A Decentralized Autonomous Organization (DAO) is created by communities that decide to adhere to certain rules in order to achieve specific goals. What sets DAOs apart is that these rules are encoded into software. The code is self-executing, eliminating the need for management and thus removing hierarchical and bureaucratic factors.
DAOs are entirely autonomous and transparent. Basic rules are set by smart contracts and operate on blockchain networks. Proposals, voting, and code can be publicly monitored. DAOs have no central control, and people from all over the world can participate.
The term DAO was first introduced in 2015 by Dan Larimer, the founder of BitShares, Steemit, and EOS. However, DAOs gained attention after Vitalik Buterin, one of the founders of Ethereum (ETH), proposed the theory behind them.
The first DAO to be launched, The DAO, was a project related to a decentralized organization for venture capital and managed to raise a total of $150 million.
As an example of some popular DAOs:
- CityDAO
- FreeRossDAO
- AssangeDAO
- MakerDAO
How Does a Decentralized Autonomous Organization (DAO) Work?
DAOs are groups that allow voting rights to individuals and are sustained through the use of crypto assets. DAO rules are determined by the community through smart contracts that work on the Ethereum network. Smart contracts determine how a DAO operates. The data of DAOs is visible and auditable by everyone. Once the rules are set and encoded on a blockchain network, the funding aspect of the DAO is fixed. This section usually involves the protocol selling crypto assets to raise funds and fill the treasury. Crypto asset holders are given voting rights depending on the amount they hold. Once funding is secured, the DAO is ready to operate. After participants vote, the DAO's rules cannot be changed by anyone.
What Are the Advantages and Disadvantages of DAOs?
The most significant advantage of Decentralized Autonomous Organizations (DAOs) is that they make organizations decentralized. In general, organizations are managed by a central authority, but in DAOs, the management of the organization is given to the investors. The rules in DAOs are predefined, transparent, and verifiable. These rules can be audited by anyone. The rules and transactions of a DAO are stored on a blockchain network. This transparency provides access to the transaction history.
One disadvantage of DAOs is that in the voting process, the majority of participants must approve the correction to eliminate problems, which can create a security vulnerability.
Another disadvantage of DAOs is whether the community can make the best decisions about the organization. Finally, the legal status of DAOs is still unclear, which creates uncertainty.
What Are the Characteristics of Decentralized Autonomous Organizations (DAOs)?
DAOs have some common characteristics, which include:
- Hierarchy
- Transparency
- Open Access
- Democracy
Hierarchy
In DAOs, there is no hierarchical management. Decisions are made by the community rather than leaders or managers.
Transparency
DAOs are open-source, which means they can be viewed by everyone. Anyone can access the transaction history on the blockchain network.
Open Access
Individuals who meet certain requirements, such as holding DAO tokens, can become part of a DAO.
Democracy
Individuals can use their votes to make changes to a DAO rule through proposals.
What Are the General Thoughts About the Future of DAOs?
Although DAOs do not cause any security problems, they raise concerns about their structural and legal status. However, a wide community and analysts have a highly positive outlook on the future of DAOs.
