A decentralized autonomous organizations, or DAOs, is an organization or group of entities that cooperate through a process encoded in a smart contract. In its simplest from this can be people voting on proposals through their token ownership. For example, one token equals one vote, and the majority gets to decide what proposals are implemented. But, it can also be a lot more complicated than this, for example requiring longer term token ownership before voting is allowed to avoid flash loan attacks, or super majority required for proposals to pass, and so on.
How simple or complex a DAO is, is down to the complexity of the smart contracts governing the DAO process, which ultimately is down to the people voting on proposals. But no matter the level of complexity, the rules of the DAO must be encoded as code in one or more smart contracts. If not, it fails to be decentralized, and centralized actors could interpret the rules in their favor.
Proposals also need to be of a certain type to ensure a fully decentralized DAO. If a proposal is for something to happen off-chain, the implementation of the proposal and the evaluation of this implementation becomes a centralized exposure. Someone somewhere needs to do something which they would then need to report back on-chain, with the risks that they either lie, misunderstand the requirements, or otherwise misrepresent the result. This is comparable to the oracle problem, i.e., a situation where you need a lot of infrastructure to help mitigate any centralized risk factors. Some proposals can happen fully on-chain, for example updating smart contract parameters, or proposing smart contract code upgrades, as these changes can be published before being voted on. In short, like what was described for the DeFi/CeFi spectrum, any off-chain activity is a manifestation of increased third-party risk or counterparty risk.
DeFi is a good example of systems that can benefit from a DAO, in their effort to be less CeFi. This by ensuring any decisions made around the operations of a DeFi is done without any centralized actor. However, just adding a DAO around a DeFi is not in itself a guarantee for a reduction in CeFi exposure, if for example the tokens used to vote on proposals are held by one or a few actors. And as with anything technical, adding more moving parts, like those required for a DAO, adds other types of risks, like for example technical risk. It is therefore often recommended that a DAO is built using existing solutions, like Aragon or similar.