A DAO (decentralised autonomous organisation) is an organisation whose members own it together. Its rules and its money are held in smart contracts on a blockchain instead of being run by a board or executives. Members put forward proposals and vote on them. When a vote passes, the contract carries out the result, for example by releasing funds from the shared treasury. In ethereum.org's definition, a DAO is "a collectively-owned organization working towards a shared mission."
How a DAO works
Smart contracts set the rules
A DAO's core is a smart contract: code deployed on a blockchain that defines the organisation's rules and controls its treasury. According to ethereum.org, once the contract is live on Ethereum, "no one can change the rules except by a vote." No manager can spend from the treasury on their own. Spending needs group approval, and the payment goes out automatically once a vote passes.
Proposals and voting
Decisions go through proposals and votes. A member submits a proposal, such as funding a project, changing a parameter or hiring a contributor. Members vote, and the contract counts the result and applies it. Ethereum.org notes that this process is transparent and fully public. In a traditional organisation, by contrast, votes are counted internally and the outcome is carried out by hand.
Three membership models
Ethereum.org describes three common ways to join a DAO and get voting power:
- Token-based. Holding a governance token gives voting power. The tokens can usually be traded. This model is typically used to govern broad protocols, and ethereum.org gives MakerDAO as an example.
- Share-based. Prospective members send a proposal to join, usually offering tokens or work as tribute. Shares stand for both voting power and ownership, and a member can leave with their proportional share of the treasury. This fits closer-knit groups such as charities and investment clubs.
- Reputation-based. Voting power comes from reputation earned by taking part. Reputation "cannot be bought, transferred or delegated."
DAO vs traditional organisation
| DAO | Traditional organisation | |
|---|---|---|
| Structure | Usually flat | Usually hierarchical |
| Changing the rules | Requires a member vote | Can be decided by a single party, or a vote may be offered |
| Carrying out decisions | Votes counted and executed automatically by code | Votes counted internally, then implemented manually |
| Transparency | Activity is public on-chain | Typically private |
Source: ethereum.org's comparison table.
Where the idea came from
The term predates Ethereum's launch. In a blog post dated 6 May 2014, Vitalik Buterin set out working definitions of DAOs, decentralised autonomous corporations and related ideas. He separated a DAO from an ordinary decentralised application by its "internal capital", meaning property it can use to reward activity. He also named Dan Larimer of BitShares as "the main exponent of DAC as terminology", where DAC stands for decentralised autonomous company. Buterin's framing of the ideal DAO is useful: "an entity that lives on the internet and exists autonomously, but also heavily relies on hiring individuals to perform certain tasks." In practice, code holds the money and enforces the rules, and people still do the work.
Have you run the article's checks on this DAO?
Answer four questions about a DAO you are looking at to see which of the article's pre-joining checks are still open.
Does the DAO have a legal wrapper, such as a Wyoming DAO LLC or a Wyoming DUNA, and do you know its jurisdiction?
- Yes, and I know the jurisdiction → next question
- No legal wrapper → Legal status is an open question
- I don't know → Legal status is an open question
Has an audit been published for the contracts that hold the DAO's funds?
- Yes, an audit is published → next question
- No, or I can't find one → Contract security is unchecked
Does the governance contract's documentation say who can submit proposals, what quorum applies and whether there is a timelock before votes execute?
- Yes, all three are documented → next question
- Some or none of them → Governance rules are not clear yet
Have you looked at the treasury and past votes on-chain, not only at the project's announcements?
- Yes, I checked them on-chain → You have covered the article's four checks
- Not yet → One check left: the on-chain record
By default a DAO has no legal form, so it is unclear who signs contracts, who pays tax and who is liable. Without a wrapper, members may be exposed to liability: in the CFTC case a court treated a DAO as a "person", and the regulator found founders liable "as members". Find out which wrapper, if any, applies and in which jurisdiction.
Bugs are hard to fix in a DAO: the immutability that protects the rules also slows emergency fixes. In 2016 an attacker exploited a flaw in The DAO's code and drained over 3.6 million ETH. Look for a published audit of the contracts that hold funds.
Changing the rules and spending from the treasury require a member vote, so you need to know who can propose, what quorum applies and whether a timelock delays execution. In token-based DAOs voting power follows holdings, so large holders can dominate. Read the governance documentation before relying on your vote.
On-chain spending and votes are public and anyone can check them. Compare the treasury and past votes with the project's announcements before relying on the announcements alone.
