Ethereum (second largest by market capitalization based on currency ETH) is also known because of the huge ecosystem around it. A DAO or Decentralized Autonomous Organization is one of the most important innovations created on the Ethereum platform, redefining how communities form, govern, and fund projects without the need for the typical corporate structure. As they expand, DAOs have made new use cases for Ethereum possible and the more they expand, the more it influences the price of Ethereum by creating more demand and usage on the network.
In this article, we will examine what DAOs are, how they operate on the Ethereum blockchain, and why the increasing adoption of DAOs is directly correlated with the price of Ethereum and its utility.
What Are DAOs?
A decentralized Autonomous Organization (DAO) is a community-owned organization without any central leadership. The decision-making is done by code and smart contracts mostly based on the Ethereum blockchain. A DAO’s rules and governance structure are encoded in smart contracts, and stakeholders — usually token holders — can vote on things like funding proposals, partnerships or product development.
The organizations have a flat structure. Unlike traditional organizations where the control and transparency over the operations is based on hierarchy, DAOs allow participants to exercise direct control of the organization. A DAO is a group of participants who can propose ideas and vote on issues, and contribute resources, all of which is recorded and managed on the blockchain.
An example of a DAO could be to fundraise for a community project, build an open-source product or manage a decentralized finance (DeFi) platform. Ethereum’s smart contract functionality is at the core of what makes DAOs possible: it provides the necessary underlying infrastructure for DAOs to function across the board, in a transparent and trustless environment.
How DAOs Increase the Utility of Ethereum
The more DAOs popularize, the more they depend on Ethereum’s blockchain technology, and the higher the demand for ETH, which is used for many things in its ecosystem. Here are several ways DAOs are expanding Ethereum’s utility:
Smart Contracts and Governance: Every DAO is based on smart contracts and Ethereum is the platform that most suits the creation of these contracts. In DAOs, governance is usually done through the voting mechanism, in which participants vote by using ETH or native governance tokens. All of this means constant interaction with Ethereum’s blockchain, deploying smart contracts, executing votes, etc — all of which require transaction fees payable in ETH.
Fundraising and Treasury Management: DAOs typically raise funds in ETH to support projects or operate. A DAO’s treasury contains these funds and is controlled by token holders, who vote on what those funds should be used for. Each DAO created locks more ETH into the treasury of each token, which acts to reduce the circulating supply and, by definition, increases upward pressure on Ethereum’s price.
Decentralized Applications (dApps): Many of the DAOs are connected with decentralized applications (dApps), including, for example, decentralized finance (DeFi) protocols, NFT marketplaces or gaming platforms. As DAOs continue to grow, these dApps will put an even greater strain on Ethereum’s infrastructure requiring more and more ETH to interact with these applications. As an example, a DeFi platform could have DAOs that can vote on a lending strategy that requires ETH to execute when they vote.
New Use Cases for Staking: With the move to Ethereum 2.0 and the advent of staking, DAOs are now finding creative ways to enable staking in their governance models. Other DAOs offer staking incentives that compel participants to lock up ETH or DAO governance tokens to earn rewards. This increases demand for ETH even further as participants need to stake assets in order to participate in decision-making.
Effect DAOs Have on Ethereum’s Price
However, with the proliferation of DAOs across the Ethereum ecosystem comes increased activity which increases the demand for ETH in various ways, creating a feedback loop that can have a significant impact on the price of Ethereum. Here are key reasons why DAOs are influencing Ethereum’s market value:
1. Increased Network Activity
The reason DAOs are so big is because they run on the Ethereum network, which means more total volume of transactions. Ethereum gas fees are paid in ETH on each transaction. It consumes more ETH the higher the network activity. ETH is also in demand helps keep its price up, especially when DAO is very active.
For example, if a popular DAO conducts a governance vote, thousands of transactions can occur on the Ethereum blockchain all of which use ETH. The more DAOs created, the greater the combined effect of these transactions on demand for ETH.
2. Locked Supply of ETH
The circulating supply of Ethereum then is decreased when many DAOs hold large amounts of ETH in their treasuries. When ETH is locked up in these treasuries it comes off the market and becomes scarce. Less ETH available for trading means any increase in demand will put upward price pressure.
Moreover, since DAOs are raising more in ETH, they often lock these funds for considerable lengths of time in support of ongoing projects or investments. This reduces the availability of supply even further and can aid Ethereum price.
3. Incentives to Hold Over the Long Run
DAOs often incentivize their participants to hold their governance tokens and ETH for long-term participation. The impact is felt most in staking DAOs, where participants receive token rewards for staking their ETH or DAO tokens. Because of this more ETH is locked away in these staking mechanisms, which lessens short-term selling pressure and increases price stability or growth.
DAOs and Ethereum in the Future
With the landscape of DAOs continually evolving, we will see Ethereum’s blockchain more and more as a trusted source. As it was designed to be decentralized, DAOs fit right in with Ethereum’s vision of creating a decentralized, permissionless financial system. With Ethereum 2.0 being more scalable, cheaper to transact, and having an overall more energy-efficient nature, DAOs should in turn have more of a reason to thrive and make Ethereum even more useful for governance, finance, and community-driven projects.
The growth of DAOs expands Ethereum’s set of use cases, which is additional validation of its position as the leading smart contract platform. With the need for decentralized governance and community-owned projects growing, we will also see the need for Ethereum grow, cementing its place as one of the most valuable cryptocurrencies in the world.
Conclusion
At the center of this rise in DAOs is Ethereum, as it changes how organizations are managed, funded, and governed. Ethereum is making the utility of its network more than just transactions, as it is now supplying infrastructure to enable decentralized governance. While DAOs will likely continue to bloom, they will drive demand for ETH which in turn will impact the price of Ethereum as a support for its importance in the future of decentralized finance and governance.
%20is%20also%20known%20because%20of%20the%20huge%20ecosystem%20around%20it.%20A%20DAO){kind=link}