If you are no stranger to Web3 then you are familiar with the language of acronyms. Those most commonly thrown around would be NFT (Non-Fungible Token), ETH (Ethereum), and the focus of this write-up, DAO (Decentralized autonomous organization) which are currently being incorporated into many blockchain projects within the decentralized finance (DeFi) landscape.
Simply using the terms doesn’t always equate to understanding their true meaning or even what they are used for so allow us to shed some light on the purpose of a decentralized autonomous organization.
Decentralized autonomous organizations (DAOs) are entities that have no central management meaning there is no specified person or entity in charge and operate via a governance system regulating the behavior of all network participants.
DAOs are organizations that run on a blockchain protocol. This means that they are fully autonomous and operate under rules that are encoded through smart contracts. The decisions made by these organizations are governed by a community that uses blockchain technology to enforce the rules of the organization.
As web-based organizations, they are collectively owned by their users and include built-in reserves and these can easily be accessed only when they are approved. The final decision is made through voting by the group on proposals at specific times. A DAO does not operate on a hierarchical structure but can serve many purposes.
Table of Contents
History of Decentralized Autonomous Organizations
The Decentralized Autonomous Organization (The DAO) was initially created to help people invest in cryptocurrency and the decentralized space. Having no centralized authority meant it could reduce costs and give more control and access to the investors.
In May 2016, members of the Ethereum community announced Genesis DAO, more popularly known as The DAO, built as a smart contract on the Ethereum Blockchain. The DAOwas the earliest example of a DAO created by Slock. It. Its code was open source, meaning anyone could contribute.
During the creation period, it managed to obtain 12.7 million Ether (worth around $150M at the time), making it the biggest crowdfund ever. At its peak, the total Ether from The DAO was worth over $250 million.
Just one month later, a hacker found a loophole in its coding and was able to extract 3.6 million ETH ($70 million at the time) from the DAO causing the Ethereum community to create a hard fork on the blockchain network that sent the hacked funds to an account available to the original owners. Funds were moved from the Ethereum network and the token owners were given an exchange rate of 1 ETH to 100 DAO tokens, the same rate as the initial offering. During this fork, they re-wrote the blockchain so that the hack never happened, meaning the blockchain was no longer immutable.
Inner Workings of a DAO
DAOs work by programming their governance rules into smart contract algorithms. This allows the organization to stay on track and achieve the common interests of its participants.
The rules of the DAO are set by a core team of community members through the use of smart contracts which are published through the governance mechanism. These contracts are written clearly and easily to understand. They are publicly available so anyone can see how they work. This allows potential members to understand protocol at any level ensuring each member comprehends how Daos operate.
DAOs use smart contracts which are essentially pieces of code that get executed when the conditions specified in them have been met, and they’re currently deployed mainly on the Ethereum blockchain but it’s also possible for them to be stored in other places too.
DAO members then get voting privileges within their governing bodies or proposals from outside sources who want permission slip access into member plans before being voted up or down depending on which plan best suits everyone involved.
For instance, a DAO can provide fractional ownership of an NFT, where smart contracts control the organization’s NFT vault, as members oversee their purchase.
Stakeholders or members will utilize a governance token to cast votes on decisions made by the DAO influencing how the organization operates by deciding on or creating new governance proposals. With several DAOs, the more tokens a stakeholder has, the bigger the impact of his or her vote on the network. To take effect, proposals have to be approved by the majority of the governance tokens and comply with the DAO’s consensus rules. The outcome is typically based on the level of participation as well as voting preference.
DAO Use Cases
A DAO is a new type of organization that can be thousands of times more efficient than traditional corporate governance. First, they’re only online and never interact with other members in real life. Secondly, their rules are informed by blockchain technology which acts as the ledger for all transactions made on this platform. Thirdly there’s no central authority overseeing it so more control is in the hands of the members, unlike a traditional organization.
Many DAOS will fall into two separate categories; managing an open-source code and making investments.
Crypto projects – Can be considered DAOs if they are managed by decentralized governance where token holders can vote on the direction of the project.
An example would be the latest Bored Ape Token, ApeCoin. Its main focus is on culture, gaming, and commerce the community can own and build on.
Grant funding – The DAO is a new way to provide funding for projects automatically. Instead of relying on individuals or organizations, The Decentralized Autonomous Organization will award money based on certain criteria set out in the code itself.
This means that anyone can create their development fund and make it available online without any need for approval from either party.
Investment – In investment DAOs, participants use the Decentralized Autonomous Organization’s governance tokens to vote on which projects they want their capital invested in. A project can only receive funds once multiple members have approved it and issued them an address holding all of its assets – this way there are no wasted votes!
