An organization without centralized authority is known as a decentralized autonomous organization (DAO). Decisions are made bottom-up by a community centered around a certain set of regulations that are implemented on a blockchain.
Collectively owned and operated by their users, DAOs are online enterprises. They keep secret funds that members can access only with permission. In order to reach a conclusion, members of the group cast votes on various proposals at regular intervals.
A DAO can serve a number of aims and operates decentralized from hierarchical management. These organizations make it feasible to construct venture capital businesses owned by a group, philanthropic organizations whose members approve gifts, and freelancer networks where contracts pool their cash to pay for software licenses.
It is essential to differentiate between a DAO, an organization formed on the internet, and The DAO, one of the earliest of its sort, before proceeding. In 2016, a failed initiative called the DAO produced a schism in the Ethereum network.
How does a DAO work?
Decisions in a DAO are made collectively by the members, as was previously mentioned. Several methods exist for joining a DAO, the most common of which is the possession of a token.
By utilizing smart contracts, which are essentially predetermined sections of code that are triggered to execute when specific circumstances are satisfied, DAOs are able to carry out their operations. Nowadays, smart contracts are used on many different blockchains, but Ethereum was the first to do so.
The smart contracts are what set the rules for the DAO. Investors in a DAO can participate in governance by casting votes and proposing new ideas for the organization’s management to consider.
This strategy prevents proposal spam in DAOs by requiring unanimous support from all stakeholders before a proposal is implemented. How that majority is decided upon varies from DAO to DAO, as specified by the smart contracts.
DAOs are transparent and completely independent. Since they were developed on public blockchains, their source code is accessible to everyone. Because every financial transaction is recorded in the blockchain, anyone may verify the accuracy of their internal reserves.
A DAO launch typically involves three primary steps.
1. Establishing smart contracts:
The smart contract that powers the DAO must first be created by a developer or group of developers. They can only alter the regulations established by these contracts after launch by using the governance system. To make sure they don’t miss any crucial information, they must thoroughly test the contracts.
2. Funding:
The DAO must decide how to implement governance and how to acquire funds when smart contracts have been developed. Tokens, which grant holders voting rights, are typically sold to raise money.
3. Deployment:
The DAO has to be put on the blockchain once everything is set up. The destiny of the company is now up to the stakeholders. The people who founded the organization and created the smart contracts have no more sway over the initiative than any other stakeholder.
Why are DAOs necessary?
Due to their origins in cyberspace, DAOs provide several advantages over more conventional forms of organization. One advantage of DAOs is that they eliminate the need for trust between participants. The trust in DAOs is limited to the code itself, as opposed to the high level of confidence required in traditional businesses’ management teams.
Trusting that code is simpler because it is available to the public and can be thoroughly checked before launch. After going live, every DAO decision is fully transparent and open for community review.
This is because there is no formal chain of command in place inside the organization. It may still carry out duties and develop while being managed by stakeholders via its native token. Due to the lack of a command and control structure, any member of the group is free to propose an idea that will be refined by consensus. Internal conflicts are typically promptly handled through voting in accordance with the pre-written regulations in the smart contract.
DAOs give people a way to pool their money and share the risk and reward of investing in startups and decentralized initiatives.
What was The DAO?
An early version of today’s decentralized autonomous organizations was the DAO. It was first introduced in 2016 and was intended to be an automated business that operated like a venture capital fund.
Owners of DAO tokens could profit from the organization’s investments by receiving dividends or by taking advantage of the tokens’ rising value. One of the biggest crowdfunding campaigns at the time, The DAO raised $150 million in Ether (ETH) and was at first thought of as a revolutionary concept.
After Ethereum protocol engineer Christoph Jentzsch made the open-source code for an Ethereum-based investment organization available, the DAO went live on April 30, 2016. By sending ether to the DAO’s smart contracts, investors purchased DAO tokens.
DAO disadvantages
Autonomous decentralized groups aren’t perfect. They are a very new technology with many open questions about their legitimacy, safety, and even their very existence.
For instance, MIT Technology Review has stated that it believes it is a bad idea to entrust the general public with crucial financial decisions. The Institute for Mathematics and its Applications (MIT) already voiced its position on DAOs in 2016, and it does not appear to have changed its mind since then, at least not in a public forum. Security issues were also brought up by the DAO hack since smart contract problems can be challenging to address even after they are discovered.
There is no specific legal structure for DAOs, and they can operate in different countries. Those who find themselves embroiled in any prospective legal conflicts will likely have to navigate a difficult legal battle involving a patchwork of different municipal laws.
For instance, The DAO sold securities in the form of tokens on the Ethereum blockchain without permission, breaking some of the country’s securities laws, according to a report published in July 2017 by the United States Securities and Exchange Commission.
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