- An organization built on blockchain that lacks a central authority is called a DAO. Everything you need to know about DAOs and their operation is covered in this article.
- A community built on the blockchain that is owned and run by its members without the intervention of a central authority is known as a Decentralized Autonomous Organization (DAO).
As of May 2024, there are projected to be 15,000 DAOs in operation. These entities are important players in the decentralized market. As a result, the article you are currently reading offers a thorough explanation of DAOs and their operation.
Let’s go back in time and study some history to get things started in earnest. How did DAOs come about to be?
A Synopsis of DAOs’ Past
2016 saw the creation of one of the first Decentralized Autonomous Organizations (DAOs). The DAO was its moniker.
The DAO, the first of its type, was created in a way that would let users contribute to the project and profit from it. When investors purchase DAO tokens, they can profit in one of two ways:
- Through receiving dividend
- Making money when the value of the tokens rises.
Numerous investors purchased DAO tokens following the April 30, 2016, launch of The DAO. But how did they manage to pull it off?
In other words, investors used Ether to purchase the tokens. Thus, the equivalent amount of Ether was sent to The DAO’s smart contracts based on the quantity of tokens purchased. Consequently, the initiative was able to raise a substantial $150 million in Ether.
One would assume that the project has more success by now. But this was by no means the case.
A few days after the token sale started, a few things happened that finally caused The DAO to crash. What then transpired?
Certain developers discovered a bug in the smart contracts of the project. This was a serious issue.
Members of The DAO put up a proposal to fix the problem out of concern that it would compromise the project’s security. A malevolent person gained access to the wallet and stole $60 million worth of Ether while this was going on.
Given both The DAO and the Ethereum network were still in their infancy, this harmed both. The Ethereum network had only been up and running for a few months, but the DAO had only been around for a few days.
As was already said, the initiative was a failure. However, steps were taken to restore the history of the Ethereum network to a time before The DAO’s hack. As a result, investors were able to remove their money from the smart contracts and keep it.
A DAO: What is it?
A DAO, which is pronounced “dow,” lacks a centralized authority. It is an organization whose members decide things together and according to rules that are recorded on a blockchain.
Is a DAO or a DAO the same as a DAO? Not at all.
DAO stands for Decentralized Autonomous Organization; it can also be referred to as DAOs. However, as the previous subsection explains, the ETH DAO is among the first DAOs to be established.
Voting for what they desire allows members of a Decentralized Autonomous Organization (DAO) to make decisions. For example, a DAO member can only access the Treasury with permission from other members.
Funding mechanisms like Decentralized Autonomous Organizations can be used to decide how to distribute cash for projects. Let’s examine how they function.
How Do DAOs Operate?
Because DAOs are based on open-source blockchains, they are transparent organizations. Every financial transaction that occurs within the company is documented on the blockchain, allowing everyone to view the transaction history and conduct an audit.
There is no hierarchy in a Decentralized Autonomous Organization (DAO) because all of its members are its owners. To join and take part in a DAO, you must purchase a token.
A DAO is a blockchain-based organization that utilizes smart contracts to function. Smart contracts define the organization’s rules. When specific conditions outlined in the smart contracts are satisfied, these regulations are immediately enforced.
A member of some DAOs must stake their tokens in order to participate in the decision-making process. By this procedure, the member becomes a validator.
Even though members control the DAO collectively, they can vote on and have an impact on governance proposals made within the group by staking. This configuration aids in avoiding a DAO overflowing with illogical proposals.
Additionally, the majority always has the final say in situations involving voting. Then, using the parameters in the smart contracts, the majority is ascertained.
Procedures for Starting a DAO
The process of starting a DAO consists of three main parts. Here is an explanation of them.
Creation of the Smart Contract: Creating the smart contract that powers a DAO is the first step in launching it. A developer or team of developers handles this.
A DAO’s rules are outlined in its smart contracts and are not amendable unless all of the members agree to the modification. Therefore, before launching, developers must thoroughly test the contracts.
Finances: In order to maintain the project, funds must be raised. After the smart contracts are created, this is the next action to take.
