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Why do we need a DAO?
The norm of jobs has always been full-time jobs, part-time jobs, or contractual. Since the industrial revolution, workers have always known the corporate wheel which is ruled by an out-of-touch privileged few who exert power through the administrative layer.
Workers are used to hierarchical structures where on top there is a board of directors, then CEOs, managers, supervisors, and at the bottom are the employees. That’s how current corporate structures are buildup and it is very efficient. The structure is all about people and contracts. However, the system has some flaws because they are highly centralized.
The centralized structure has a single point of failure. It is susceptible to corruption, insider trading, hacking and human error. You also need a large influence in the organization to leverage the wisdom of the crowd. There may be a lot of creative representatives within the organization who know a lot of things but do not have the chance to express themselves.
And the administrative process within the company takes a lot of time and has a lot of paperwork. You need to get a lot of approval before something can be done. And the organization has a lot of regulations to abide by. The regulation can be both internal and external laws governing business activity.
Now corporations also rely heavily on third-party authorities like banks, lawyers, and brokers. And they also have to abide by the government. These third parties act as intermediaries and consulting them is costly and takes time. In the end, everything is bid by contracts.
And now what’s worst is that if this profits the company, they can get rid of your job. This eventually happened with the fourth industrial revolution when industries started to automate repetitive and tedious tasks with hardware and software. A lot of companies were shifting to automation to increase outcomes and reduce costs.
And things are getting even worst with robotic process automation taking on administrative tasks. But all this may be coming to an end. What if you join a company without any bosses. Today we are shifting from automation to autonomy. There are a lot of technological trends going on nowadays and one of them is cryptocurrency.
The technology behind cryptocurrencies has a lot of potential applications. The technology is called blockchain and it is used to decentralize crypto. But the emergence of blockchain technology has created new distributed systems and novel methods of governance and coordination.
Blockchain also gives the possibility to write smart contracts which are pieces of code that enforce and execute permission the same way an institution does. Now, there is another complex entity that is being created on the blockchain called a decentralized autonomous organization or DAO.
The idea behind the DAO is to completely transform how an organization operates, people work, and the way social collaboration is organized. It is a digital system that runs entirely on its own and interacts with a bunch of other different digital systems at the same time.
On its surface, a DAO is an organization just like any other where there is a group of people gathering together with a common goal. The group of people run the company, invest in assets as well as develop and sustain projects. But what makes this concept unique is that it operates through smart contracts on the blockchain. This specification allows the company to be decentralized and autonomous.
What is a DAO?
The Decentralized Autonomous Organization (DAO) is an open-source blockchain protocol governed by a set of rules. It is an organization that operates without any central authority. Its members make decisions on their own, based on programming instead of rules. Blockchain technology is enabling these organizations to function safely without any central authority.
A decentralized organization is a type of corporation that operates on a decentralized basis. Instead of a CEO, members vote on the organization’s goals and policies. Instead of an executive, a board of directors, or activist investors, DAOs are entirely open and transparent. They can also be more collaborative than traditional companies.
The DAO is governed by smart contract algorithms. Its rules are decentralized, and there is no need for a central authority to oversee its operations. Members control the decisions through voting, without the need for any bureaucracy. Unlike traditional organizations, autonomous corporations are transparent, and independent of centralized governments, and other intermediaries.
Decentralized autonomous organizations are constructed on the blockchain using smart contracts. And members buy their way in by purchasing a governance token, allowing them to vote on important decisions. They may come from any country and communicate via discord channels. They may be interested in building a particular service.
How does a DAO work?
A Decentralized Autonomous Organization is an internet-native organization run by its members. It is created by its elected members, and it can automatically execute certain actions without the need for any third party. Each member possesses tokens, which act as a voting system. Each corporate member can vote on important DAO matters.
The rules and subsequent actions of the DAO are recorded on a distributed ledger on the blockchain. Distributed means that everybody in the network has a copy of the ledger which creates a high level of transparency. Each transaction done within the autonomous organization is encrypted on the ledger one after another where the previous one lock to the recent one.
