What Is a DAO and How Does It Work?

An examination of the inner workings of decentralized autonomous organizations and a discussion of their implications for the business world's future.

Key Takeaways

• A decentralized autonomous organization, or DAO, is an entity that is meant to be completely self-sufficient and work even without a command and control node.

• When people try to explain what a decentralized autonomous organization (DAO) is, they often talk about these five things: flat organization, transparency, open access, democracy, and decentralization.

• A core team writes the DAO's rules of committee members. Smart contracts are then used to make the rules work.

• Users often need to acquire the governance token of a decentralized autonomous organization (DAO) in order to receive voting power or membership in the DAO.

• Some well-known examples of decentralized autonomous organizations are the DAO, Uniswap, and ConstitutionDAO.

What Is a DAO?

The creator of BitShares, Steemit, and EOS, was the first person to suggest the idea of a decentralized autonomous organization, often known as a DAO, in the year 2015. (Block.one). On the other hand, this way of governing didn't become popular until after Ethereum co-founder Vitalik Buterin had improved its theoretical foundations.

A decentralized autonomous organization, or DAO, is an entity that is intended to be entirely autonomous and to function without the need for a centralized point of control. Instead, it comprises a committee that has agreed to follow a set of norms to achieve a shared goal. The members of this committee control and run the DAO together using the DAO's own currency, and they help the DAO work toward a common goal.

These five characteristics commonly define a DAO:

• Organizational structure with no layers. Decisions are made by a DAO's stakeholders or members rather than by its leaders or managers, but specific domains of decision-making may be delegated to a core or chosen team. A decentralized autonomous organization (DAO) does not have a hierarchy.

• Transparency. A DAO must be open-source, and anybody may read the code on the smart contract or see the DAO’s transaction history on the blockchain

• Access without restriction. Anyone may, in principle, be a member of the DAO, as long as they meet the established prerequisites, such as owning its governance token

• Democracy. Once a proposal has made it through the voting process, no one party may use their veto power to stop it.

• Decentralisation. Execution of DAOs is handled by means of smart contracts. On occasion, members of the DAO may contract human resources services to address problems like bugs or upgrades.

How do DAOs Work?

Governance Through Smart Contracts

At the very least, in principle, the rules of a decentralized autonomous organization (DAO) are implemented via smart contracts. A core team of committee members defines these rules.

The DAO is built on top of smart contracts, which serve as the organization's core blueprint. When they have been completed, these contracts are then uploaded to the blockchain and made public. Any member, current or prospective, has the ability to read the code and confirm that the smart contract is in accordance with the objectives of the DAO. They are highly visible, verifiable, and publicly auditable.

In general, a DAO's rules and regulations cannot be updated or amended unless the vast majority of its members come to an agreement on the subject. In a similar vein, due to the fact that the smart contract protects the treasury (the money) contained inside a DAO, it is impossible for a single entity to have access to the assets without first receiving authorization from the majority of the DAO's members.

The use of smart contracts in a decentralized autonomous organization (DAO) makes it possible for that organization to function with a reduced reliance on the input of humans. Instead, choices are arrived at by the community as a whole via a system of voting, and then the smart contract carries them out automatically.

Voting Power

Participatory and democratic practices are associated with DAOs. Put another way, if the majority of the members supports the decision, it will be implemented.

Users normally need to be in possession of a DAO's governance tokens in order to be eligible for voting or for membership in the DAO. In addition, the power is often split among the organization's members in proportion to the number of tokens held by each individual member.

To give you an example, a member of the DAO who has 100 tokens may have double the voting power of a member who only holds 50 tokens. This is because more tokens equal more votes. Users who have contributed more cash to a DAO are thought to possess greater decision-making power because they are incentivized to operate in the good faith of the DAO, which is the concept that underpins the widespread practice of allocating voting rights in this manner.

Examples of DAOs

The use cases for DAOs vary from straightforward, single-purpose endeavors to more involved, multi-stage endeavors. Depending on its goal, a decentralized autonomous organization (DAO) may have use cases that are similar to those of a traditional business in any sector.

