A decentralized autonomous organization, or DAO, is - as the name suggests - an organization that is governed by a transparent code and, for the most part, free from centralized influence. As a blockchain-based organization, governance rules are coded like a computer program and available to everyone, while financial transactions are recorded on a blockchain . Since DAOs are open source, their code can be viewed, verified, and audited by anyone.
In many ways, Bitcoin is considered the first true DAO because it has a transparent, programmed set of rules that are executed in a decentralized fashion and has a distributed consensus protocol. It wasn't until after the creation of smart contracts on the Ethereum protocol , however, that DAOs began to gain traction in the broader blockchain and cryptocurrency space.
How do DAOs work?
DAO development For a DAO to work, a set of operating rules must be established and encoded as a smart contract on a blockchain, such as Ethereum. This smart contract will exist autonomously on the Internet. However, the involvement of humans is still necessary to develop and maintain a DAO.
Following the establishment of the rules of a decentralized autonomous organization, a DAO typically enters a funding phase, a critical step, as a DAO requires some form of spendable and rewardable capital. Additionally, a DAO needs investors so that entities can vote on governance proposals.
Typically, a DAO is deployed after it has completed its funding period. Once deployed, the organization becomes - to match its name - decentralized and autonomous, as the rules are permanently recorded on a blockchain. In this phase, a DAO takes advantage of all the advantages of blockchain technology – namely its transparency and immutability.
After implementation, decisions related to the DAO are reached by consensus. DAO stakeholders can propose governance changes, new rules, reward adjustments, or other ideas, typically by making a deposit. Stakeholders can then vote on these proposals, with participation requirements and approval rates varying from DAO to DAO services.
Once operational and deployed, DAOs enable the borderless and decentralized exchange of funds between individuals or entities through investment, donation, funding, lending, or various other means of conducting financial transactions.
The advantages of a DAO
The most obvious advantage of a DAO is the fact that it removes centralization from organizations. While the vast majority of organizations in the world are governed and controlled by centralized parties, DAOs truly put the governance of an organization in the hands of those
who have a stake in it. Every investor, in theory and in practice, should have the opportunity to help govern a DAO.
Another advantage is that the rules are predefined, transparent, verifiable, and distributed. No one can argue that they did not understand the rules of a DAO before joining, since the rules are always publicly verifiable. Additionally, proposals and decisions are often carefully considered before being submitted, as they often require a certain amount of spending.
In addition, the rules and transactions of a DAO are always recorded on a chain of blocks, which guarantees full transparency and responsibility for each decision and financial movement. While centralized organizations may keep opaque records, a DAO's records are always available to everyone.
The disadvantages of a DAO
One of the problems with the decentralized nature and voting mechanisms of DAOs is that a post-release security flaw may not be fixed until a majority of stakeholders vote to approve a fix. This leaves the door open for hackers and criminals to drain a DAO of all its funds.
DAOs cannot develop on their own either. For a DAO to build on its core foundation, a contractor must be hired, which requires decentralized voting. Some might say that this has the potential to slow down the development of a DAO, although many would argue that the pros of a decentralized governance model outweigh the cons.
An additional concern shared by those who are not natural advocates of blockchain and cryptocurrency has to do with the belief that the masses are unlikely to make the best governance decisions about an organization, although this largely depends on beliefs. personal.
Lastly, one of the main concerns for DAOs is the lack of a clear regulatory framework. Most governments around the world do not have clearly defined legal positions regarding DAOs, which can hamper the rapid development of these organizations.
DAOs in the current crypto space
Decentralized autonomous organizations are prevalent in today's blockchain and cryptocurrency space, although the average retail user may not necessarily realize it.
MakerDAO and more
Maker DAO, a collateralized decentralized finance platform, is perhaps the most famous DAO. Major decentralized exchanges Uniswap , Compound and SushiSwap are also governed in a decentralized way and rely on governance tokens – UNI, COMP and SUSHI, in these cases – for proposal submission and voting. Other DeFi platforms, such as Yearn , Aave Curve Finance, and Badger DAO, are also DAOs.
Outside of the world of DeFi, the older digital currencies are also decentralized autonomous organizations. Dash, for example, is a DAO, due to its decentralized government model and its budget system.
