DAO, stands for Decentralized Autonomous Organization.
They’re called ‘Decentralized’ because they operate on decentralized networks, or distributed networks of computers - for example, a blockchain.
The ‘Autonomous’ part is there because DAOs operate by rules which are encoded in smart contracts - basically computer code.
An ‘Organisation’ is… well, you get the idea - it’s a group, right?
They’re a pretty thought-provoking invention and in straightforward terms, a DAO is a transparent, fully autonomous, community-led group.
They make it unnecessary to have a central authority (like a board of directors), as all decisions can be made by group consensus.
In this article, we'll see what they are, how they work, where they came from, and some of the benefits and downsides you can expect from them.
What does a DAO look like?
In essence, every member of a DAO can be directly involved in its governance.
To better understand the concept, let's use a simple example.
Imagine you have teamed up with your colleagues to start an online art supplies store.
For the organizational structure of this business to be a DAO, it would mean that EVERYONE would have equal say on how the business runs, what it sells, prices, and so on.
The business would run on algorithms to track orders, initiate and finalize shipping, pay suppliers, restock, and do anything else needed to keep it running.
In this way, there wouldn’t need to be any one person, in particular, calling the shots.
The business could run automatically through algorithms, with decisions being made by agreement between you and your colleagues - reaching a consensus.
Where did DAOs come from?
The DAO concept started in 2016 with the creation of a project called The DAO.
A group of Ethereum users created this project, and its main goal was to operate as a type of decentralized venture capital firm for the crypto world.
This first DAO started a crowdfunding campaign, raising money for investment in promising crypto projects. In exchange for investment, members would get DAO tokens, depending on the amount they purchased.
These DAO Tokens could then act as governance tokens, meaning that holders of these tokens had the power to determine what kind of crypto investments The DAO should pursue.
Holders would also get a say in how the profits would be used, if any, and any other decisions related to the capital raised.
Anyone with an investment idea for crypto could pitch it to The DAO. After that, each member of the community would get the chance to vote, using their DAO governance token on which projects The DAO should invest in.
Were DAOs Successful on Launch?
The concept was popular; and in time, the first original DAO raised $150 million.
However, only a few weeks after its successful launch, The DAO was hacked, and over $50 million was siphoned out.
This was one of the most consequential moments in the history of the Ethereum chain. It triggered a spirited debate on how the founders of the blockchain should respond.
After much debate, the Ethereum team decided to do a hard fork of the blockchain, which essentially meant deleting all records of transactions that happened after The DAO was hacked.
The hard fork, however, meant that Ethereum had breached one of the key attributes of blockchain technology, as they have always been intended to represent a free market.
The DAO, despite its initial promise, also collapsed. However, this did not limit the emergence of DAOs.
Almost eight years since, there are over 4000 DAOs in operation today.
How do DAOs work?
First, let's start with how DAOs sign up members in the first place.
DAOs often start as some sort of crowdfunding. There’ll be something called an Initial Coin Offering, or ICO, where interested participants get the chance to buy into the DAO.
In this way, the DAO is able to raise money for its treasury, and In exchange, investors will gain a proportional amount of governance rights.
So, the more governance coins you have, the more power you hold in making decisions, as governance in DAOs is decided through voting.
Let’s say, for example, a DAO intended to use its treasury funds to invest in new blockchain games.
A proposal would be drafted by any member of the DAO and brought in front of the community.
The DAO members would then use their tokens to decide whether to proceed.
All votes would be recorded on the blockchain, meaning they could later be audited and verified.
Once a vote is completed, the next question now is, how will the decision of the DAO be implemented? After all, no single entity within the DAO has the power to implement decisions unilaterally.
This is where the idea of smart contracts comes in.
Smart contracts are basically coded algorithms that will executive orders automatically if certain pre-conditions are met.
For example, a DAO can pre-decide that a proposal must receive at least 60% of the vote from DAO members for investment to be made on a project using money from the treasury.
As long as this condition is met, the smart contracts will automatically execute the investment without any outside input.
Sound interesting? Well, DAOs offer a lot of other benefits too.
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What are the benefits of DAOs?
One of the key benefits of DAOs is that they are open entities. Anyone from anywhere in the world can join, as long as they believe in what the DAO is doing and are ready to commit to the buy-in required.
DAOs also have an element of transparency. Everything is done using smart contracts and is recorded on the blockchain. This means that any decision made by the DAO can be audited, verified, or questioned.
In addition to this, DAOs are completely trustless. In other words, you do not have to rely on one person or single entity to make decisions for you.
Instead, you become an active participant in the governance structure of the organization, something that puts your destiny in your own hands.
Are there any downsides to DAOs?
For all their positives, DAOs are not 100% perfect. In fact, they have several risks.
For starters, please note that participants of DAOs tend to be Pseudonymous in nature. This means that they can be using false names. There is no way of knowing who is on the other side of the Discord chat and no way of holding anyone accountable for their actions.
Furthermore, since everybody has an equal say, it means that any failures of the DAO have to be absorbed by the entire community, even those who voted against bad decisions. The sad part about this is that, unlike in a normal centralized organization, in DAOs, there is no accountability.
DAOs can also be prone to scams. It's easy for someone to come up with seemingly great prospects, only for them to disappear with treasury money. Again, because of the pseudonymity of these entities, it's very hard to take any action against such scammers.
Also, it is worth noting that the voting power in any DAO will depend on the number of governance tokens you hold. In some cases, entities may be allocated vast chunks of governance tokens at the initial coin offering.
This gives them unilateral power to make decisions while within the rules of the DAO. So even if this is a decentralized entity, it still runs as a centralized one.
Conclusion
A DAO is a Decentralized Autonomous Organization. It’s a transparent, autonomous, community-led group that makes all decisions among themselves.
The benefit is it empowers the community to make decisions, instead of a central authority.
However, there are instances where members of the community can hold too many tokens and end up becoming the authority.
