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DAOs are based on smart contracts that define the rules and govern the organization's treasury. Once deployed on Ethereum, the rules cannot be modified unless approved by a vote. Any behavior that doesn't comply with the code rules and logic is invalid. The treasury, also defined by a smart contract, cannot be accessed without the approval of the community. This means that DAOs don't require centralized management. Instead, decisions are made collectively, and payments are authorized automatically after a vote.
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The immutability of smart contracts once deployed on Ethereum ensures that any modifications to the code (the rules of the DAO) are transparent and traceable.
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## Ethereum and DAOs {#ethereum-and-daos}
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Ethereum provides an excellent foundation for DAOs due to the following reasons:
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- Ethereum's consensus is decentralized and well-established, making the network trustworthy.
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- Smart contracts, once deployed, cannot be modified, even by their creators. This allows DAOs to operate according to the programmed rules.
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- Smart contracts can send and receive funds, eliminating the need for trusted intermediaries to manage the organization's treasury.
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- The Ethereum community tends to collaborate rather than compete, fostering the development of best practices and support systems.
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## DAO Governance {#dao-governance}
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Governance of DAOs involves various considerations, such as how voting and proposal processes work.
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### Delegation {#governance-delegation}
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Delegation is a form of representative democracy in DAOs. Token holders can delegate their voting power to users who self-nominate and commit to managing the protocol and staying informed.
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#### Example {#governance-example}
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[ENS](https://claim.ens.domains/delegate-ranking) - ENS token holders can delegate their votes to community members who actively participate in the ecosystem.
In many DAOs, transactions are automatically executed if they receive a certain number of votes and a majority vote in favor, unless vetoed by the creator.
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#### Example {#governance-example}
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[Nouns](https://nouns.wtf) - In the Nouns DAO, transactions are automatically executed if they receive the required number of votes and a majority vote in favor, unless vetoed by the creator.
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### Multisig Governance {#governance-example}
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While DAOs can have thousands of voting members, funds can be stored in a wallet controlled by a smaller group of trusted and publicly known (within the community) active members, typically ranging from 5 to 20. After a vote, the multisig signers execute the will of the community.
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## DAO Laws {#dao-laws}
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In 1977, Wyoming created the Limited Liability Company (LLC) structure to protect entrepreneurs and limit their liability. More recently, Wyoming pioneered DAO-related legislation, granting DAOs legal status. Currently, Wyoming, Vermont, and the British Virgin Islands have some form of DAO-related laws.
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### Example {#law-example}
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[CityDAO](https://citydao.io) - CityDAO used Wyoming's DAO-related legislation to purchase 40 acres of land near Yellowstone National Park.
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## DAO Membership {#dao-membership}
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DAOs have various membership models, where members decide on voting mechanisms and other important aspects of the DAO.
Token-based membership is typically fully permissionless, depending on the tokens used. Governance tokens of this kind are often freely tradable on decentralized exchanges without permission. Some may require earning them through providing liquidity or other forms of "work." Holding the tokens grants voting rights.
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#### Example {#token-example}
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[MakerDAO](https://makerdao.com) - MakerDAO's MKR token is widely available on decentralized exchanges, allowing anyone to acquire voting rights to decide the future of the Maker protocol.
Share-based DAOs have a higher level of permission but are still relatively open. Potential members can apply to join the DAO, usually by providing valuable contributions in the form of tokens or work. Shares represent direct voting and ownership rights. Members can exit with their share of the treasury at any time.
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#### Example {#share-example}
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[MolochDAO](http://molochdao.com/) - MolochDAO funds Ethereum projects. To become a member, you must apply and be evaluated by the community for the necessary expertise and capital to make informed decisions about potential grantees. You cannot directly purchase membership in the DAO on the open market.
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