Decentralized Autonomous Organizations (DAOs) And What Is Driving Them Popular?
Wouldn’t it be wonderful to collaborate with people worldwide, establish your own rules without knowing anyone else? How about making decisions autonomously with blockchains? Well, that is what DAOs enable. Let’s check a quick definition of what Wikipedia says about DAO. A Decentralized Autonomous Organization is encapsulated in a transparent computer program, under the control of its members, independent of any central authority. Embedded rules do not require managers, eliminating any bureaucracy or hierarchy. Sounds interesting? Let’s deep dive into this, then.
The DAO as an organization is built to be decentralized and automated. Essentially, it is a type of venture capital fund based on open-source code with no typical management or board. The DAO was neutral to any country or state, despite relying on the Ethereum network as a decentralized organization.
So, why make a DAO? The developers believed in eliminating human error or manipulating investor funds with automated decision-making and crowdsourcing. Powered by ether, the DAO lets investors quickly and anonymously send money across the globe. Those owners are then provided with tokens to vote on future projects.
In essence, DAOs work autonomously without any intermediaries, yet over collective decision-making of group members/investors.
Now let’s look at DAOs even better.
How do DAOs work?
One might wonder, what makes this autonomous function work efficiently? Smart contracts are the core of a DAO. The contract specifies the rules of the group and holds its assets. Once the contract is live on Ethereum, changes to the rules can only be made by voting. There is no exception to the rules and logic contained in the code, so anything outside of them will fail. Since a smart contract defines the treasury, that means no money can be spent without the group’s approval.
As everything is public, it is impossible to simply edit the code (the DAO’s rules) without anyone noticing. In other words, DAOs need no centralized control. As a result, decisions are made collaboratively, and payments are automatically approved when votes are passed. The reason behind such a precise process is due to the tamper-proof smart contracts once they go live on Ethereum.
Now, we know they are safe against manipulations, free from errors and transparent to all and secure from edits. But do we really need DAOs? Perhaps. We will investigate it shortly.
Why do we need DAOs?
Due to the fact that they are internet-native, DAOs come with a bag of benefits — making it a perfect blend of choice. A key benefit of DAOs is they do not require mutual trust between the parties. Unlike traditional organizations that require a high degree of confidence with the people involved, particularly investors, DAOs just need trust in the code.
Since the code is public and can be tested extensively before launch, it is easier to trust it. Upon launching, every DAO action requires community approval that is fully transparent and verifiable. Organizations of this type do not have hierarchies. Nonetheless, it can accomplish tasks and grow, with its native token being controlled by stakeholders.
Every stakeholder can submit an idea, which can be evaluated and improved by the whole group. By using a voting system, smart contracts often facilitate internal dispute resolution. In addition, DAOs allow investors to share the risks and profits of decentralized projects and early-stage startups.
How different are DAOs from traditional organizations?
The idea of starting an organization involves not just money and funding but a mountain of trust for the people involved. There is, however, something difficult about trusting someone you have only interacted with online. DAOs provide you with 100% transparency and verifiability, eliminating the need to trust anyone involved. It opens up a world of possibilities for global collaboration and coordination. Let’s see how different are DAOs from traditional organizations.
With that comparison in mind, let us see where DAOs are in place across the business world.
How are DAOs being used today? — Significant Examples
Since their establishment, DAOs have served various purposes such as investing, donating, fundraising, borrowing, or purchasing NFTs — all with no third parties involved. Let us take a few examples that could explain this jargon better.
Significant Examples of DAOs
A DAO, for instance, accepts donations regardless of where they are from, and the members decide on how to utilize those funds. Let’s take a look at another piece of news.
Could you become a co-owner of an Artist’s song with cryptocurrency through an online organization? Everything’s possible with a DAO now.
- Jenny DAO acquired a song by Steve Aoki and 3LAU as its first NFT in May 2021. The members will have control over the purchase of NFTs, and Unicly protocol’s smart contracts will manage the vault where the NFTs will be kept. That is a very diverse usage of DAOs — from donations to NFTs. Few DAOs which fall under the metaverse basket provide fractional ownership of NFTs.
Decentralized autonomous organizations gained momentum in recent years. A growing number of blockchain projects now use DAOs.
- The decentralized finance (Defi) sector deploys DAOs to decentralize applications fully.
Some consider Bitcoin (BTC) to be the earliest DAO. Even though most participants have never met, the network scales via community agreement. Furthermore, it lacks a well-established governance mechanism. Instead, miners and nodes must signal support.
- Hence, Bitcoin is no more a DAO by modern definitions. Currently, Dash would top the list of DAO. A governance mechanism is in place for this project that lets stakeholders approve the use of its treasury.
Stablecoins backed by cryptocurrency are launched by advanced decentralized autonomous organizations, including those built on the Ethereum blockchain.
- Often, the organizations that started these DAOs gradually relinquish control of their project to become irrelevant one day.
- However, token holders can continue hiring new contributors, adjust parameters, or add tokens for collateral using a voting system.
In 2020, a Defi platform launched its own governance token and distributed it through liquidity mining.
- The protocol rewards anyone who interacts with it by granting them tokens. Several other projects have run on the model since then.
We now have an extensive list of DAOs. A few projects continue to seek complete decentralization, but it’s worth noting that they’re only a few years old and on their path to achieving more goals. Companies and brands must stay up-to-date on the latest trends that impact how they interact with consumers. While Decentralized Autonomous Organizations have not yet become mainstream, many creators are catching up on this steam. DAOs can completely transform the way corporate governance works as internet-native organizations. More and more organizations will likely adopt a DAO model as the concept matures and the legal grey areas are clarified. Is there a bright future besides that? The answer appears to be a big YES!