Can you think about collaborating with others globally without knowing each other, setting your own rules, making decisions, and all of it is recorded on a blockchain? DAOs are making this happen.
Internet users want a social organization that they can trust to exchange values. DAO offers a safe and effective environment to work with people who share the same idea worldwide.
Bitcoin is the most successful and fully functional DAO because it is autonomous, has programmed rules, and has a consensus mechanism. The interest in DAO has been rising since 2020 with the explosion of Decentralized Finance.
If you want to contribute to the world of cryptocurrency or Web 3.0, you should understand what DAO is and how it works.
What is DAO?
Decentralized Autonomous Organization – DAO – refers to a society management that uses blockchain technology and its rules to work toward a shared mission without a central authority.
An autonomous organization is governed by a community that uses a bottom-up management approach to make decisions. This kind of structure allows all individuals to oversee the protocol. DAO is transparent as it uses smart contracts to set the foundation rules, and everyone can access its data. Through smart contracts, DAO replaces the trust in central authority and personal relationships. At any point, you can propose, vote and audit the code itself because decision-making and execution are code programmed in the software.
The community of DAO can make decisions regarding the future of the projects, money allocation, and technical upgrades. Furthermore, they can make proposals about future projects and vote on each proposal. Projects with the most votes are accepted and enforced by the rules inside the smart contract. This voting system is in the best interest of the individuals and the protocol itself because a healthy, robust protocol will attract more users and increase the value of tokens DAO members possess. Hence, as the protocol’s success grows, so do the token holders.
DAO’s vision is to create a decentralized organization that acknowledges the interest of stakeholders without any party in control. DAO has no founder who can spend money or manipulate books. Instead, the treasure can be accessed only with the group’ approval. The blockchain carries the rules in the code, and determines how to work and spend the funds. Until now, DAO has raised money from projects, formed new business structures, and automated financial processes on the blockchain. Moreover, it has facilitated shared votes, ensured shareholders are compensated, funded software subscriptions, charity work, etc.
Understanding Decentralized Autonomous Organizations
One of the main characteristics of cryptocurrencies is that they are decentralized. Meaning no bank, government, or entity controls them. Instead they operate in a distributed ledger inside a cluster of computers. Some developers got inspired by this mechanism, and in 2016 they created the Decentralized Autonomous Organization.
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How Does DAO Work?
A team of community members uses smart contracts to set DAO’s regulations. They code the groundwork for how DAO will function, how it will automate transactions, mine new coins, and allocate votes. The contracts are transparent, verifiable, and auditable, allowing potential members to understand how the protocol will work at any step fully.
Once DAO sets and writes the rules on the blockchain, it must determine how to recieve funding and give governance. Usually, DAO raises funds and replenishes the treasury by selling tokens through token issuance. Token holders win voting rights in exchange for their fiat money, which usually is in proportion to their holdings.
DAO is ready for deployment once funding is complete. In addition, once the code has been pushed into production, it can only be changed with a consensus reached through member voting. So, no special authority can change the rules, and it is entirely up to the community to decide. Smart contracts are tamper-proof, which adds security to the system, and no one can spend the money because it will fail.
A DAO must have a legal structure. The United States Securities and Exchange Commission requires them to be registered as securities if they want to sell crypto tokens in DAO.
Why Do We Need DAO?
You need a lot of trust if you want to start an organization with someone because it requires funding and money. It is even harder to trust people you met on the internet and never interacted with in real life. DAO opens new ways of collaboration and opportunities with people worldwide. With DAO, you do not have to put your trust in individuals. All you need is trust in the DAO code. The code is 100% transparent, and everyone can access and verify it.
This kind of organization does not have a hierarchical structure but still manages to do the work successfully and grow. Stakeholders share their idea for innovation with the entire group, and they all vote if they want to continue forward or not.
How To Get Involved?
There are different ways to get involved in DAO. It is important to know that not every DAO operates similarly or has the same purpose. So the first step is to understand how the project of your interest functions at its core.
Some DAOs focus more on the voting rights of token holders and the type of proposal at stake. Whereas some other DAOs focus more on treasure pooling and allocation. A key characteristic is transparency because the user should have all the details available to read and record the voting history and even the voting records of particular token holders.
Anyone with an entrepreneurial mindset can freely make suggestions and bring ideas to support the future development of the protocol. DAOs frequently call on the community members to build out innovative ideas for the project they are funding. The level of participation in a DAO varies. You have the option to invest in governance tokens and focus solely on Snapchat’s voting system; you can join the DAOs Discord and contribute to authentic projects where you will receive reimbursement for your efforts; or, you can invest in DAO’s interests by networking at conferences. The decision on how to get involved is entirely yours to make.
