Blockchain technology has introduced some of the most fascinating concepts at the cutting edge of technology and the Internet. Some of these concepts include DeFi, utility NFTs, the rise of the Metaverse, and now, DAOs.
DAOs might be one of the most recent trends in blockchain but the possibilities looming are incredible and endless. This article will explore DAOs and everything you need to know about them, starting from what a DAO is.
What are DAOs?
DAO, pronounced ‘dow,’ is an acronym for Decentralized Autonomous Organization. It is an organization controlled and led by its members. In other words, a DAO is an organization that has no central leadership unit that makes unilateral decisions on behalf of the organization.
Each DAO comes with in-built treasuries that cannot be accessed or used on any project without the approval of the group members. Decisions taken on behalf of the organization are put forward as proposals and subjected to voting by the members within a specified period through a decentralized voting system such as Snapshot.
As relatively new as DAOs might be, the concept has been around for twenty-five years since German computer science teacher Werner Dilger wrote a paper introducing it in 1997. His paper described DAOs as “self-sustaining and autonomous systems.” This concept would lay fallow for nineteen more years until the first decentralized autonomous organization, ironically named The DAO, was launched in 2016. It was the first of its kind, and although it failed, it opened the door for more DAOs to surface.
Common use cases where DAOs would make a perfect solution include:
- Venture fund pools for venture capitalists looking to invest in exciting ideas
- Charity organizations where people in the world pool funds together to solve a social problem and get a say in where the money goes.
- Freelancer networks where freelancers pool funds to pay for software subscriptions.
How do DAOs work, and why are they important?
How do DAOs Work?
DAOs are the direct opposite of most organizations which are centralized and have leaders who control and manage the resources. DAOs run on a flat hierarchical model where every organization member is on the same level and has as much right to make decisions as everyone else.
A smart contract is the most important part of a DAO’s workability. A smart contract is a code that automatically executes instructions when a preset set of terms is fulfilled. Smart contracts are autonomous and are used in many blockchains and decentralized exchanges to maintain integrity. The smart contracts in a DAO are used to establish preset rules and criteria for managing the in-built treasuries.
When people are interested in being a part of a DAO, they indicate that Interest by providing liquidity to the in-built treasury that is a part of the DAO. In exchange for their stake, they are given crypto tokens that provide them with the right to vote on the decisions, spending, and governance proposals.
The most significant selling point of a DAO is transparency. The process is transparent and doesn’t grant anyone undue control of the organization. So, for decisions to be made, there will have to be a majority. How the majority is decided varies from organization to organization, but each governance proposal approved reflects the decision of the majority of the group.
How DAOs Differ from Traditional Organizations
At its core, a DAO is the complete opposite of traditional organizations. Here are some of the important differences.
1. Hierarchy
The hierarchy of traditional organizations usually resembles a pyramid. At the top is an entity or group of entities that make all the decisions on behalf of the entire organization. In a company, this level would be occupied by the CEO, CFO, and executive members. In a DAO, there is a flat hierarchy that places everyone on par with others.
2. Service Automation
In a DAO, all services are automated and controlled by a smart contract. The funds in the DAO treasuries are dispersed according to instructions in the DAO’s smart contract. In a traditional organization, services are handled manually or controlled by a sector of the organization which can lead to tampering and misuse.
3. Decision-Making
In a DAO, all decisions are made by members of the group. This process occurs as voting which is overseen and collated independently without the help of a third party. In a traditional organization, decisions are made single-handedly by whoever is at the top. If voting occurs, it is private and controlled manually.
4. Transparency
DAOs are very open and transparent. Anyone can access their codes and all the members are kept abreast of all the activities. In traditional organizations, almost all activities are carried out privately often without the knowledge of some of the members of the organization.
DAOs can be grouped into different types based on technology and structure. The categories of DAOs include:
- Collector DAOs
- Social DAOs
- Service DAOs
- Grant DAOs
- Media DAOs
- Protocol DAOs
- Investment DAOs
- Entertainment DAOs
Why We Need DAOs
The simple answer is collective governance. DAOs are automated and run by smart contracts that can’t be changed without the input of the members of the group. Many organizations have failed because the person in charge didn’t manage the resources of the group well. Smart contracts do the managing for DAOs instead of a centralized authority.
