DAO Meaning: What It Is And How It Works?

Decentralized autonomous organizations are typified by the use of blockchain technology to provide a secure digital ledger to track digital interactions across the internet - read a brief summary here!

DAO definition

DAO, meaning decentralized autonomous organization, is an online investor-oriented venture capital fund organization based on a blockchain and managed by all members.

Their main goal is to create a decentralized business model for all future companies. One important aspect is that all code is open source. This is done to eliminate human error, manipulation, and third parties through an automated decision-making process. Unlike the company, the DAO has democratized organizations that allow all members to vote for any change implemented.

The DA organization is represented by transparent computational rules, secured on the digital ledger across the internet, hardened against forgery by timestamping, and disseminated as a distributed database. The DAO is controlled by the members; no managers or bases are needed.

Future perspective

Despite the fact that DAOs can revolutionize the industry and be a disruptive force on the entire company structure, they face security and legitimacy challenges. As we all know, the SEC claims that some blockchain companies may have made illegal offers of unregistered securities. Also, new investors do not have an understanding of cryptocurrencies, let alone the technical expertise needed to understand the computing infrastructure and consensus mechanisms under a smart contract to feel good about investing in it.

The most important DAOs will govern many billions of dollars and control, as just one example, the upgrade path for the future financial infrastructure of the world. The tokens by which grant access to DAO voting will play an increasingly important position for investors to take best interest changes into their own hands, while also earning revenue from the success playing out through protocol fees.

These assets are a superset of what equity in a traditional public company is, and thus will flourish in the DeFi world in which they were natively built. Furthermore, lending and borrowing of governance tokens will make voting power fluid and reactive to the value of the vote, incentivizing great protocols to make great decisions.

The negatives

It is a highly new technology that continues to be criticized for its legitimacy, security and structural problems. Because DAOs can be distributed across multiple jurisdictions, there is no legal basis.

You may have heard of The DAO's failure, as in 2016. The DAO was launched in Ethereum and raised $ 150 million. USD ETH (the largest crowdfunding effort at the time), but a few days later, developers expressed concern about an error that would allow malicious actors to drain the funds, and although it was suggested to fix it, the attacker took $ 60 million. USD value ETH. At that time, 14% of the total circulating ETH was invested in DAO. Chaos ensued and ETH was installed in hardfork.

Those who disagreed switched to the previous version of the ETH network, which became known as Ethereum Classic or ETC. The bottom line is that failure to close any gaps in the terms of your contract before you launch it can and will lead to theft and loss of money. Depending on the governance, there are only different levels of decentralization. Although there may be independent but equivalent network actors in the network, the very rules of the smart contract will always be a centralized loss of direct autonomy; architecturally and geographically decentralized but logically centralized in the protocol. Updating the code is often outsourced to experts who understand the technical and legal intricacies of the code and are therefore the point of centralization.

How to create and how to join

Firstly, DAO needs to ensure there is a funding token, voting rights, roadmap and clear rules - after that creators have to start a smart contract that can only be changed by the governance system.

Then - funding needs to happen and sources need to be determined, those purchased tokens increase voting rights for specific parties.

Lastly - creators need to deploy that smart contract on the blockchain where stakeholders will vote on the future (govern). How to join? Just buy the sale of tokens - the smart contract token you just bought establishes the DAO’s rules, most likely you have to stake the token or another in the DAO to get voting rights and influence operations. This is typically done by deciding on and creating governance proposals.

The fact that you need to stake to create proposals is to prevent spam proposals, and only (typically) proposals will pass if a majority of stakeholders approve (different percentage majority per DAO; specified in the smart contract).

Why is DAO even important to us?

DAOs are internet-native organizations with technological advantages compared to traditional companies. They have and establish a higher level of trust than, say, the classical corporate hierarchy.

Only the open source code needs to be trusted which is transparent thus auditable and verifiable at any time. This solves the economic principal-agent-dilemma where there may be a conflict of priorities between a group and those making the decisions for the group. The answer is community governance where incentives are aligned. There are charity DAOs, ones for NFT investments, for funding projects by Black women and non-binary artists, for funding women and non-binary crypto founders, some are exclusive social clubs, and others are for-profit business applications.

I’ve even seen freelance DAO networks of contractors. Basically, as Forbers said ‘Can you imagine a way of organizing with other people around the world, without knowing each other and establishing your own rules, and making your own decisions autonomously all encoded on a Blockchain? Well, DAOs are making this real.’ Wikipedia defines DAO (Decentralized Autonomous Organization) as an organization represented by rules encoded as a transparent computer program, controlled by the organization members, and not influenced by a central government. As the rules are embedded into the code, no managers are needed, thus removing any bureaucracy or hierarchy hurdles.