Abstract We develop a theory of decentralized autonomous organizations (DAOs) that explains why they exist in terms of what they do. In New Institutional Economics, firms exist to minimize the transaction costs of using a market. DAOs, which are a species of firm made of smart contracts, seem to extend this logic. But by observing how DAOs behave in the wild—through cases like Shapeshift, Uniswap, and Optimism—we reveal that the core value of a DAO is its capacity for dynamic adaptation in governance. DAOs enable fast, low-cost changes in governance to respond to shifting regulatory, financial, and competitive conditions. They are not just automation tools to reduce agency costs via token governance. Rather, they are mechanisms for organizational variation in governance itself. When the benefits of this adaptive mechanism exceed its costs, we predict the existence of a DAO.