Collecting – The popularity of NFTs has grown exponentially in recent years. As a result, they have become an integral part of many people’s crypto investment landscape- primarily because these digital collectibles can provide investors with long-term gains when held correctly and securely by collectors on behalf of or artists who create them! One such organization seeking out new ways to bring value through its creations would be Collector DAO; this type acts similarly to other standard DAOs but instead specializes solely in acquiring artwork from selected portfolios/artists while paying creators directly via tokenomics rather than using off-chain transactions.
Becoming a Member of a DAO
To become a member of the DAO, users would typically need to purchase its native token and hold it. This gives token holders proportional voting power within decision-making bodies like proposals or updates as long they own enough tokens determined by the organization. Making this sort of investment can provide long-term benefits even if you’re not planning on getting involved right away!
Once you’ve found one or multiple blockchain projects that interests you, there are many other ways to get involved. Not all DAOs operate with the same purpose so figuring out their core function will be important for success.
Some DAOs focus on technical governance, while others are more so interested in treasury pulling and allocation. It’s important to understand what sort of voting rights are granted and what kind of proposals are at stake.
The transparency within a DAO is unparalleled. Each proposal and voting history can be observed, making this system more democratic than traditional models of governance while also maintaining oversight from stakeholders who hold tokens on behalf of their investors with an interest in knowing how funds are spent.
The DAO is a place where you can choose how involved you are in the decision-making process. There are opportunities for people with different interests and needs, whether they want more direct involvement or just an opportunity to share their opinions on proposals that come up throughout each month
You can choose to swap into governance tokens and pay attention to snapshot votes, join the DAO’s Discord and take on actual projects where you’re compensated for your contribution or you can even invest in the DAOs of interest by networking. The level of involvement is completely up to interests.
Benefits of a DAO
A DAO has the potential to offer a more socially conscious structure than traditional organizations because it is decentralized, functions autonomously, and is operated by its members instead of large shareholders. This could be useful in helping people from all over prosper, rather than just focusing on those who can afford it most.
The idea behind Decentralized Autonomous Organizations (DAO) is that there should not only be the focus on making a profit or generating revenue at any costs; rather what’s important emerges when these entities serve communities or groups whose needs might otherwise go unmet due to simple lack of access, money, etc. It provides an innovative new way for individuals everywhere to determine how resources flow within & outside
Transparency – Voting, funding decisions, and other actions are viewable by anyone.
Access – Members across the world can contribute, giving DAOs lower barriers of entry than companies.
Cheaper – The concept has firmly taken root in decentralized finance (DeFi), and there are many tools available so little needs to be built from scratch.
Collaborative – Giving everyone a voice and making it easy for experts to invest in the ecosystem they are building.
Challenges With DAOs
There is a lot of uncertainty around decentralized organizations due to their newness, as well as criticism from critics who say they cannot be trusted because it’s unclear what these entities’ legal status and safety practices might turn out to be. It has been reported that MIT Technology Review considers trusting people within DAOs “a mistake.” In addition, there have been two hacks where smart contract flaws were found which raised concerns about security for this type of system – one in 2016 (which was eventually repaired)and another not that long ago raising even more questions than before
Flat structure – by not having a clear authority figure, or chain of command, decentralized organizations are slower to operate as decisions take longer to make.
Disagreements – when the community disagrees strongly, it could split the organization into two.
No change – in some DAOs, those with the most tokens call the shots, so governance looks very similar to traditional organizations.
Legality – minefields abound with token projects that might be deemed to be securities.
The Future of DAOs?
Most in the world of Web3 believe the DAO will replace the traditional business model because a decentralized autonomous organization permits an individual and their communities to achieve a single goal without the need for central coordination.
Within a DAO, there is no need to worry about trust. The code is publicly accessible and thoroughly tested before a launch, which means you can be sure that every initiative will pass rigorous safety standards! And when an organization launches its first project through this new system, they have no choice but to approve it in a community dominated by members who are just like them: passionate innovators committed to changing how business gets done altogether.
With the potential for wide-ranging consequences, it’s important to understand how DAOs work and what their strengths are as well as weaknesses. For example, no one person can make decisions on behalf of everyone in this new organizational structure – so if someone has an issue with something they might try taking over or compromising other code that isn’t theirs just based on proximity alone (which would also create vulnerabilities). Additionally, since these organizations represent considerable deviations from conventional organizations then many legal issues must be overcome.
DAOs have the potential to solve many trust problems by implementing smart contracts and programming governance rules that guide organizations towards a common goal. However, this new technology is still facing legal issues as it may disrupt existing structures/systems completely. There’s also less understanding among investors about technical competencies required for maintaining infrastructure consensus mechanisms- which makes them hesitate in engaging with DAO projects as fully decentralized options.