A DAO is an organization run by token-holder votes and smart contracts. How DAOs work, real examples, The DAO hack, legal status, and risks.
A DAO, or decentralized autonomous organization, is an internet-native group that holds a shared treasury and changes its own rules through smart contracts, with members voting on proposals in place of a board. In most DAOs, voting power comes from governance tokens, so whoever holds those tokens decides how the money is spent and how the underlying software changes.
The idea had its first real test in 2016, when The DAO lost about a third of its funds to an attacker within weeks of launch. Ten years on, DAOs govern lending and trading protocols, yet two questions still decide whether one works as advertised: who actually votes, and who is legally responsible when a vote goes wrong.
A DAO is an organization whose rules and treasury live in smart contracts, which are programs that run automatically on a blockchain. Through those contracts, members propose changes and vote on them, usually with governance tokens, and an approved proposal can move funds or update software without a manager signing off.
Where a company relies on courts and officers, a DAO enforces its rules in code, so a transaction the contract does not allow simply fails. Our guide to how smart contracts work covers that code layer in more detail.
Each word in the name describes a goal more than a guarantee. “Decentralized” means no single party controls decisions; “autonomous” means approved decisions execute through code; and “organization” means a group pooling money toward a shared purpose.
A DAO works through a loop of proposal, vote, and execution. Typically, a member posts a proposal, token holders vote during a fixed window, and if the proposal reaches its quorum (the minimum number of votes required) and wins a majority, the smart contract carries it out, often after a waiting period called a timelock.
DAO governance tokens are crypto tokens that carry voting rights, usually one vote per token, and holders can vote directly or delegate their votes. How those tokens are split among founders, investors, the treasury, and users, a subject covered in our guide to tokenomics, decides who really holds power.
As a worked example, the Uniswap governance process, last updated in April 2026, runs in three phases:
Taken together, those phases add up to at least 23 days from first post to execution.
For most DAOs, the treasury sits either in a smart contract, where a passed vote moves the funds directly, or in a multisig wallet, which needs several keyholders to approve any transfer. Those signers (often five to 20 people, as ethereum.org's DAO guide notes) carry out what the vote decided.
Three well-documented DAO examples are MakerDAO, renamed Sky in 2024, which governs a decentralized stablecoin; Uniswap governance, which controls the Uniswap protocol's treasury and fees; and the ENS DAO, which runs the Ethereum Name Service. Each uses a governance token, and Uniswap and ENS also have legal entities that represent them offline.
| DAO | What it governs | Governance token | Notable detail |
|---|---|---|---|
| MakerDAO, now Sky | The DAI stablecoin and its successor, USDS | SKY, which replaced MKR | Rebranded in August 2024; SKY became the sole governance token in May 2025 |
| Uniswap governance | The Uniswap protocol's treasury, protocol fee, and UNI minting | UNI | Adopted DUNI, a Wyoming DUNA, in a vote executed on September 12, 2025 |
| ENS DAO | The Ethereum Name Service, which maps .eth names to wallets | ENS | Launched November 8, 2021, with half of the 100 million ENS tokens sent to the DAO treasury |
Before the rebrand, MakerDAO created DAI, a stablecoin backed by crypto collateral and widely used in decentralized finance (DeFi), and MKR holders voted on risk settings such as which collateral the system accepts. As for ENS, the DAO is represented offline by the ENS Foundation, based in the Cayman Islands.
The DAO hack of 2016 was the theft of about 3.6 million ETH, roughly a third of the funds raised by The DAO, an early investment DAO on Ethereum. Starting June 17, 2016, an attacker exploited a flaw in The DAO's code, and the Ethereum community answered with a hard fork that split off Ethereum Classic.
After the attack, most of the network adopted software that reversed its effects, and on July 20, 2016, block 1,920,000 moved the funds into a recovery contract where token holders could reclaim them.
A minority, arguing that a blockchain's history should never be rewritten, kept running the original chain, which became Ethereum Classic.
