What is a DAO? Token holders vote on a shared treasury through smart contracts

A DAO is an organisation whose rules are written into a smart contract on a blockchain and whose members make decisions by vote. The acronym stands for decentralized autonomous organization. There is no board that decides on its own how money is spent or which direction the project takes. Voting rights are usually tied to a token: the more governance tokens you hold, the more weight your vote carries.

For investors, the subject is more tangible than it sounds. Many well-known coins are voting rights in a DAO, including the tokens of large DeFi protocols on Ethereum. Buying such a token buys you a say in decisions, but no share in a company and no claim on profits. Most people buy them on an exchange; an overview of licensed providers is available in our comparison of the best crypto exchanges. This explainer shows how votes work, where the weak points lie and what the legal position looks like.

DAO basics: an organisation run by rules in a smart contract

A smart contract is a program on a blockchain that executes predefined rules automatically once the conditions are met. A DAO uses this technology to model an organisation: who counts as a member, how votes are held and when money is paid out are all set in code. The explainer page on ethereum.org describes a DAO as a collectively owned organisation working towards a shared mission.

At its core sits the shared fund, the treasury. It is held in a smart contract, and nobody can empty it without the group's approval. Once a proposal passes, the contract releases the payment automatically. According to ethereum.org, nobody can change the rules once the contract is running, except through a vote.

Compared with an association or a limited company, a DAO therefore has no managing director, no articles of association on paper and no entry in a company register. Their place is taken by public code, public votes and a public treasury. Anyone can check on the blockchain how much money the DAO holds and how its members voted.

DAO governance tokens: how voting power is distributed

A governance token is a token that grants voting rights in a DAO. The most common form is token-based membership: whoever holds the token may vote, usually one vote per token. Ethereum.org cites MakerDAO's MKR token as an example. The model is open, because anyone can buy the tokens on an exchange.

Two other models exist alongside it. With share-based membership, you apply by contributing tokens or work, and when you leave you take your share of the treasury with you; investment clubs work this way, for instance. With reputation-based membership, you earn voting rights by contributing, and those rights can be neither bought nor transferred.

The token-based variant has an obvious drawback: votes can be bought. Whoever owns many tokens has a lot of influence. In many large DAOs, founders, early investors and venture capital firms hold a substantial share of the tokens, and turnout among the remaining holders is often low.

How DAO voting works: proposal, quorum and automatic execution

A vote usually follows a fixed sequence. First a member submits a proposal, often after a discussion in the DAO's forum. Many DAOs require a minimum number of tokens to do so, so that nobody can flood the process with nonsense. A voting period then opens, during which holders cast their votes with their wallet.

A proposal only passes once the quorum is reached, meaning the minimum number of votes cast, and a majority approves it. Under fully automated governance, the smart contract then executes the decision itself, for example a payment from the treasury or a change to protocol fees. There is often a waiting period in between, during which holders who disagree can still sell or withdraw their tokens.

Many votes are also held off-chain and free of charge using signatures. That lowers costs but shifts execution to a small group that implements the result afterwards.

Delegation and multisig: three models of DAO governance

Because most holders do not follow every vote, many DAOs allow delegation: you assign your voting weight to a representative who stands for the role publicly. The tokens stay in your wallet; only the voting power moves to the delegate. Ethereum.org cites holders of the ENS token as an example.

The second model is automatic execution after quorum and majority, as described above. The third is multisig governance. A multisig wallet requires signatures from several keys for every transaction, for example three out of five. According to ethereum.org, under this model 5 to 20 trusted, publicly known members manage the funds and carry out the community's decisions.

In practice, many DAOs combine these forms. The community votes, a multisig committee executes and can step in during emergencies. The more power such a committee holds, the less decentralised the DAO really is.

The DAO hack of 2016: the attack that split Ethereum

The first major DAO was simply called The DAO. In 2016 the project raised ether worth around $150 million in order to vote on investments as a venture capital fund. In June 2016 an attacker exploited a bug in the smart contract and drained around 3.6 million ETH.

The Ethereum community then opted for a hard fork, a change to the rules that is incompatible with the old version. The new blockchain recovered the funds and is today's Ethereum. Those who rejected the change kept running the old blockchain, which became Ethereum Classic. To this day, the case shows the limits of the principle that code is law: when the code failed, people made the final decision.

cryptoticker.io first wrote about DAOs in 2022 as an introduction to the decentralised world economy. Since then the model has changed considerably, above all with regard to liability and attacks carried out through votes.

Well-known DAOs: MakerDAO, Uniswap, Lido and CityDAO

The best-known DAOs govern DeFi protocols, meaning financial applications on the blockchain that work without a bank. MakerDAO manages the DAI stablecoin and renamed itself Sky in 2024. Holders of the UNI token vote on the decentralised exchange Uniswap, and holders of LDO on the staking service Lido.

Other DAOs serve a single purpose. According to ethereum.org, CityDAO used the DAO law of the US state of Wyoming to buy 40 acres of land near Yellowstone National Park. Some blockchains also organise themselves partly like DAOs: on Polkadot, DOT holders vote on spending from the shared treasury, as Referendum 1954 in October showed.

How much power a vote really carries varies widely. Some DAOs decide on budgets running into the millions, others only on fee tiers, while the development team sets the direction.

DAO governance attack: when a majority drains the treasury

A governance attack exploits the vote itself rather than a flaw in the code. Anyone who buys or borrows enough tokens can push through a proposal that transfers the treasury to themselves. Low turnout makes this easier: if only a few holders vote, a relatively small number of tokens is enough for a majority.

How this plays out in practice is shown by the case in which the BONK DAO lost $20 million without any hack. Countermeasures include waiting periods before execution, veto rights for a committee and minimum participation thresholds. Each of them makes the DAO safer and, at the same time, a little less decentralised.

Legal status of a DAO: Wyoming law, the Ooki ruling and Germany

A smart contract is not a legal person. Several US states have therefore created their own rules: according to ethereum.org, Wyoming, Vermont and the US Virgin Islands have DAO laws in some form, with Wyoming leading the way through its own type of LLC for DAOs.

Without such a legal wrapper, members face consequences. In June 2023 the US regulator CFTC obtained a default judgment against the Ooki DAO before a federal court in California. In its order of June 8, 2023, the court classified the DAO as an unincorporated association that can be sued under US commodities law. According to a CFTC press release, the DAO must pay a civil penalty of $643,542, and the court ordered its website to be shut down. Back in 2022, in an order against the predecessor company bZeroX, the CFTC had already held its two founders liable, as active members of that association, for the DAO's violations.

Germany has no dedicated DAO law. In legal scholarship, some argue that a DAO without a legal form can be treated as a civil-law partnership, with personal liability for those involved. No highest federal court in Germany has yet ruled on the question. Anyone who actively takes part in a DAO's decisions should be aware of the risk; on current understanding, merely holding a token is less sensitive than active participation.

DAO tokens: a say in governance is no claim on profits

Buying a governance token is a bet on the protocol behind it; no dividend comes with it. For anyone who wants to get involved in practice, three steps make sense.

1. Buy tokens on an exchange: Many governance tokens are listed on large trading venues. You can compare providers, fees and licences in our overview of the best crypto exchanges.
2. Vote from your own wallet: Votes are cast from the wallet that holds the tokens; this is usually not possible from an exchange account. Suitable apps are listed in the software wallet comparison.
3. Record purchases and sales: For tax purposes you need every transaction with its value at the time. Crypto tax tools and portfolio trackers handle this for you.

(As of November 11, 2026. This article is not investment advice. Prices and fee structures change; check the terms with the provider before you buy.)