Decentralized Autonomous Organization (DAO)
What Is a Decentralized Autonomous Organization (DAO)?
Decentralized autonomous organizations are unions formed and operated without a CEO acting as a governing body. All members have equal voting rights in a DAO. The rules are hard-wired right into the code for everyone to view, and cannot be changed by any one individual. This means equal power for all and no absolute control for anyone.
DAOs have recently been gaining traction, especially with the DeFi crowd. They open up all the internet's possibilities, while mitigating the risk of getting scammed. It allows like-minded groups to come together to work toward a common goal. Individuals in a DAO only need to trust the code, which is much less infallible than individuals. So far, the DAO holds great potential for the future of global partnerships and joint ventures.
How Does a DAO Work?
Decentralized autonomous organizations have many moving parts that come together to make them possible.
Smart contracts powered by blockchain are the technology which powers decentralized autonomous organizations. Their open-sourced software allows high levels of transparency for all stakeholders. Smart contracts determine the DAO’s rules.
The way the DAO works is by mutual agreement of its members. Ideas and proposals are put forth and voted upon by all members. The counting of votes and any actions taken afterward are usually automated, without any intermediary.
DApps play many pivotal functions within a DAO, including managing funds and resources. The funds allotted to the decentralized autonomous organization aren’t accessible by anyone, and can only be released once a preset number of votes approving a particular expense have been cast.
Why Are DAOs Necessary?
Simply put, trusting a code that’s open for everyone to scrutinize is much easier than trusting an individual halfway across the globe. That’s exactly what makes DAOs the choice of groups who wish to come together without needing to trust each other explicitly.
Another great advantage the DAO offers is the uniform division of control. For instance, DAOs have great applications for fundraising, financing start-ups, and forming groups of freelancers.
DAOs also reduce the inherent risk of getting scammed. No information is hidden, and no “inner circles” are formed, since all members hold equal stakes. Goals and priorities are better aligned in a DAO than in more traditional group formations.
This creates more transparency and also saves costs.
DAOs are sets of code and, like all software, are susceptible to hacks and scams. They’re globally distributed and are very difficult to regulate under any singular jurisdiction and set of laws. That’s why many are skeptical of the new technology,
The now-infamous DAO hack of 2016 is perhaps the most well-known example of just how the software can be manipulated. In July 2016, hackers stole nearly $50 million in Ethereum, resulting in a much-debated hard fork. To read about the details of this scam, click here.
DAOs are relatively new phenomena that are growing in popularity. Some examples of successful DAOs include:
Uniswap: Arguably the most currently well-known decentralized autonomous organization. Its most notable contribution was voting for reduced trading fees of specific stablecoin trades, which resulted in increased trading.
Aragon: A DAO created to facilitate the creation of other DAOs, Aragon has assisted in the creation of more than 300 DAOs to date. These DAOs have an estimated combined holdings of $350 million.