What is a DAO?

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Inspired by blockchain-based solution and Web3, a group of developers came up with the idea to create DAO, which stand for “decentralized autonomous organization,” in 2016. The first DAO was built by a German-based developer called Slock on top of the Ethereum blockchain. All its members collectively own DAO and wherein members get an equal say in making decisions and potentially benefit financially. DAO is aimed to automate decisions and facilitate cryptocurrency transactions based on equal votes in a decentralized environment. What is the full story behind DAO, and why do we really need it?

Source: PointPay analysis. DAO scheme

What is a DAO?

DAO is a blockchain-based organization collectively owned and controlled by its members equally. DAOs have built-in resources that no one can access without the group's permission and can be accessed only by its members. It functions as an open-source venture capital fund with no management structure or board of directors. All proposals are implemented using voting processes to make the decisions upon any rule and policy. This ensures that everyone in the organization gets a say which is one of its main concepts. DAOs can work on any blockchain; however, currently most of them are created on Ethereum.

The DAO's creators hoped they could remove human intervention in various procedures by putting decision-making power in the hands of an automated system and a crowdsourced process. Focusing on that, DAO was created to allow investors to send money anonymously from anywhere globally and not only!
Basically, that smart contracts (programs that run when certain conditions are met and are stored on blockchain) are the backbone of DAO. The core community members establish the rules of a decentralized organization through smart contracts.

Step one is when the documentation of the idea takes place; similarly, in DAO, a group of people writes these smart contacts to administer the organization. Once the contract goes live on the blockchain, changes to its rules can be proposed only by voting. The contract automatically fails if the rules are violated.

Once the rules are formally written into the blockchain, the next step is funding. The DAO will need to determine how to receive funding and how to grant governance to its members. Take an example of a real-life project when people pitch in front of selected investors or members. Similarly to that, people in the DAO organization contribute money to DAO by purchasing tokens that signify their membership in the organization. Token holders are given certain voting rights, typically in proportion to their holdings of the native token.

The next step is when the approval and implementation process of the idea takes place, or let’s say when the DAO starts to operate. Once the code is produced, it can no longer be changed by any other means than some consensus reached through member voting. DAOs are the ideal situation for most people attracted to crypto, as it provides fair and transparent representation.

Main Characteristics of a DAO

As the world becomes more familiar with the tools to create and manage DAOs, these organizations will continue to proliferate, uniting communities of individuals with common ideas, values, and visions. DAO can offer many advantages over traditional businesses.

The rules governing a DAO are encoded into smart contracts by the ideators. And from there, changes can be proposed by any DAO member. However, the weight of the proposal, courtesy of the voting rights, is determined by the number of governance tokens that the member holds, which plays a significant role in giving a better seat at the table.

Some of the elements every DAO has are the following.

  • Decentralization
    This feature helps achieve high levels of privacy and security. All of them are decentralized, which is a DAO's main element and core value.
  • Autonomy
    This element brings businesses to a more innovative platform where things can be operated without human intervention. They have no offices, no employees, and no managers.
  • Participation
    Individuals within an entity may feel more empowered and connected to the entity when they have a direct say and voting power on all matters.

Disadvantages of DAOs

DAOs do have many positive aspects that can be implemented in different businesses and spheres. Like most things, DOAs aren’t perfect. There are some concerns about DAOs.

  • More time is needed to cast votes or gather users due to the decentralized nature of the entity.
  • It often takes longer for decisions to be made as there are more voting participants.
  • Severe exploits, such as theft of treasury reserves, are possible if the DAO's security is not properly established.

If you wish to get involved in a DAO and make investments, make sure to research everything thoroughly before any further steps.

Examples of successful DAOs

So far, DAOs are being used for many purposes, such as investment, charity, fundraising, borrowing, or buying NFTs, all without intermediaries. Some of the leading DAOs are:

  • Uniswap
    A popular decentralized crypto exchange globally, Uniswap, has taken the throne as one of the biggest DAOs today. Uniswap runs on the Ethereum blockchain network. The volume and membership at Uniswap have undergone exponential growth due to its firm control over the DeFi markets.
  • Aragon
    Aragon is another popular decentralized autonomous organization that allows other platforms to introduce their DAOs. Aragon functions to empower clients to connect with anybody from any location globally within a DAO infrastructure.
  • MakerDAO
    MakerDAO is a peer-to-peer DAO built on the Ethereum blockchain network that allows people to lend and borrow using cryptos. MakerDAO is one of the leading decentralized organizations out there.
  • Curve DAO (CRV)
    Curve is the decentralized exchange and automated maker protocol. Curve DAO runs on the Ethereum blockchain network. The protocol is designed to make it easy to swap between similar ERC-20 tokens, primarily stablecoins

    DAOs are well-positioned to become the future of online transactions and decentralized networks as they allow people to organize their efforts based on openness, transparency, and decentralization: the core values of blockchain technology. Businesses and brands need to stay abreast of current trends that could impact how they engage with consumers. While DAOs are not universal yet, they do seem to be picking up steam with many creators.

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