Home / Industry / DAO (Decentralized autonomous organization): Important Thing You Need to Know

DAO (Decentralized autonomous organization): Important Thing You Need to Know

by | Jun 12, 2022 | Industry

Blockchain is not just a technological revolution but also a socio-economic revolution. It is a tool that brings us into a more decentralized world. Back in the early 90s, the internet revolutionized information and then about 10 years later it became a more mature, programmable interface and more importantly, it has social media platforms.

The internet has made communication easier than ever before and has created a peer-to-peer economy where consumers and producers came closer to each other. However, the original vision of the internet was to create a decentralized world where everybody could put information online. But then the web became very centralized with huge platforms that act as the middlemen.

These platforms in the middle started to control all the data and dictate the rules of transactions. Their algorithms are based on what they believed is good for people and what’s lucrative for them. Instead of decentralizing everything, the internet became more centralized.

The internet became centralized just like the world as a whole, where everything is ruled by middlemen such as the bank, big organizations and government. There are no transparency in their work and everything is based on trust in the systems. But this is about to change, the blockchain is a tool that is set to redesign data structures.

The world is changing rapidly and the internet is entering a new technological era. Blockchain is the driving technology behind a more decentralized web called web 3.0 or web 3. Blockchain technologies are the next generation of Internet technologies that offers many interesting technological, economic and social innovations.

The blockchain brings with it innovations such as digital currencies, distributed Ledger, blockchain IoT, smart contracts, decentralized finance, etc… These systems are set to transform many industries from finance and insurance to energy and cybersecurity. This next-generation Internet built on the blockchain will act as an institutional technology at the heart of social organizations.

How does the DAO work (Decentralized Autonomous Organization)?

The blockchain allows the exchange of value within an environment through an automated trust without any person or institution in the middle. It allows peer-to-peer transactions without any middlemen, where people who don’t know or trust each other send assets without a trusted third party in the middle.

It all comes down to trust in a protocol that decentralizes trust. Instead of a central party verifying a transaction, the latter is democratically verified by a peer-to-peer consensus. This is done automatically by a network of computers with no people behind but only machine consensus.

This machine consensus is based on smart contracts which are pieces of code running on top of the blockchain. A smart contract codifies the rules of a transaction and when the rules are met the transaction is automatically executed. The contract is like legislation that governs us in the actual world, however, it can’t be manipulated, altered or corrupted.

Blockchain gives us the capacity to automate social institutions and increased interconnectivity. And this also means that we have the technological power to create organizations that are distributed and automated. The potential of blockchain to truly decentralize the world is clearly demonstrated in distributed autonomous organizations.

Maybe you are a manager or owner who comes up with a profitable investment policy for the company. But before implementing it, you need to pitch the idea in front of the board of directors. But the board of directors didn’t approve the idea without any explanation. Hence, through Decentralized Autonomous Organization or the DAO, this could have been prevented.

The DAO is roughly an organization run by code agreed upon by the people who started the entity. It is a collectively owned entity that runs on blockchain technology. And smart contracts simply do the tasks it has been programmed to, making the whole organization autonomous and self-sustained.

business city glowing with technology line
Image by Tung Nguyen from Pixabay

Big companies all have board meetings that consist of shareholders of the organization. Together, they vote and make decisions for the company and then the CEOs of this company make sure that the decisions are actually followed through the chain of command. But in a DAO there are no CEOs.

Once a decision is made by the board of directors, the code of the smart contracts is changed immediately so that computers and code will perform the new decisions and routine operations. The world of cryptocurrency is run by tokens that hold value. Within an autonomous corporation, whoever holds the most tokens can have the largest votes. Just like shareholders hold a certain amount of share in a company. So what exactly is the DAO?

What is a DAO (Decentralized Autonomous Organization)?

A decentralized autonomous organization is a system where people who use a platform can vote for their preferred outcome. This income is usually in the form of Ethereum and is distributed among token holders. The DAO’s blockchain is typically used to represent its authority.

Decentralized distributed corporations differ from traditional organizations in several ways. One major difference between them is that they do not rely on external authorities and instead, utilize a collective power structure that increases the voice of all members. This model encourages individuals and organizations to work together to improve society.

In addition to decentralized control, DAOs use blockchain technology to maintain the system’s rules and operations. It is made up of thousands of members and a network of nodes. However, this model is not yet ready to replace traditional corporations. In the meantime, it is necessary to understand how decentralized organizations work.

A decentralized organization functions using smart contracts, which automate rules and decisions. This model relies on decentralized trust among members and users. The program acts automatically whenever certain conditions are met. Using smart contracts allows the corporation to make decisions based on rules, rather than on a centralized leader.

Members of the DAO make decisions on their own, based on programming instead of rules. Blockchain technology enables these organizations to function safely without any central authority. Another important feature is its immutability. The backbone of the DAO is an immutable digital contract that runs on the blockchain infrastructure.

