What Is a DAO?

A decentralized autonomous organization is a structured entity with no central authority. A DAO is a governance protocol that leverages blockchain technology for organizational structure and enforcement rules. The governance protocol is used by a community of organized individuals who are like minds. Decisions and deliberations are made from the bottom to the top hierarchy according to a set of rules enforced on a blockchain.

Decentralized Autonomous Organizations are built on open-source blockchains, making them fully transparent and autonomous. Every stakeholder or decision-maker of a DAO can access and view the code running the organization. In Decentralized Autonomous Organizations, the participants and stakeholders make the regulations that the smart contract will execute. Instead of the traditional organization where the top executives or management give order and make the rules, all stakeholders make the rules and vote on salient issues in the Decentralized Autonomous Organization.

What Is a DAO?

A decentralized autonomous organization (DAO) is typical without a hierarchical structure and central authority. The Decentralized Autonomous Organization uses the smart contract to build rules and regulations. DAO is a blockchain-enabled governance protocol that has decentralized an organization’s entire operations and management activities.

When an organization wants to use the DAO governance protocol, the members or stakeholders will come together and form a community. These stakeholders will make the rules and regulations guiding the organization. After the necessary adjustments and cross-checking, the blockchain developer will build the codes (smart contract) in line with the final agreement from all stakeholders.

A Decentralized Autonomous Organization is a decentralized and automated organization that uses open-source code, so it does not have a typical management structure or board of directors. Every stakeholder is a decision-maker; the more tokens or stakes you have, the higher your staking power. A DAO usually consists of like-minded individuals who share the same idea and vision and are always reaching a consensus regarding updates or decision-making.

Decentralized Autonomous Organizations are internet-native organizations with virtual structures collectively managed by the members. Only members can access and make decisions via proposals or votes during a specified period. Since the first Decentralized Autonomous Organization was launched in 2016 on the blockchain network, we have seen freelancers, charitable organizations, and venture capital firms coming together and pulling their funds to set up a DAO. The largest Decentralized Autonomous Organization is Uniswap, and to join DAOs such as DASH, MakerDAO, and Augur, you have to purchase their native currency on the blockchain network.

How Does a DAO Work?

The Decentralized Autonomous Organization (DAO) works without hierarchical management, and all members or stakeholders make collective decisions. Decentralized Autonomous Organizations (DAOs) use smart contracts. Smart contracts are chunks of programming codes that automatically execute the rules and regulations.

Smart contracts are open-source, publicly auditable, and verifiable. They are used in establishing the DAO rules. Before the rules and regulations governing the organization are transcribed into a smart contract by a developer, all stakeholders would have reached a consensus on how the organization will be managed. The most used coding language in Smart contract is the Solidity programming language. Decentralized Autonomous Organizations are widely deployed on the Ethereum Blockchain.

If you have a stake in a DAO, you automatically have a voting right and can influence how the virtual organization operates. You can decide on the need to create a new governance proposal, adjustment to the existing structure, or the need to update the smart contract.

Launching a Decentralized Autonomous organization requires three major steps. They are:

• Smart contract creation: the first step is for the developer to create the smart contract that will run the DAO. Once the smart contract is created, they can change the rule set of the contract through the governance system when the DAO is launched. It is therefore vital to test the contracts in this stage before launch.

• Funding: the next step is to determine how to receive funding and enact the governance protocol. DAO usually sells tokens to raise funds, giving the holders voting rights.

• Deployment: the final step is to deploy the DAO on the blockchain. Once the DAO is deployed, the stakeholders decide on the organization’s future. The stakeholders will influence all decisions and adjustments to the smart contract. The deployment makes it fully accessible and available to the public.

Pros of a DAO

Some of the notable advantages of DAOs are:

• Trust: A foremost advantage of a DAO is the trust it restores among the stakeholders. Unlike traditional organizations where parties lack trust in each other, you can always trust your team members in a decentralized organization, because the code is publicly available and open-source.

• Human error elimination: Errors and manipulations that come with decision-making are eliminated in the automated system. The decision-making in DAOs is based on mutual agreement, and all stakeholders will air their views, and it is hard for all stakeholders to make similar errors.

• Reduced costs: Because a DAO is run on a blockchain, it can potentially reduce the need for intermediaries and other third parties, which can lower costs.

Cons of a DAO

The shortcomings of a DAO include:

• Security vulnerabilities: The DAO is well secured and has security firewalls; however, it is prone to cyber-attacks. In June 2016, hackers siphoned about 3.6 million ETH worth about $50 million from a DAO.

• Unclear legal status: To date, the legal status of decentralized organizations remains unclear. In some countries, the legal status varies, and only a few countries like the US have recognized DAOs as legal entities.

• Lack of accountability: Because a DAO is not controlled by any single individual or group, it can be difficult to hold anyone accountable for its actions. This can make it difficult to resolve disputes or address issues within the organization.

DAO Example: The DAO

One of the most well-known examples of a DAO is The DAO, which was created in 2016 on the Ethereum blockchain. The DAO was designed as a decentralized venture capital fund, where members could propose and vote on investments using the funds that had been raised through the sale of its native token, DAO tokens. It was highly successful and raised over $150 million during its initial coin offering (ICO).
However, due to vulnerabilities in its code base, it was later hacked and a significant portion of its funds were stolen, leading to its collapse. The hack had significant implications for the Ethereum community and led to a hard fork of the Ethereum blockchain to recover the stolen funds. The hard fork resulted in the creation of two separate blockchains: Ethereum (ETH) and Ethereum Classic (ETC). Despite of the hack, The DAO remains a significant example of the potential for DAOs to be used as a new form of organization.

Conclusion

The Decentralized Autonomous Organization was launched to change the organizational structure from having a board of directors or superior officers to stakeholders. The governance protocol in DAOs is run by smart contracts that are visible and auditable by all stakeholders.

The use cases of DAOs cut across the charity to cryptocurrency, financial institutions, etc. Depending on the rules and regulations in a smart contract, every stakeholder has equal rights and can make decisions.