On July 25, 2017, the Securities and Exchange Commission (SEC) issued a report concluding that DAO tokens were securities. Although the SEC brought no charges, its press release warned that federal securities laws apply whether the issuer is a traditional company or a DAO.
In March 2026, the SEC, joined by the CFTC, issued an interpretation (Release No. 33-11412) that still cites The DAO Report but says a governance token tied to a functional crypto system can be a digital commodity, which is not a security.
A DAO and a traditional company both pool money toward a goal, but they differ in who decides, how rules are enforced, and who is liable. While a company has directors, officers, and a charter enforced by courts, a DAO has token holders and smart contracts and, without a legal wrapper, may have no clear legal status.
| Feature | DAO | Traditional company |
|---|---|---|
| Who makes decisions | Token holders or their delegates, by vote | A board and officers, with shareholders voting on major matters |
| What holders own | Governance tokens, often with voting rights only | Shares carrying votes and a claim on profits |
| Legal status | Often none, unless wrapped in a DAO LLC or DUNA | A registered legal entity |
| Member liability | Unclear; some courts have let claims proceed on the theory that a DAO is a general partnership | Shareholders' losses are generally limited to their investment |
Transparency is the clearest DAO advantage, since anyone can audit the treasury and every vote onchain. On the other side, a DAO has to win a vote to change course, and if its members are anonymous, nobody may be answerable when that vote causes harm.
Creating or joining a DAO is not illegal in itself in the US, but many DAOs have no recognized legal form, which leaves open who signs contracts, pays taxes, or answers in court. Wyoming, Tennessee, and Utah now offer DAO legal wrappers, and US regulators have shown that adopting a DAO structure does not place an activity outside existing law.
A DAO LLC is a limited liability company that may be run, in whole or in part, by smart contracts. In Wyoming, a supplement to the LLC Act took effect on July 1, 2021, and Tennessee followed with a 2022 law that lets an LLC become a decentralized organization through a notice in its articles. Utah instead created a separate entity type and began accepting registrations for limited liability DAOs in January 2024.
Since July 1, 2024, Wyoming has also offered the decentralized unincorporated nonprofit association (DUNA) for groups of at least 100 members, the structure Uniswap adopted for DUNI.
In June 2023, a federal court entered a default judgment in the Commodity Futures Trading Commission (CFTC) case against Ooki DAO, which the agency had charged with illegally offering leveraged crypto trading. Holding that a DAO is a “person” under the Commodity Exchange Act, the court ordered a civil penalty of $643,542 and the shutdown of the DAO's website. Because no one appeared to defend Ooki DAO, the ruling never tested the opposing arguments.
Without a legal wrapper, DAO participants risk being treated as partners in a general partnership, where each partner can be responsible for the group's debts. In March 2023, the court in Sarcuni v. bZx DAO let claims proceed on that theory, and in November 2024, the court in Samuels v. Lido DAO found that a plaintiff had plausibly alleged Lido DAO was a general partnership and that three of its large institutional investors could be liable as partners. Both rulings came at the motion-to-dismiss stage, so neither is a final finding of liability.
The biggest DAO risks are low voter turnout, voting power concentrated in a few large holders, governance attacks that pass harmful proposals, bugs in the smart contracts, and unclear legal liability for members. Because most of these risks come from the voting system itself, secure code alone does not remove them.
For most holders, voting costs time, attention, and sometimes transaction fees, while a small holder's vote rarely changes an outcome. In a July 2025 forum post, Uniswap's accountability committee reported that average turnout had fallen from nearly 60 million UNI in the DAO's early years to about 45 million, against a 40 million quorum.
Because votes are counted by tokens held, one large holder or a few delegates can outweigh thousands of smaller holders. In a hypothetical DAO with 100 million tokens where others cast about 5 million votes, a holder with 5.1 million tokens wins while owning just over 5% of the supply.
Through delegation, small holders can pool their influence, though it also moves power to a short list of delegates (such as investment funds and professional governance firms) whose interests may differ from theirs.