You have looked at the legal wrapper, the audit, the governance rules and the on-chain record. These checks do not remove the other weaknesses the article lists: slow decisions, concentrated token voting and legal uncertainty.
This walks through the article's four pre-joining checks only; it does not judge whether a DAO is safe or worth joining, and its legal points cover US law and Ethereum-based DAOs, not other jurisdictions or chains.
The DAO, 2016: the case that shaped everything after
The first well-known attempt was a project called The DAO, launched on Ethereum in 2016 by the German company Slock.it UG. The SEC's later report says about 1.15 billion DAO tokens were sold for about 12 million ETH, worth about $150 million when the offering closed.
In June 2016 an attacker exploited a flaw in the contract code. Ethereum.org's fork history says the contract "was drained of over 3.6 million ETH." Ethereum responded with a hard fork at block 1,920,000 on 20 July 2016. The fork moved the funds into a new contract with a single withdraw function, and holders could reclaim 1 ETH for every 100 DAO tokens.
On 25 July 2017 the SEC published a Report of Investigation (Release No. 81207). It concluded that DAO tokens were securities under the Securities Act of 1933. The SEC chose not to bring an enforcement action. The report also noted that The DAO's "curator" mechanism and its dependence on its organisers limited how much control token holders really had.
There are two lessons. Code that cannot be changed quickly also cannot be patched quickly. And calling a project "decentralised" does not remove it from securities law.
The legal status of DAOs
By default, a DAO has no legal form. That leaves open who signs contracts, who pays tax and who is liable. Several US states now offer legal wrappers:
- Wyoming DAO LLC (2021). Senate File 38 added a Decentralized Autonomous Organization Supplement to Wyoming's LLC statutes, effective 1 July 2021. An LLC can elect DAO status, and its organising documents must carry a notice that members' rights "may differ materially" from those in other LLCs. Ethereum.org notes that CityDAO used this law to buy 40 acres of land near Yellowstone National Park.
- Utah DAO Act (2024). H.B. 357, "Decentralized Autonomous Organizations Amendments", was signed on 13 March 2023 and took effect on 1 January 2024.
- Wyoming DUNA (2024). Senate File 50 created the Wyoming Decentralized Unincorporated Nonprofit Association Act, approved on 7 March 2024 and effective 1 July 2024. It requires at least 100 members.
- Wyoming DUNA amendments (2026). Senate File 22 took effect on 1 July 2026. According to the Legislature's bill summary, a DUNA now converts automatically into an ordinary unincorporated nonprofit association if its membership falls below 100, unless its governing principles say otherwise. When a DUNA winds up, its assets must be distributed according to federal law.
Ethereum.org also lists Vermont and the Virgin Islands as having DAO laws in some form.
Enforcement: a DAO can be held liable
On 8 June 2023, in a case brought by the US Commodity Futures Trading Commission, a federal court entered a default judgment against a DAO that ran a leveraged trading protocol. Judge William H. Orrick held that the DAO is a "person" under the Commodity Exchange Act. The court imposed a civil penalty of $643,542, a permanent trading and registration ban and an order to shut down its website. The charges included unlawfully acting as a futures commission merchant and failing to meet Bank Secrecy Act obligations. In a separate administrative order, the CFTC found the protocol's founders liable "as members" of the DAO. The ruling was a default judgment because the DAO did not appear, so its value as precedent is limited. Even so, the regulator's position is now on record.
Strengths and weaknesses
Strengths
- Transparent treasury. On-chain spending and votes are public and can be checked by anyone.
- Rules enforced by code. Funds move only when a vote passes, not at one person's discretion.
- Open, global membership. Depending on the model, anyone who acquires tokens or earns reputation can take part.
Weaknesses
- Bugs are hard to fix. The same immutability that protects the rules also slows emergency fixes, as The DAO showed in 2016.
- Slow decisions. Proposal and voting cycles take longer than a manager making a call.
- Token voting concentrates power. In token-based DAOs, voting power follows holdings, so large holders can dominate.
- Legal uncertainty. Without a wrapper, members may be exposed to liability, as the CFTC case shows.
Before joining a DAO
- Read the governance contract's documentation: who can submit proposals, what quorum applies and whether there is a timelock before votes execute.
- Check whether the DAO has a legal wrapper and in which jurisdiction.
- Look at the treasury and past votes on-chain, not only at the project's announcements.
- Find out whether an audit has been published for the contracts that hold funds.
The legal section focuses on US law and the examples on Ethereum-based DAOs. Rules in other jurisdictions and on other chains differ.
