What is a DAO?
With the entry DAO, Wikipedia provides the following result:
“DAO is an organization constructed by rules encoded as a computer program that is often transparent, controlled by the organization's members and not influenced by a central government.”
The term DAO stands for Decentralized Autonomous Organization, an internet-native organization or community based on an open-source protocol governed by a smart contract (a self-execute set of rules) and its internal members and doesn’t follow a hierarchical structure. (What is a Smart Contract)
The idea behind that comes from the decentralization of the crypto world, where there is no central authority, and decisions are made from the bottom-up via proposals; each member votes on it (or proposes a different one) during a determined period of time.
The definition of a DAO by Binance Academy.
How does a DAO work?
Governance and Purpose
The core concept of a DAO lies in creating a community with decision-making and organizational power according to a predetermined set of criteria.
In a DAO, as in any other society or community, you can make proposals, vote and make decisions. The voting process is uploaded on a blockchain where users are selected according to different options. The voting power is based on the number of tokens a user holds; The ownership of DAO’s tokens gives the opportunity to be involved in the governance and contribute to its development. This easily means that the users who are more invested in the DAO are encouraged to act in good faith, theoretically. Moreover, a proposal will only pass once the majority of stakeholders approve it according to the established rules of the smart contract.
The governance rules and the number of tokens to vote for or make a new proposal vary depending on the DAO. There is no unique rule. All details should be enclosed in the whitepaper or in the official documentation in a transparent way.
How can you invest in a DAO?
As we explained, investing and participating in a DAO is very simple. The whole is governed by a mechanism of proposals to make a common and collective decision. When you are interested in a DAO, you need to buy and own its related token because only those who own the investment DAO's governance token are allowed to make proposals. Proposals can be made depending on the number of tokens held, as well as voting depends on the internal rules of the DAO. Once the voting process is over, the decision according to the consensus is announced and implemented.
Pros and Cons of a DAO
DAOs reflect all the characteristics of the web3, such as transparency, decentralization, security and accessibility. For this reason, they gained a foothold. Among the most important benefits we indicate:
The autonomous structure
The common drawbacks are
Time for transactions
The best examples of DAOs by Forbes.
The DAO experiment
There is uncertainty around the concept of DAO, and often a tendency to confuse Decentralized Autonomous Organizations with the unsuccessful experiment of the DAO.
The DAO was one of the first decentralized autonomous organizations and also a form of investor-directed venture capital fund. It was launched in April 2016 on Ethereum as one of the largest crowdfunding campaigns in history. The project's main goal was to provide a new decentralized business model for organizing commercial and non-profit enterprises. In June of the same year, users exploited a vulnerability in The DAO code, and around 3.6 million ETH were stolen. Its fallout resulted in an Ethereum hard fork to undo the hack. This was the reason why we now have both Ethereum and Ethereum Classic. In September, the tokens’ value (DAI) was delisted from major cryptocurrency exchanges, and the entire project is dead and gone.
What Is the purpose of a DAO?
DAO will probably be one of the most important developments of web3. The main purpose of a DAO is to improve, thanks to its transparency and democracy, the traditional management structure of enterprises.
Instead of relying on the choices of a single individual or a group of people (CEO and Boards of directors, for example), a DAO wants to give everyone a voice, vote and opportunities to make proportions and decisions. With its stricter governance rules established by the code and smart contracts, initiatives and decisions will be publicly viewable, and the so-called principal-agent trilemma doesn’t exist more.
Many good projects in the DeFi world have a DAO behind them; for this reason, it is important to know and study the characteristics of a DAO that we consider valid and try to take part and start to get your hands dirty.