What Was The DAO?
Modern decentralized autonomous organizations have their foundation in the DAO.
A DAO is an internet-native organization, whereas the DAO is the first created organization of its kind. In 2016, the DAO was a revolutionary invention that raised $150 million in Ether. However, later it failed and caused a dramatic split in the Ethereum network.
It acted as a form of venture with a capital fund. People who owned tokens would profit from the organization’s investment by collecting dividends or benefiting from the appreciation of the price of tokens.
When the DAO launched, investors purchased tokens by transferring Ether to its smart contracts. The investors expressed their concern about a bug. In the attempt to fix the bug, an attacker took advantage and stole more than $60 million Ether. Vitalik Buterin, the Ethereum co-founder, proposed a soft fork to blocklist the attacker’s address and prevent them from transferring the funds. The hacker claimed that they lawfully took the funds. The hard fork aimed to reset the Ethereum network history to a point before the DAO hack occurred and transfer the stolen funds to a smart contract.
Benefits of DAO
There are many benefits to a DAO structure, such as:
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- Decentralization – DAO takes decisions by a group of people without the interference of any central authority.
- Participation – People feel more empowered when they have the right to vote, even if the vote does not have a big power weight.
- Transparency – The code of the smart contracts DAO uses is public for everyone to see. In addition, the public can also see the votes and if the participants voted for what is best for the community.
- Community – Different individuals can come together from all over the world to be part of DAO; all they need is an internet connection.
Drawbacks of DAO
There are some limitations when it comes to DAO, such as:
- Speed – It takes more time for DAOs to vote than regular entities. In regular entities, the CEO can take a decision and implement it immediately. Whereas, in DAO, every member has to vote, and since people are from different countries, there are different time zones.
- Education – since there is diversity among the members, they have different educational backgrounds and access to resources. These people need to learn how to work, grow, and communicate together.
- Inefficiency – Because of the longer time it takes to decide and the different backgrounds that need to work together, Dao runs the risk of being inefficient.
- Security – All digital platforms for blockchain face security issues. Implementing security in DAO requires significant expertise. The security builds trust between the users and prevents fraud, hacks, and manipulations.
Examples of DAO
Different goals, such as investments, charity, borrowing, fundraising, and purchasing NFTs, are being pursued through the use of DAOs.
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- Charity – People from all over the world can donate to charity, and then you can vote for what cause you want to fund.
- Collective ownership – After you have purchased physical or digital assets, individuals can vote to decide on how to use them.
- Ventures and grants – You can establish a venture fund to exchange investment capital and vote on which project to support. Member of the DAO can distribute repaid funds among themselves.
- Non-Fungible Tokens – Jenny DAO took its first NFT in May 2021, an original song by 3LAU and Steve Aoki. The DAO offers NFT fractional ownership and allows its members to supervise the NFT purchase process. The Unicly protocol will determine where the NFTs will be placed.
DAOs have the capacity to change the world and support important causes. They can help new ventures and attract significant investment. A DAO, which is responsible for launching stablecoins, is built on top of the Ethereum blockchain and is highly advanced. Moreover, there is ConstitutionDAO, which tried to buy a copy of the United States Constitution. This DAO raised $47 million in a week. Other DAOs had the opportunity to fund spaceflights, hire a legal team for a person or an issue, lend money, etc.
- In Wyoming, CityDAO purchased 40 acres of land.
- FreeRossDAO established a legal fund to help Ross Ulbicht. The authorities imprisoned him for creating Silk Road, a website selling illegal goods.
- After Julian Assange’s was charged with violating the United States Espionage Act, AssangeDAO purchased non-fungible tokens to fund his legal defense.
- MakerDAO established a new type of decentralized bank based on consensus voting.
Takeaways
- A Decentralized Autonomous Organization is a social management that uses blockchain technology and its rules to work towards a shared mission without a central authority.
- It is transparent as it uses smart contracts to set the foundation rules, and everyone can access its data.
- DAO’s regulations are set by a team of community members using smart contracts, which are transparent, verifiable, and auditable.
- Once the funding is complete, the project is prepared for deployment and can be altered without requiring consensus.
- In 2016, the DAO created the first decentralized autonomous organization and raised $150 million in Ether.
- DAO has many benefits, such as decentralization, participation, transparency, and community, but it also has limitations, such as education, speed, and security.
- DAOs can potentially change the world and support important causes, such as investments, charity, launching stablecoins, purchasing NFTs, and lending money.
- Investing in a DAO is up to you, and you can choose different levels of participation depending on the project’s purpose.
