Almost all of the major DeFi applications, from Uniswap to Aave to MakerDAO, are governed by DAOs: Decentralized Autonomous Organizations.

A DAO is a community-led entity that uses Ethereum smart contracts to establish the foundational rules and execute the agreed upon decisions. DAOs use smart contracts to manage many of the same processes and responsibilities found in corporations or nonprofits. Members of DAOs use tokens to vote on the rules governing the protocols and systems for which their DAO is responsible. MakerDAO is one example, where holders of the MKR governance token vote on changes to the DAI stablecoin protocol.

Many of the five thousand DAOs in existence today use similar applications and voting frameworks to manage their collective $11 billion in treasuries.

Typically, anyone holding a defined minimum number of tokens can suggest changes to the underlying protocol. These proposals can be technical in nature, like deciding on reserve ratios for lending protocols, or even political, like removing a leader. After a proposal meets the requirement for a vote, the community of governance token holders vote on if they are “for” or “against” the proposal. Each DAO will have its own quorum requirements for a proposal to pass: and typically when that quorum is met, majority vote rules. Each DAO has some core differences, just like each democracy around the world varies in how they execute democratic principles. There are distinct levels of checks and balances within the different DAOs.