Once a transaction is recorded on the ledger it becomes immutable which means the information cannot be altered or deleted. Unlike most constitutional systems, the DAO does not have a central authority and allows for collective decision-making. They don’t have a president, chairperson, or a hierarchical system.
Instead, the idea is that everybody in a DAO can collectively vote on how resources will be allocated and where to put assets. The participants of the decentralized corporation all share a common goal. The organization is governed by codes that are decentralized, open, and transparent. If the system is well designed, the organization will autonomously achieve the common goal.
This system also creates strong wisdom of crowds where everybody has a say and can share their idea. This collectivity increases the odds of better decisions making. The DAO aims to avoid the concentration of power and resources in a few actors compared to traditional companies.
Rules are enforced by smart contracts which are essentially self-executing computer code defining the boundaries of interaction between the entities involved. In the same way, everyone is forced to abide by certain rules in the real world, the smart contract enforces the rule established by the creator of the autonomous organization.
Actions are executed every time a criterion of the smart contract is met. The DAO is run by a bunch of smart contracts that anyone can interact with. For instance, let’s say you and two friends of yours put money together into a smart contract to create a decentralized organization. The three of you collectively vote on how the money should be spent.
Now that all the money is together, you realize that there’s not enough to develop the intended project. The project needs more funding. You can add more people to the DAO to support the project. So you market the project online which allows other discord groups from all over the world who like the idea to engage with it.
They deposit their money in it and they also get to collectively vote on the proposals. What is more interesting here is that you and your friends have never met the newly join members before. But it doesn’t matter because everyone is bound by the rules of the smart contract.
And what’s even more interesting is that the project has received a lot of funding as well as creative like-minded people contributing ideas to the DAO. Those who invest in it receive a percentage of profits that are distributed back to the investors according to their investment. The DAO market valuation is around USD 13 billion and there are more than USD 10 billion held in DOAs treasuries.
Benefits of DAO
A decentralized autonomous organization is a type of governance and management system that follows a set of computer programs. It executes decisions by pooling resources and using them in a conflict-free manner. A decentralized organization is formed after securing a funding source.
There is no single governing body. Instead, everybody who purchases shares in a DAO has a say in what happens within it, where it receives funding, and how it moves forward. As a result, it appeals to investors because they avoid the problem of having a centralized decision-maker who may not always have the best interest of the community at heart.
To become a member of a digital organization, members often buy into it by purchasing a governance token. They also receive voting rights and communicate through a discord channel. As a result, they are transparent and have lower barriers to entry than centralized organizations.
A digital autonomous organization doesn’t have a central authority and works on proposals from its members. Ideas must be approved by a majority of members to become valid. They implement these proposals using smart contracts, which give the organization rules and execute the agreed-upon actions of its members.
In a DAO, decision-making power is distributed and automated, thus eliminating the need for day-to-day administration. The benefits of a DAO include increased transparency and decentralization of power. This also enables the autonomous corporation to function independently and without third-party influence. The removal of third-party reduces cost and downtime.
Traditional organization requires trust in the people running them whereas in a DAO the trust is based on the code. Codes are far more concrete than trying to understand human motivations. DAOs are also completely transparent and verifiable where every transaction is available on the blockchain.
A Decentralized Autonomous Organization uses blockchain innovation to create a secure, digital ledger. This secure ledger is free from fraud, eliminating intermediaries and data reporting. A DAO allows businesses to be much leaner and faster to scale. Since decentralized organizations have no hierarchical structure they allow any stakeholder to put forward an innovative idea to improve a project.
Another feature of a DAO is that it distributes decision-making power to all participants. This is crucial to avoid human error. Human beings tend to misbehave in organizations. They are often given power and act in their own interest, whether they are motivated by greed, prejudice, or a desire for fame. Those flaws can make an organization vulnerable.
Autonomous organizations can also act as automated investment funds in which investors could send funds anonymously and exchange them for governance tokens, which can be used to vote for projects. A DAO works with the blockchain to run its operations. Its rules are written in source code and are executed by thousands of computers and people using a consensus-based algorithm.
The rules within the consensus-based system are capable of handling large amounts of data and transactions. This way the DAO runs without the need for a central decision-maker or human leader. The contracts within the organization are computer code that runs automatically when pre-established conditions are met. They eliminate bureaucracy and hierarchy.
