.

 reference material 

• How The DAO Hack Changed Ethereum and Crypto

  https://www.coindesk.com/consensus-magazine/2023/05/09/coindesk-turns-10-how-the-dao-hack-changed-ethereum-and-crypto/

• Bybit Pledge (About donation)

  https://docs.bitdao.io/partners/bybit-pledge

• Introducing Nouns Fork 

  https://mirror.xyz/verbsteam.eth/iN0FKOn_oYVBzlJkwPwK2mhzaeL8K2-W80u82F7fHj8

• 王超：我如何用 DAO 投资 AI（一）

• 关于 ARB 资助游戏的相关讨论

  https://x.com/lurenbian/status/1796333187288940957