Also, the flat hierarchical model that DAOs run on allows these members to also contribute to the decisions of the organization, knowing that they have a stake in the organization.
The use cases of DAOs in crowdfunding, charity, and investment are proof that we need a system people can trust to not only handle their money but also involve them in the decision-making process. Any organization where people have a stake, can be run on the DAO hierarchy structure to ensure integrity and transparency.
Advantages of DAOs
The advantages of DAOs can be summed up in their differences from traditional organizations. The keyword is transparency. The reason why people want to be a part of DAOs is because of the transparency. All the processes in a DAO are clear and above board. There are rules governing the DAO as well as all transactions, making it difficult for this smart contract to be biased towards one person or group of persons. Therefore smart contracts protect the pool and ensure the collective investment is protected.
In addition to transparency and autonomy, DAOs have efficiency on their side. They make global collaboration efficient and seamless. With smart contracts, there isn’t any confusion among members.
Lastly, the flat hierarchy also allows investors to play an active role in protecting their investors and ensuring their money goes to the right projects.
Disadvantages of DAOs
As incredible as DAOs are, they are also new. This means that the process is not totally foolproof. There are risks involved. Take the story of the first DAO, for example. The DAO, also known as Genesis DAO, was able to pool as much as $150 million from over 18,000 stakeholders and it was successful until June 2016 when a hacker was able to drain the pool of 3.6 million ETH, roughly worth $70 million at the time, due to a loophole in the smart contract. This attack led to Ethereum’s hard fork decision and the splitting of the blockchain into two — Ethereum Classic and the Ethereum blockchain we all know.
There are concerns over the legality, structure, and security of DAOs. So, if you want to be a part of one, ensure that you conduct proper research to remain on the safe side.
How to Launch a DAO
Launching a DAO takes place in three short steps:
1. Creating a Smart Contract
The first step in launching a DAO is creating a smart contract that will automate the DAO. This stage is done by one or more developers who program a set of agreements set to execute when the conditions in the agreement are met. The smart contract has to be looked over carefully to spot any weaknesses. The downfall of The DAO was due to a loophole in the smart contract used to create it. It’s also important to cross-check the smart contracts because once finished, they cannot be changed until the DAO has been launched and the governance protocol set. Any changes at this point would be voted on and approved by the members of the DAO.
2. Sourcing Funds
The next stage in the launching of a DAO is the funding stage. In this stage, the DAO sells governance tokens as a way to receive funding and set up a mechanism for governance. When people buy these tokens, they get voting rights in return.
3. Deployment and Governance
The next step is to deploy the DAO on a blockchain and then the governance process can begin. Set up Snapshot or other tools for voting and logging member contributions. At this point, the creators of the DAO don’t have control over the organization anymore. All decisions would pass through a vote by the stakeholders.
How to Get Involved With a DAO.
Now that you know how great and exciting DAOs are, how can you be a part of one?
There are three membership models for DAOs — token-based model, reputation-based model, and share-based model. The most common model is the token-based model and the process outlined below is for joining DAOs using this model.
- The first thing to do is pick a DAO you’d like to be a part of.
- Next up is to find out everything about the DAO. What is the core function of the DAO? How do they run their operations? What voting rights are you eligible for?
- Buy the cryptocurrency token of the DAO
- Become a governing member of the DAO with voting rights
- Join the DAO community
Examples of Common DAOs
There are many DAOs right now and some of them are:
- Dash
- Decentraland
- SharkDAO
- MakerDAO
- BanklessDAO
What’s Next for DAOs?
The sky is the starting point for DAOs. Already, as a new development that is still being perfected, there are many use cases and possibilities for DAOs. The more popular they become, the more they will be adopted by organizations. The rise of NFTs is only precipitating the growth of DAOs and soon there will be more organizations and people choosing to use the flat hierarchical model of DAOs. Until then, DAOs make collaborations, businesses, and organizations easy and more efficient.
