In this article, you will learn what a DAO is, how it works with smart contracts and blockchain technology, why they are so popular for use in the crypto world today.
What is a decentralized autonomous organization (DAO)?
A decentralized autonomous organization (DAO) is a business organization that operates around a common objective and coordinates via smart contracts on the blockchain. Cryptocurrency holders vote on important matters related to the DAO. DAOs are also transparent, self-governing, and independent of a centralized government, lending to their decentralization.
A DAO is a new type of legal business entity becoming increasingly popular in the Ethereum blockchain ecosystem. Essentially, they represent a shift in collaboration since the company decentralized away from third-party influence. They’re “decentralized” because they’re hosted on a blockchain and all their stakeholders, not just executives and board members, make decisions. They’re “autonomous” because they employ smart contracts that automatically execute actions when certain conditions are met, without requiring human approval.
Typically, anyone who owns tokens tied to a DAO business can vote on proposals, and their votes are weighted based on the number of tokens they hold – similar to the voting rights attached to shares.
DAOs are a type of company characterized by their decentralized autonomous structure. DAOs can be either Member Managed or Algorithmically Managed. TheDAO is an innovative way to finance projects without relying on traditional financial institutions. TheDAO uses smart contracts to allow investors to participate in funding decisions by sending ether (the cryptocurrency used on the Ethereum network) to specific addresses.
If at any point the creators of TheDAO decide that they do not want investors’ money, they can “withdraw” all funds from the DAO by reversing all transfers made using its smart contracts. So far, TheDAO has raised more than $15 million worth of ether.
How do Decentralized Autonomous Organizations Work?
DAOs are digital organizations that provide a fresh way to fund ventures, democratize decisions, and split proceeds. They’re “decentralized” because they’re hosted on a blockchain and all their stakeholders, not just executives and board members, make decisions.
A DAO is created when a group of individuals come together to form a contract. The code for the DAO is written in the form of smart contracts, which are executed on the blockchain. In order to participate in the DAO, members typically need to hold governance tokens. These tokens give members voting power and allow them to have a say in decisions made by the DAO, such as the allocation of funds.
DAOs are unique in that they often allow for a large degree of participation from their stakeholders. In the case of many DAOs, the outcome can be based on degree of participation and voting preference. For example, if a DAO is tasked with choosing a new board member, stakeholders who have greater involvement in the DAO’s operations (and thus have more voting power) will likely have a greater say in the final decision.
Why do we need DAOs?
DAOs have advantages over traditional organizations in that they lack trust. Every action a DAO takes after launch must be approved by the community, which is transparent and verifiable.
There is no hierarchy in DAOs, which allows for easy dispute resolution. DAOs allow investors to invest in early-stage startups and decentralized projects while sharing the risk or any profits that may come out of them.
Examples of DAOs
The Aave token is used in the third-largest decentralized application in the world and the second-largest lending protocol on Ethereum. Wyoming is the only state that recognizes DAO LLCs specifically. Founders can register an LLC by filing their Articles of Organization with the secretary of state’s office.
2. The DAO
The DAO was launched in 2016 and failed within months. However, it remains the most prominent example of what blockchain technology envisions. The original plan was for investors in The DAO to receive tokens proportional to their ether token investment. Investors could use those tokens to vote on which projects to fund. Unfortunately, an exploit in the code allowed hackers to steal the organization’s funds.
Ethereum reversed the transaction history to return funds to their owners, a contentious decision since the hacker was operating within the bounds of the program. The DAO was a venture capital fund that raised ether, digital tokens used on the ethereum blockchain.
Following a contentious argument over the DAO’s future and the massive hacking incident of earlier in the summer, in September 2016, several prominent digital currency exchanges de-listed the DAO token, marking the effective end for the DAO as it was initially envisioned.
In July 2017, the Securities and Exchange Commission (SEC) issued a report, which determined that the DAO sold securities in form of tokens on Ethereum blockchain violating portions of US securities law.
Dash is a popular digital currency. It is governed and budgeted by a decentralized autonomous organization we do not make representations or warranties about the accuracy or timeliness of information
Maker is a cryptocurrency incorporated into MakerDAO, DeFi’s largest lending platform. It empowers users to vote based on MakerDAO’s parameters, including business logic and risk management systems. Upon configuration, the DAO must be deployed to the blockchain.
From this point forward, stakeholders make decisions about the organization’s future. The founders of the organization no longer hold sole influence over the project
Uniswap token and the Uniswap Decentralized Exchange (DEX) are extremely popular. Users who own the UNI token can vote on new proposals. However, Uniswap retains a powerful developer voice in decision-making, making it less decentralized than others.
What advantages do DAOs have?
DAOs are internet-native organizations and have several advantages over traditional organizations.
One significant advantage of DAOs is the lack of trust needed between two parties. While a traditional organization requires a lot of trust in the people behind it — especially on behalf of investors — with DAOs, only the code needs to be trusted.
DAOs offer investors a chance to invest in early-stage startups and decentralized projects. DAOs allow investors to share the risk or any profits that may come out of them.
What disadvantages do DAOs have?
Decentralized autonomous organizations are slower to operate because decisions take longer to make. In some DAOs, those with the most tokens call the shots, so governance looks very similar to traditional organizations.
DAOs have seen a big revival of interest in the last few years, but there are still some disadvantages: for example, they can be less transparent than traditional organizations. DAOs have been criticized for their misleading information to investors.
They are moving towards official recognition, but this is not yet complete. DAOs may employ prediction markets and voting and delegating capabilities in the future.
How do DAOs make decisions?
DAOs use smart contracts to make decisions. Once a DAO’s rules are written in code, they are tamper-proof and no one can change them without being noticed. A DAO’s community can adapt and program the DAO according to its own goals.