Decentralized Autonomous Organisation (DAO) is also known by the name Decentralized Autonomous Corporation. It’s an organization that represents a set of rules that is encoded as a transparent computer program. Moreover, organization members control it, and the central government does not influence it. The records of financial transactions & program rules of DAO are maintained on a blockchain.
The accurate legal status of this business organization is not clear. A well-known example is that The DAO was launched in June 2016 with a budget of 150 million US dollars in crowdfunding. But it was immediately hacked, and about $50 million were drained out. However, the hack was undone in a few weeks, and all the money was brought back.
Why Do We Need DAOs?
When you establish a business, you need to involve a lot of funding and trust in the people you are working with. But it is not at all easy to trust someone with whom you have hardly talked, even on the internet. But with DAOs, you need not trust anyone else out of our group. You only need to trust your group members & DAOs code, which is 100% transparent & verifiable by anyone. Furthermore, this is opening a lot more opportunities for global coordination & collaboration. Here is a comparison between DAO & traditional organizations:
|Usually, it is flat & fully democratized||Usually; it is hierarchical|
|Voting is compulsory by the members to implement any change.||It depends on the organization’s structure. They may request the changes from a single party or may offer a voting system.|
|Votes are tallied, and outcomes are automatically implemented without any trusted intermediary.||If voting is allowed, they tally the votes internally. Additionally, they also handle the outcomes manually.|
|They are offering the services automatically in a decentralized manner.||Also, it requires human handling or centrally controlled automation. But it is prone to manipulation.|
|All the activities are transparent & fully public.||All the activities are transparent & fully public. However, all the activities are typically private from the public and limited to them.|
Examples of DAO
To make this more sensible, here are some of the examples of DAO:
- A Charity – You may accept membership & donations from anyone worldwide and how to spend the donation(s).
- A Freelancing Network – You may create a network of contractors who can pool their funds from office spaces & software subscriptions.
- Ventures & Grants – You may also create a venture fund that pools investment votes & capital on ventures to back. Repaid money is also be redistributed among DAO members.
There are various models available for DAO membership. Membership can decide how voting works and other parts of DAO.
Usually, it is permissionless, but it depends on the token you are using. Apart from this, you can also trade these tokens on an exchange without any permission. But it would be best if you had to earn other tokens by providing liquidity or some ‘Proof of Work.’ Either way, you use, holding the tokens will give you the right to vote.
Comparatively, these are more permission-bound, but still, it is pretty open. Any prospective member may submit the proposal to join DAO by offering a tribute either in the form of token or work. In addition to this, shareholding directly gives you the power to vote. Members may also exit at any point in time with their share in the treasury.
How do DAOs work?
The backbone of a DAO is its smart contract. This contract defines the rules & regulations of the organization and upholds the group’s treasure. Once the contract goes live on Ethereum or another Chain, no one can change it except only in the case of voting. If someone tries to perform something that does not come under the regulations of the contract, it will immediately fail.
What this means is that the DAOs do not require any central authority. Instead of a central authority, the group makes the decisions collectively through the system of voting. This is possible as once these smart contracts go live, they become temper-free. Moreover, you cannot edit or break the DAOs rules without letting people notice it as everything here is public.
Ethereum & DAOs
Ethereum is an ideal platform for DAOs for various reasons:
- Ethereum’s consensus is distributed & established for the businesses to trust upon the network.
- Also, you cannot modify it once it goes live, not even by its owners. Thus, it allows the DAO to run smoothly with the rules it has been programmed with.
- Additionally, smart contracts can send as well as receive funds. Without this, you’ll need an intermediary to manage the funds.
- Finally, the Ethereum community is more collaborative and less competitive. It allows the best practices & support systems to synchronize as quickly as possible.
Future of Decentralized Autonomous Organizations (DAOs)
What is there in the future of DAO? The DAO, as initially envisioned, hadn’t reached till the mid-2020. However, the interest rate in DAOs is still growing. While there are various concerns & potential issues with the security, legality, & its structure, some investors & analysts believe that it will eventually come up to prominence. Perhaps, it may even replace the traditional & hierarchical businesses.
Criticisms of DAO
By May 2016, the DAO had a large percentage of Ethereum tokens that has ever been issued (up to 14 percent). However, an article was published simultaneously addressing the potential lacking in the security system of DAO. The article’s primary purpose was to caution the investors to vote in future investment projects carefully until all the issues had been set on.
Later, in June 2016, some hackers attacked the DAO and stole 3.6 million ETH, nearly 50 million US Dollars in that time’s money. This eventually resulted in a vast & controversy among the DAO investors, individuals suggesting the ways to hack, and those asking for the DAO to be permanently disbanded. Also, this incident figured significantly in the difficult forking of ETH that took place soon after that.
As per IEEE Spectrum, the DEO was vulnerable to attack vectors & errors. It’s a fact that charting new territory in terms of corporate laws didn’t make the process any easier. Even the consequences of this organization’s structure were potentially a lot. That’s why the investors were a bit worried that they will be held liable for DAOs actions.
DAO (Decentralized Autonomous Organization) is an organization that represents a set of rules & guidelines that is encrypted with programing language. What’s more impressive is that government does not influence it. On the contrary, it is run by the organization’s members. It’s a flat & democratized system which needs voting by its members to implement any change.
Moreover, all of its services are transparent and open to the public, making it a lot more likable among its users. There are two types of memberships available in DAO – Token-Based Membership & Share-Based Membership. In both cases, it gives you the right to vote for any change in the organization. Keeping all these in mind, you can do it right now if you want to join the DAO.