A DAO governance attack happens when someone gains enough voting power, by buying, borrowing, or gathering delegated tokens, to pass a proposal that benefits them at the DAO's expense. Since the attack follows the DAO's own rules, it can be hard to stop in time.
On April 17, 2022, for example, an attacker used a flash loan (a loan borrowed and repaid within a single blockchain transaction) to acquire enough Beanstalk voting power to pass a proposal instantly, then voted to send the protocol's reserves to themselves. About $182 million left the treasury in seconds, the Guardian reported.
The five-question DAO check covers votes, turnout, powers, safeguards, and legal standing: who holds the voting power, how many holders actually vote, what a vote can change, what can stop a bad proposal, and what legal entity stands behind the DAO. Together, the answers show how decentralized and accountable a DAO really is.
| Check | Question to ask | Where to look | What a weak answer looks like |
|---|---|---|---|
| Votes | Who holds the voting power? | Token distribution and delegate rankings | A few wallets can reach quorum alone |
| Turnout | How many tokens vote on a typical proposal? | Past proposals on the voting portal | Turnout barely clears quorum |
| Powers | What can a passing vote change? | Governance docs and contract permissions | One vote can mint tokens or empty the treasury |
| Safeguards | What can stop a harmful proposal? | Timelocks and any security council | Proposals can pass and execute on the same day |
| Legal standing | What entity, if any, represents the DAO? | Foundation, DUNA, or LLC disclosures | No entity, or one with an unexplained role |
On the safeguards row, Beanstalk would have failed, whereas Uniswap's two-day waiting period and two-day timelock give holders time to react.
None of the five answers predicts a governance token's price, and a DAO can pass every check and still lose users or suffer a code exploit. For a first look, the DAO's own record of past proposals is usually the most useful single page, since it shows turnout, margins, and who voted.
In simple terms, a DAO is an online group with a shared bank account that no single member controls. Members hold tokens that let them vote on how the money is spent and how the rules change, and smart contracts carry out whatever the vote approves.
Many DAOs earn money from the protocol they govern, such as trading or borrowing fees, while others rely on token sales, donations, or investment returns. Whether token holders receive any of it is a separate decision, made by vote, and many governance tokens carry no automatic share of revenue.
Bitcoin is not a DAO, because it has no governance token, no shared treasury, and no onchain voting. Changes to its software spread only when node operators and miners choose to run new versions. Although Bitcoin is decentralized, no group of token holders can vote to spend funds or rewrite its rules.
Most token-based DAOs are open to anyone who holds the governance token, since the blockchains they run on are permissionless and no one approves new members. Some restrict membership by vote or NFT ownership, and at Uniswap, holders must delegate their votes, even to themselves, before voting.
Governance tokens are volatile crypto assets that can fall sharply in price, and voting rights do not guarantee any claim on a DAO's treasury or revenue. The five-question DAO check shows how a DAO is governed but says nothing about its token's future price, and none of this is a recommendation to buy or avoid any token.
Governance tokens are bought like other crypto assets, through a broker or trading platform, and then held on that platform, with a custodian, or in your own wallet if you plan to vote. UpTrade's guide on how to buy Aave (AAVE), the governance token of the Aave lending protocol, walks through the broker-assisted process.
Holding a governance token raises questions about where it sits and who can move it, which a broker can help you answer before you buy. UpTrade is a dedicated crypto brokerage built around real relationships, not a self-serve app you navigate alone.
Read more from UpTrade's research and insights, or see how custody and security work at UpTrade.
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This article is for general informational purposes only and does not constitute financial, investment, or tax advice. It does not recommend any asset, allocation, or strategy. Cryptocurrency investments carry significant risk, including the possible loss of principal. Past performance is not indicative of future results. UpTrade does not make investment recommendations based on your personal financial circumstances. You should conduct your own research and seek independent financial advice before making any investment decisions.
General information only. This article is for educational purposes and does not constitute financial, investment, legal or tax advice, nor a recommendation to buy, sell or hold any asset. Cryptocurrency is a high-risk asset and you should consider your own circumstances and seek independent advice before making any decision. UpTrade does not make price predictions.
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