A DAO is an abbreviation of a Decentralized Autonomous Organization (sometimes referred to as a Decentralized Autonomous Corporation or DAC). DAOs are an emerging legal structure not controlled by central authorities.
In DAOs, voting power is distributed among holders of tokens, NFTs, or other assets that allow them to decide on organization development. Therefore, the capability to determine the direction of organizational growth is critical. Learn facts about DAOs, understand their pros and cons, and form your opinion!
DAO Definition – critical facts at your fingertips
DAOs are organizations fully controlled by their members and are not influenced by any central government, DAOs don’t have a centralized leadership. Therefore, there aren’t any central bodies that would make decisions without the approval of a group.
Every member of the organization is expected to act in their best interest. DAO entities are fully autonomous. The voting process happens on the blockchain, with the smart contract being the backbone of operations. External parties can audit proposals, voting procedures, and the code itself.
DAO vs. Standard organization
While a traditional organization usually has a hierarchical structure and is led by a central authority, a DAO keeps a flat and fully democratized format.
A standard organization can often decide upon a sole party’s decision; in a DAO, voting by the owners of governance tokens for any binding resolutions is required. Again, the voting process happens automatically, without a trusted intermediary. Services are handled decentralized, and all activity is transparent and entirely public.In a traditional organization, even if voting is allowed (in some cases, decisions may need collective approval), the votes are tallied internally. The entire procedure requires human handling or automation controlled by a central entity and therefore is prone to manipulation. Then the activity is frequently private and limited to the public1.
Decentralized voting power, how does it work?
Now that you know key facts related to DAOs and how fully decentralized entities compare with traditional organizations, it’s time to pick up some insightful details characterizing those whatsoever innovative formations.
Smart contracts lay in the foundational framework by which DAO operates, and their key characteristics include:
That means anyone, including potential members, can comprehend the protocol’s functionality. Furthermore, once the smart contract has been created on the blockchain, it can be changed exclusively via voting.
Often, a DAO operates, providing more voting rights for members who hold more governance tokens than for those with a smaller amount of them. The logic is simple, associates who invested more in the project are more likely to act in good faith. Violating proportions could jeopardize DAOs operations, which would be the most harmful for those who made significant investments in a project.
A key distinction is that DAOs have built-in treasuries. A decentralized version of an organization doesn’t give the authority to access banks without the group’s permission. The decisions made by token holders can impact the change in the tokens circulating supply (increase/decrease), push the burn of selected tokens or reward its existing users.
Smart contracts also define those treasuries, meaning they can be changed only by following the rules encoded in the contract. Suppose someone tries to introduce changes not embedded in the smart contract (this could include an attempt to manage treasury assets without the permission of other like-minded folks from the organization). In that case, they will end up not being successful.
Member owned communities
There are a variety of membership rights among organizations with blockchain technology at its core. You already know about token-based membership (the voting power depends on the number of tokens you own). Other types of DAO feature share-based membership (you can join a DAO in exchange for some tribute, i.e., tickets of work; then you receive a proportionate share of the treasury) and reputation-based membership (you cannot buy reputation, you earn it through participation and your contribution).
Real-world examples of DAOs
To better apprehend the DAO meaning, learn about some examples and find out how the real-world DAOs operate!
A currency exchange built on the Ethereum blockchain is a typical example of a decentralized autonomous organization. The DAO launched the Uni token, giving everyone the right to impact how the business is run and operated. They serve the idea of permissionless access, security, and immutability. You can find more information about their token on this page!
A decentralized investment fund aims to support the builders of the decentralized economy. One of their principles is that they are not a standard company. In their documentation, you can read that BitDAO is a collection of builders and stakeholders of $BIT token motivated to make the project successful.
MakerDAO is another brilliant example of a decentralized organization that aims to bring financial stability and transparency to the world economy. It’s an open-source project on the Ethereum blockchain created in 2014 and managed by people worldwide who hold its governance token.
Pros and cons of Decentralized Autonomous Organizations
The idea of permissionless entities that act without the involvement of a central authority, governed by people who freely submit proposals and vote on their future, may seem superb. However, it still encompasses some disadvantages that block the growth and development of decentralized companies.
Cons of the DAOs
- Inefficiency and slowness. While there isn’t a single governing body (like a CEO of the company), and the responsibility to make the decisions is distracted, it could take a long time to make significant decisions. And if the resolutions are eventually made, another obstacle appears: implementation.
- Lack of education. While people from diverse backgrounds can form traditional organizations, they are often selected according to standardized guidelines. Therefore they share common characteristics, i.e., their professional skill set or educational experience. In contrast, a permissionless DAO can constitute practically every person globally. Consequently, educating the participants about the significant issues takes time, and they may also have trouble understanding some strategic and operational aspects.
- Controversy. While a DAO is still relatively new, some disagreements and unknowns may delay its growth and development. For example, it is generally unclear what is the precise legal status of a DAO and what its liability is. Security aspects are also disputable. It’s challenging to alter DAO’s code once the system is up and running, preventing the implementation of even the most basic bug fixes.
Pros of the DAOs
While the above mentioned limitations of DAOs can threaten the skeptics, many benefits make them innovative and noteworthy.
- Decentralization. DAO decentralizes authority across a vast number of people. As a result, a diverse set of stakeholders is involved in the decision process. In a formal organization, critical resolutions are often made by a single person (CEO) or a tight group of people.
- Transparency. The votes are publicly viewable. It encourages people to act in good faith and make decisions that benefit the organization.
- Inclusion and Community. Decentralized autonomous organizations empower collaboration with people from the entire globe. Even if an individual doesn’t have strong voting power, they may feel committed to acting in the best interest of an organization, developing their skills, and fostering ideas they believe will benefit its other members.
Will DAOs change the world as we know it?
The concept of a decentralized autonomous organization is still fresh, and today we still observe the very early stage of developing entities with decentralized governance.
The conception of autonomous organizations being governed by dispersed stakeholders is unique and differs from standard business models as we know them in the modern economy. You cannot introduce that significant change as a DAO without people noticing. And to some extent, this is a kind of revolutionary.
Blockchain-native organizations that leverage smart contracts for their operations may change the world or go away forgotten. Most likely, they are yet to make a lot of buzz.
Source 1: https://ethereum.org/en/dao/