A decentralised autonomous organisation (DAO) is a non-centralized institution whose members make choices at the community level in accordance with a set of rules enforced by a blockchain network.
They are owned and administered jointly by their members and contain monies that are only available with their approval. Groups come up with suggestions that are then voted on over a period of time.
DAOs are also utilised for a number of purposes, such as freelancing networks to pool cash for contracts to pay for software subscriptions, charity projects where members authorise payments, group-owned venture capital organisations, and others.
How DAO works?
Smart contracts, which are just bits of code that run automatically when a set of predetermined criteria is satisfied, power DAOs. Smart contracts are now deployed on a number of blockchains, with Ethereum being the first to do so.
These smart contracts establish the DAO’s laws, and individuals who own shares have voting rights and may alter how companies work with new governance requirements.
This prevents DAOs from being swamped with ideas and recommendations, as they can only succeed if a majority of stakeholders agree. The process for calculating that majority differs amongst DAOs and is specified in the smart contracts.
DAOs are totally self-sustaining and transparent, and because they are built on blockchain technology, their source code is publicly available as open-source resources. Furthermore, because the blockchain keeps a comprehensive record of all money activity, anybody may audit their built-in treasuries.
A DAO is typically launched in three stages, which contain the following:
1- Developing smart contracts
Developers or groups of developers must first design a smart contract, but they may only change the rules defined in them after they have been launched via the democratised governance system. This necessitates that they properly evaluate contracts to ensure that crucial information is not overlooked.
2- Getting funds
Second, DAOs must decide on a finance and governance strategy. Tokens are typically issued to raise revenue and to grant holders voting rights. After the fundraising process, the DAO is regarded as live and functional, and all essential decisions surrounding the organisation are taken by users to achieve agreement on ideas.
Users can vote on proposals by holding and locking cryptocurrencies in a voting contract, with the amount of currency locked determining the voting weight. The proposal is then implemented in accordance with the network consensus rules, and voters are rewarded with extra coins in return for their involvement.
Following setup, the DAO must be put on the blockchain, where stakeholders will select how the organisation will operate. The organization’s founders, or the individuals who created the smart contracts, no longer have any more influence on the initiative than other stakeholders.
Why Are DAOs Required?
Because of their internet-native nature, DAOs have tremendous benefits over traditional organisations. One significant advantage of DAOs is the elimination of the necessity for two parties to trust one another. While traditional organisations require a high level of confidence in their leaders, especially on behalf of investors, DAOs just require code. The fact that the code is publicly accessible and can be fully vetted before deployment makes it simpler to trust it.
Communities must assess DAOs when they launch, and they must be transparent and verifiable. It does not have a hierarchy, but it may continue to run and expand while being managed by stakeholders through its native token. Because there is no hierarchy, any stakeholder may make an innovative concept for consideration and improvement by the entire group. The voting technique is used to resolve the majority of internal disagreements in accordance with the smart contract’s restrictions.
How does a DAO generate revenue?
Traditionally, a DAO receives money through dividends on its investments. Individuals that establish a DAO may be able to earn money by convincing others to invest in their business concept.
The emergence of NFTs and cryptocurrencies is reviving interest in DAOs, which fell out of favour in 2016 after The DAO, or Genesis DAO was hacked, thus shutting the market for new ones to form.
DAOs can possibly provide cash for entrepreneurs if their community excels at governance or if they are capable of reaching a collective choice.
DAO vs Traditional Organizations
A DAO differs from standard corporate structures in two major respects. For starters, DAOs are entirely online, with members seldom, if ever, engaging in person. Second, they follow rules and objectives guided by blockchain technology, which is a permanent record of digital information that is not administered or governed by any central authority and serves as an online ledger of digital transactions.
A DAO’s members have a common goal but lack a leader who guides the organisation. Rather than a single leader, choices are made jointly, guided by the community through voting, hence the “decentralised” aspect.
DAOs can participate in any purpose or initiative. FlamingoDAO and PleasrDAO are crypto investment clubs that have joined forces to buy and accumulate uncommon and pricey NFTs. Komorebi Collective is a DAO that provides funding to women and LGBT cryptocurrency users. And Friends With Benefits is a nearly 2,000-member online social club DAO that is transforming into a thriving media empire through its music discovery platform, business incubator, and online crypto news magazine.
DAO supporters think DAOs are the long-awaited substitute for centralised businesses. However, opponents have pointed out that there are several unknowns regarding the new trend and the repercussions of participating in it, suggesting that its uncontrolled nature may bring more harm than benefit.
Unique Features of DAO
There are some features of DAO that make this a hot topic among the investors and fundraisers and make it different from the traditional approach.
1- No or Flat Hierarchies
DAOs appear to have flat hierarchies, with no central leader or figurehead, instead depending on the entire community to make choices. Despite the fact that every DAO member has a voice in how the organisation is handled and where it goes, some have more input than others.
When someone joins a DAO, they invest in the group’s custom-made crypto tokens. The more tokens a member has, the more votes he or she may cast.
Even in the absence of a recognised leader, DAOs operate under the assumption that all of their members would adhere to a set of rules. These rules are written in code online, so if they are broken, the group’s financing may be frozen and no member can access it. A DAO’s regulations might be as basic as requiring a majority vote on all decisions, or requiring each member to commit to purchasing a particular quantity of metaverse land for the DAO.
The rules of each DAO are written in code and stored on the blockchain as a smart contract. These contracts are the foundation of any DAO, as they guarantee that a group’s pooled funds will only be used to fund its objective.
2- DAO Uses Defi
DAOs are available to fully utilise decentralised finance, commonly known as DeFi.
DeFi refers to a wide range of innovative financial applications and transactions enabled by blockchain technology. Most crucially, they can do so without the need for a centralised entity, such as a bank. DeFi allows crypto users to engage in nearly any type of digital activity, from cryptocurrency trading to owning a crypto wallet to making predictions about current events. DeFi can be used by an individual. DAOs, on the other hand, can unite individual cryptocurrency traders into a much larger user base.
DAOs and DeFi have a symbiotic connection. DeFi would lose a large number of users if DAOs were not present. And, without DeFi, DAOs would struggle to coordinate their members’ resources and direct them toward the group’s objective.
Over the following year, DAOs are expected to play a larger role in the mainstreaming of DeFi.
3- Uncharted Location
However, not everyone is ready to board the DAO train just yet. Anyone who has ventured beyond the occasional Bitcoin trade will tell you that the blockchain world is a wild and unregulated place.
DeFi can entice individuals to join DAOs, but the industry is still patchy and prone to fraud. According to research by blockchain analytics firm Elliptic, online theft by blockchain hackers would total $12 billion in 2021. Because the Defi industry is still relatively new, hackers may quickly modify code and steal large sums of money from unwary consumers.
Would you trust your bank account to be shared with individuals you’ve never seen in person? People you’ve only interacted with online and may not even know their true names?
Yeah, I understand your answer is ‘NO’. That is where DAO comes into the picture.
A DAO, or decentralised autonomous organisation, is a group of people who have agreed to work together to achieve a common purpose. It can range from collecting rare NFTs to forecasting stock market movements. And it is typically used to raise funds for a certain purpose.
Members of each DAO can vote on choices jointly, usually on an equal footing, rather than a chosen few having the bulk of say. Transparency is the most crucial component of DAOs. Every DAO decision is pitched, discussed, voted on, and published publicly.
DAOs had a total market valuation of $21 billion in January 2022. Among the 4227 DAOs in the ecosystem, there are almost 1.7M governance token holders and 497k active voters. In addition, almost 47k choices have been made, and 2.5 million votes have been cast.