Types of DAOs

DAOs may be created for a variety of reasons, the primary one being financial benefit, but this is not always the case.

The following is a list of some of the existing applications for DAOs:

Protocol DAOs. One of the principal applications of DAOs at the moment is protocol DAOs, which are used to control decentralized protocols. For instance, MakerDAO is responsible for keeping the dollar's peg to the stablecoin DAI.

DAOs to be collected. A collector's decentralized autonomous organization (DAO) aims to accumulate non-fungible coins (NFTs). The funds contributed by participants in a DAO will be pooled and then used to purchase NFTs determined by those participating in the DAO. At a public sale in 2021, the CD "Once Upon a Time in Shaolin" by Wu-Tang Clan was acquired by PleasrDAO, considered one of the most prominent collector DAOs. In an effort to purchase a copy of the United States Constitution at auction, ConstitutionDAO aimed to raise the equivalent of $47 million USD in ether.

Social DAOs. The vast majority of DAOs have some type of social component, but social DAOs are designed from the ground up with the specific intention of bringing together individuals who share common passions.

Therefore, due to the fact that the majority of DAOs demand ownership of governance tokens, they may begin to resemble a country club in certain ways. For instance, in order to become a full member of Friends with Benefits, one must first purchase 75 FWB tokens. The Bored Ape NFT collection is known for giving owners access to the Bored Ape Yacht Club discord channel and events that are only open to members.

Investment DAOs. Members of investment DAOs, which are sometimes referred to as venture DAOs, pool their assets and use governance tokens to vote on how and where the pooled funds should be invested. All members get a cut of the profits and losses in direct proportion to the amount they have invested.

DAOs for charitable giving. These decentralized autonomous organizations (DAOs) fulfill the role of a community-led charity by collecting cash and determining which organizations should get those donations collaboratively. These work the same way grant DAOs do, in that they choose decentralized finance (DeFi) projects to fund.

Examples of Well-Known DAOs Include:

The DAO

The Decentralized Autonomous Organization (DAO) was the first organization of its sort to be established as a kind of investor-directed venture capital fund. The company that established Slock.it, a firm in Germany that was created on the Ethereum blockchain, intends to incorporate transactions from the real world onto the blockchain.

The firm was seeking a way to gather cash for its project at the beginning of 2016, and its creator, Christoph Jentzsch, referenced the idea of crowdfunding and applied it to the blockchain. As a result, the concept of a DAO came into being.

The DAO became an unexpected success during the period in which it was being created. It was able to generate around US$150 million at that time from more than 11,000 participants, making it the largest crowdfund in the history of crowdsourcing.

Uniswap

Uniswap is a cryptocurrency exchange that is powered by a system that is decentralized throughout the network. By using smart contracts, this group wants to make it easier for cryptocurrencies on the Ethereum blockchain to trade with each other automatically.

Uniswap operates in a manner that is similar to that of a conventional decentralized autonomous organization (DAO) in that it gives back control of the protocol to its individual members via the use of a governance token called UNI. The Uniswap community now has the power to vote on ideas that might have an effect on the day-to-day operations and future development of the Uniswap project thanks to the UNI token.

The UNI token has a maximum supply of one billion, and this supply is distributed proportionally among the primary contributors to the platform. These contributors include the Uniswap community members, the development team, external investors, and advisers.

Through the use of the Crypto.com DeFi Wallet, users are able to access Uniswap.

ConstitutionDAO

In November of 2021, a company called ConstitutionDAO was established with the intention of obtaining the first printed copy of the United States Constitution. This single-purpose DAO brought together over 17,000 participants and raised a total of $47 million in collective funding. However, ConstitutionDAO was eventually unsuccessful in their offer and Ken Griffin, the creator of Citadel, won the auction. As a result, the DAO's members received a full return of their assets.

Even so, the event was a big step forward that showed how a decentralized autonomous organization (DAO) could work.

Conclusion

The development of Web3 and the crypto space are inextricably linked to decentralized autonomous organizations (DAOs). Since they've only been around for a few years, their structure will likely get better, and they may soon become more common both inside and outside of blockchain technology.

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