To raise money, investors are typically required to purchase and retain tokens. Next, governance powers are granted to token holders as a reward.
Deployment to the Blockchain: Setting up a DAO on the blockchain is the last important step before launching it.
The rules governing the project cannot be changed after they are deployed by the developers who wrote the smart contracts. The shared right to own and run the DAO is limited to its members.
DAO Examples
As of this writing, DAO tokens have a market capitalization of more than $58 billion. DAO tokens have a trading volume of more over $5 billion as well.
Three well-known DAOs and their tokens are covered in this article below.
Uniswap (UNI): Uniswap is an Ethereum blockchain-based open market that exchanges ERC-20 tokens and offers liquidity. The holders of UNI (the Uniswap token) own and operate it.
Uniswap, a community of educators, developers, designers, and users, was intended to be uncensored and free of middlemen or custody from other parties.
Aave (AAVE): Users can engage in the decentralized protocol Aave as suppliers or borrowers. Aave is an open-source organization that enables everyone to communicate directly with the Ethereum network’s smart contracts. It is run by the holders of AAVE tokens.
Making transactions in order to interact with the protocol results in transaction fees. The complexity of the transaction and the network speed affect the transaction fees.
MakerDAO (MKR): Developed on the Ethereum network, MakerDAO is an open-source initiative that is a Decentralized Autonomous Organization.
The project can be managed by holders of MKR, its governance token. The number of tokens that a token holder has locked in the contract determines how much power they have during a decision-making process.
Remember that this is not a complete list of DAOs and the coins associated with them. The list goes on.
Advantages of a DAO
A DAO has several advantages over conventional entities because it is a decentralized entity. A few advantages are outlined below.
The Principal-Agent Dilemma is Solved by a DAO: A dispute between the principal and the agent is referred to as the “principal-agent dilemma.” Here, an individual or group of individuals is referred to as the primary, and those who make choices on behalf of the people are referred to as the agent.
In a traditional environment, the CEO is the agent and is typically given authority to make decisions on behalf of the firm, which comprises of the stakeholders. However, occasionally, the CEO could make decisions that serve their interests at the expense of the firm. The principal-agent dilemma is a conflict that typically arises between the two parties as a result of this conduct.
This problem is resolved by the collective ownership and governance that a DAO provides. This is a highly significant benefit.
It is not necessary for someone to act on behalf of investors. Instead, they participate in the procedures that lead to decisions. Certain investors have as much power as the quantity of tokens they own and have locked in the smart contracts, depending on the project.
Token holders are also incentivized to engage with the projects, which makes it harder for them to take actions that might impede the network’s expansion.
Everyone Can Participate in the Network Due to the Lack of a Hierarchical Structure: Any token holder can submit a groundbreaking proposal or concept, and other investors can choose to support it or oppose it.
Because the projects are guided by the rules established in the smart contracts, automated tasks can be completed without waiting for approval from higher-level personnel.
Advantages of a DAO
Security Concern: The circumstances surrounding The DAO’s demise demonstrate that a Decentralized Autonomous Organization is not impervious to security lapses. Additionally, because a smart contract is irreversible, errors found in it could be challenging to correct.
It’s Relatively New: A decentralized autonomous organization (DAO) has the ability to expand and succeed continuously in the future, but it’s still relatively new and hasn’t earned the full trust of some people.
How Do DAOs See Their Future?
Over time, DAOs have gained popularity as the underlying idea has become more and more evident. The fact that there are now more of these projects demonstrates this.
Equally essential is the realization that, even while some projects have not yet reached complete decentralization, they are still in their infancy and might succeed in doing so in the future. DAOs have the potential to enhance community governance and administration, therefore more organizations might adopt the model in the future.
The decentralized space can yet develop further, despite the aforementioned facts being true. This is due to the fact that its expansion ought to extend beyond the internet and digital spheres. Additionally, it ought to be applied to the real world. DAO’s are a relatively new form of governance but have immense potential.
Disclaimer : This article was created for informational purposes only and should not be taken as investment advice. An asset’s past performance does not predict its future returns. Before making an investment, please conduct your own research, as digital assets like cryptocurrencies are highly risky and volatile financial instruments.
