What Is A DAO? Why Should You Know About It?
Have you ever wondered what a DAO is?
A DAO is a decentralized autonomous organization.
It is an organization run by code deployed on the blockchain, known as smart contracts.
The people included in this organization collectively vote on the code that runs this organization and automates it.
In a DAO, smart contracts will act as the decision-makers on behalf of the DAO’s participants.
For instance, if the DAO’s community is trying to determine whether someone should be fired, promoted or have a raise, a deploy smart contract will decide all of that.
Think of it as a shared bank account owned by multiple people where No one can decide on the account alone. A collective decision is required.
This makes the DAO self-sustainable and autonomous.
Let’s break it down more.
An automated Teller Machine or an ATM works is a machine from which you can
Deposit money.
Withdraw money.
Exchange currencies.
Although this machine automates most of its tasks, it still needs humans to work:
Tech specialists do regular maintenance to make sure the system is updated.
Employees must regularly put money in the ATM daily and transfer all the money deposited by users to banks.
You still need to go yourself to withdraw/deposit money.
If the machine offers currency exchange services, more upkeep is required by bank personnel to make sure various currencies are available.
The electricity bill for the ATM needs to be paid by someone.
Bank personnel must provide support in case of a lost card.
If an ATM becomes a DAO, then simply every action that needs a human to do it would be replaced by code or robots!
The machine would regularly update itself.
Money will be dispensed automatically to banks after deposit.
You wouldn’t need to withdraw/deposit money from the machine.
The machine would pay its electricity bill and provide autonomous support to currency exchange.
In other words, there would be ZERO human interference in any of the processes, which is precisely the point of a DAO.
In a company
Decisions are made during board meetings when the board decides on what is the next best move for the company.
CEOs are responsible for ensuring that these decisions get through and that all employees act upon them.
In a DAO
There are no CEOs
When the code changes, the entire structure of the DAO/company will automatically adjust accordingly.
Community members can regularly submit and vote on proposals regarding the structure and decisions of the DAO.
The deployed smart contracts act as the CEO in a traditional company and ensure that passed proposals are applied.
This takes us to the governance model of DAOs.
Many DAOs have their own tokens.
Community members hold these tokens in varying numbers.
Whoever holds a certain amount of tokens gets the right to vote.
In that model, tokens have a use case which is governance.
Tokens also have a demand incentive which increases their price.
The price will increase more when members try to accumulate more tokens to gain more voting power.
Voting power can be used to
Hire new developers.
Increase salaries.
Invest in a new asset class.
Change the direction of the DAO/company.
Like in traditional companies, whenever the DAO makes a profit, the price of the token increases and community members benefit from that price increase.
A DAO can have a lot of benefits:
DAOs are trustless: A DAO doesn’t rely on a manager or a CEO to keep working. Even if an essential developer in the DAO leaves, The organization will continue working no matter what as long as the code is running.
DAOs cannot be shut down: Many companies face government scrutiny and are forced to shut down or leak users' private data. This cannot happen in a DAO because they run on blockchains.
If a government wants to shut down a DAO or gain access to private information on the DAO
It has to buy enough DAO tokens to gain voting power.
It has to submit a proposal.
The proposal must win a voting majority.
This is the only way a government can access a DAO, which gives them a lot of independence.
DAOs are open-source: A DAO’s code is publicly available for anyone to look at or use. This increases transparency and also enables collaboration between various developers to eliminate bugs. Further, it reduces illicit activity on DAOs since any crime will be recorded forever on the blockchain!
This doesn’t mean that DAOs don’t have downsides.
DAOs are vulnerable to attacks: Since they are open-source, even attackers can access the code. If said attackers know precisely how this code operates, they can damage the DAO by corrupting it.
Open-source doesn’t leave room for business secrets: Since all the information of a DAO is publicly available on the blockchain, this doesn’t leave room for research & development to maintain privacy and secrecy. Anybody can steal ideas and improve on them.
The most famous example of a DAO’s failure is The DAO.
The DAO was created in 2016 as a venture capitalist fund.
Around 20,000 investors invested more than $150 million into The DAO
The code was exploited, and hackers stole $50 million worth of Ethereum.
This story is the reason why nowadays there is Ethereum & Ethereum Classic.
Developers of the Ethereum blockchain agreed on hard forking Ethereum to punish the hackers and not allow them to use the stolen funds.
The Ethereum blockchain is the new blockchain on which hackers couldn’t use their funds.
Ethereum Classic is the old blockchain on which the hackers had stolen funds.
However, there have been a lot of successful DAOs over the last decade with solid governance models. Examples of these DAOs are
MakerDAO, which is responsible for minting the DAI stablecoin that currently has a market cap of $6.4 billion
NounsDAO was launched last year, and its treasury is currently worth almost $50 million in Ethereum.
These successful DAOs pioneered a new concept of business models where company tasks & routines can be completely automated and run by code.
This creates a safer and trustless community where no single entity can be trusted but the collective consensus of the organization.
In such companies, shareholders will be decision-makers. Proposals will be passed only when they serve the greater good of the majority and improve the automated system that runs the company. The collective profit of everyone included in the organization will increase as a result.
At Qurious Labs, we believe that Web3 is the future and Decentralized Autonomous Organizations or DAOs, will be the future of companies. If you share the same view as us, join us!
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