Using a smart contract, DAO can make decisions that are in the best interests of its members. The DAO’s rules are similar to an organization’s rules of procedure codified in software. But instead of being a rulebook for the organization, they are written on a blockchain. Blockchain act as a system for storing data and makes it difficult or impossible to change, hack or manipulate the data.

It is basically a digital log of transactions that are duplicated and spread across a network of computers and the DAO makes use of its rules and policies for its proper functioning. If someone wants to break through the organization’s infrastructure, it will have to break through the entire network of computers simultaneously, which is near impossible.

Why the DAO (Decentralized Autonomous Organization) is important?

A decentralized autonomous corporation is an online community without a central leader or governing body. Typically, members purchase a governance token, which provides voting rights. The organization can operate around the globe and members communicate through discord channels. This decentralization makes this model of business a desirable one for investors.

The term “decentralized autonomous organization” refers to a unique type of digital entity. It shares many of the same characteristics as a traditional company but adds a few key features, including a digital-first approach to operating rules enforced through smart contracts. A DAO may have a number of different structure types, including a company, a group or a series of organizations.

These entities all work as a collective and their operating rules are enforced by a digital contract. The decentralized approach allows businesses to be much leaner and faster to scale. A true DAO’s network and its protocol must consider many factors. Several factors, such as the number of stakeholders, should be considered for its design.

man in black suit holding tablet with hologram of people coming through it
Image by Tung Nguyen from Pixabay

It also eliminates the risk of human error or faulty decision-making. The DAO’s goal is to eliminate the possibility of human error, manipulation of investment funds, insider trading or corruption. It is fueled by cryptocurrency that allowed anonymous money transfers between investors with a high level of transparency.

A DAO can also ensure a more rigorous democracy because its decisions are made by the community’s predefined rules, rather than a board of directors or the individual who has the most shares. It uses a democratic voting system in which all stakeholders can vote and a majority vote prevents it from changing.

Its structure, voting rights and decision-making process are different from traditional organizations. The combination of democratic principles and fail-safes found in the technology is an excellent combination for any business. Decentralized organizations have the potential to improve corporate structure.

Nowadays, most corporations are still structured in ways that were implemented in the 1600s and they accept investor funds and try to maximize shareholder value. DAOs allow investors to pool funds and invest in decentralized projects and early-stage startups. By pooling funds, they solve the principal-agent dilemma, whereby the agent has a conflicting interest in the project.

Benefits the DAO (Decentralized Autonomous Organization)

A DAO can be created for a specific purpose or as part of a larger project and can be associated with any number of industries. The main advantage is that it can function without a central decision-maker, which is one of the most common problems with traditional companies.

A DAO operates on smart contracts that set its rules and it can even adapt itself over time. These contracts enable members to vote on proposals and make all decisions based on consensus rather than a single individual. And because it doesn’t have a single owner, the entire process is transparent.

The DAOs offer a promising alternative to traditional businesses and some even propose that they can be used as an e-government tool. Its emergence is a significant step in decentralizing organizations. Its success may hinge on the development of efficient consensus rules. This basically means the organization operates without any central authority.

An autonomous corporation is a group of people who come together and decide their own rules and guidelines. The benefits of such a company are several and are highly cost-efficient. There is no need to pay for any intermediary, bank fees, interest rates and lawyer. And there is a low risk of corruption and low to no tax.

DAOs are associated with a decentralized, transparent and high-level security structure. The high level of transparency and security solves the issue of digital trust and cyberattacks which are two major problems in today’s world. The process of developing rules for an organization is complex and a smart contract is an excellent tool for this process.

Decentralized organizations do not have a hierarchy structure and still allow companies to set their own rules and make decisions. Because their decisions are made by a native token, they require far fewer resources than traditional organizations. Moreover, a DAO allows businesses to gradually introduce a hierarchy as needed.

It is also more efficient than a traditional organization because it is much less bureaucratic. While a decentralized organization is similar to a traditional business, one main difference is that it can use Non Fungible Tokens to verify the authenticity of online assets. Not to mention that everything that travels over the internet is a duplication.

The DAO is a group of people who have a common goal. It can also be used to fund any industry and even buy franchises. As such, all stakeholders have a voice in what happens within the autonomous corporation. In addition, the people who purchase shares in a DAO have an opportunity to influence how its funds are allocated and where its future will lead.

The blockchain and new distributed models of governance and is something that a lot of stakeholders are working on. It is going to play a major role in providing trusted infrastructure and off-the-shelf organizational solutions to massive social systems. However, it is important to understand that this technology is very early on in its development. It is like the internet in the 90s.

The DAO is still in the experimental state but its potential should not be underestimated. It will only grow as the underlying technology is being developed and our understanding of distributed self-organizing systems is gaining maturity.