Smart contracts can be incorporated with complex sets of information and can be reprogrammed to meet the specific needs of the decentralized organization when a collective decision is made. Nobody outside the network has access to a DAO. In recent years, smart contracts have been used to create incorruptible forms of legal governance. Hence, DAO promises a bright future.
Future of DAO
There is a lot of excitement surrounding the future of decentralized autonomous organizations. It is a self-managing group that operates under transparent rules. These organizations can function autonomously and eliminate the need for managers. They can also operate on a global scale, increasing the amount of information we can learn about outer space.
While the future of DAO is still up in the air, we can start preparing ourselves for the future by exploring how they can make our lives more comfortable. Decentralized organizations are built on the blockchain and use smart contracts to make decisions. They are going to be part of a new internet called Web 3.0. There is also a decentralized financial service called DeFi.
What the blockchain is creating is decentralized communities with new types of governance protocols. Think of it as a kind of community with no central authority. Decentralized Finance (DeFi) is combining these technologies to create a new financial system. And cryptocurrency is used as an asset class and alternative payment system.
You can think of a DAO as an internet community with a shared bank account. It is built on the blockchain and is going to be a key emerging infrastructure of a big decentralized ecosystem. Among the most relevant DAOs are Ethereum and Aragon. These platforms allow an online community to come to an agreement with one another on how to run an autonomous organization.
They operate automatically by running appropriate code on the blockchain network. For example, Aragon and DAOstack are tools that facilitate the creation of a DAO. DAOstack is an open-source project that aims to build decentralized governance frameworks for organizations.
The DAOstack platform has decentralized autonomous business models that replace traditional business functions with smart contracts. Another example of decentralized autonomous organization is DASH and JennyDAO. The JennyDAO operates in the Non-Fungible Token (NFT) space. JennyDAO provides fractional ownership of non-fungible tokens.
A true DAO is difficult to build, and the number of variables is continually increasing. For example, its network and protocol must consider many factors. Several factors, such as the number of stakeholders, should be considered when designing a DAO. The potential of DAOs is immense, however, its future depends on how well the technology is developed and applied in the real world.
Despite these advantages, decentralized organizations face significant challenges. One of those risks is a potential monopoly of power over an asset. If DAOs aren’t regulated, they will be unable to make decisions in the best interest of their investors. Moreover, it requires investment trust from its investors. There is no central oversight of the DAO’s transactions and its tokens.
Another major problem with a DAO is that it is not fully accounted for in a legal sense. Because many operate outside of traditional boundaries, most jurisdictions are unsure about their tax obligations or contractual obligations. Also, most DAOs are unregistered, which can hamper their development.
In addition, DAOs lack officers and directors, which are two key roles in traditional corporations. It must also overcome several legal hurdles and limitations before mainstream adoption can be a success. These obstacles range from governance issues to questions about the interests of members to liability.
Further, DAOs are not eligible for limited liability regime. This could be a hindrance to the growth of decentralized autonomous organizations, but the benefits outweigh the disadvantages. Their future uses are still being debated. But for now, they offer a promising alternative to traditional businesses. Some even propose that DAOs will be used as an e-government tool.
While DAOs are relatively new to the public, they have gained traction in the past few years. Today, they are fully incorporated into several blockchain projects. The first real DAO to gain mainstream recognition was BitShares. The platform used cryptocurrency as a medium of exchange. The US state of Wyoming has recently recognized CryptoFed DAO as a legal business entity.
With Web 3.0, DeFi, NFT, and DAO, we’re seeing a revolution in the underlying financial and governance infrastructure which can change the way the world works. In the future, many things that we see as LLCs today, or limited corporations, maybe DAOs. As blockchain technology continues to advance, more use cases for DAOs will emerge.
Eventually, these organizations will replace traditional governments and corporate hierarchies. Some even envision a future where smart contracts are used in everyday operations or even replace a government.
DAO is a powerful idea because it can bring creative people without geographical constraints together. There’s really no end to the creativity by which these structures can actually reshape the financial world, as we know it. For many DAO represent the next step in the evolution of corporations and organizations.
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