What are Decentralized Autonomous Organizations (DAOs)?
When the world was first introduced to Bitcoin in 2009, one of the key ideas that stuck with people was decentralization. As financial institutions were regulated and centralized by nature, this real-world application of decentralization gave us new ways to facilitate transactions online.
Bitcoin’s use of blockchain technology triggered a flurry of developments—one of which is DAOs. Decentralized autonomous organizations, or DAOs, are one of the most popular applications of the blockchain, allowing people to forego traditional organizational structures and share the responsibility of running an organization.
What are DAOs?
Traditional organizations would often employ a hierarchical structure to arrange their members. After all, this is the most efficient way for people to hold one another accountable. Unfortunately, this makes it so that people are never at the same level, which leads to questions of power balance.
When Ethereum was created in 2015, we were also introduced to smart contracts among other new features. Essentially, these are agreements that will only be executed if the necessary conditions are met. These smart contracts are what decentralized autonomous organizations (DAOs) are based on and what let them function as they do, as a collective with no central authority.
To be a member of a DAO, you will need to buy the DAO’s token. Acquiring any amount of the token can grant you access to the DAO but having more can give you more voting rights when the time for a decision comes or grant you special access to exclusive events and activities.
So, in summary, DAOs are like internet communities with no inherent leaders, sharing a single bank account that is able to autonomously run itself with the help of the blockchain.
Advantages of DAOs
To understand its advantages, we have to take a different look at how DAOs’ components help give it an edge.
DAOs are organizations that are based on Ethereum’s blockchain technology. This allows people to unilaterally make decisions by making use of smart contracts that automatically execute transactions or prevent them if need be.
This means that they help bridge people’s transactions by securing the agreement, making sure that the transaction only follows through if the stipulations of the deal are followed. This automation of tasks is what helps members of DAOs to maintain efficiency and effectiveness in their operations. This also helps people develop trust while maintaining anonymity online.
And while it may seem weird to most people to transact with anonymous users, the whole point of smart contracts on the blockchain is to allow people to do just that. Given how cryptocurrencies were meant to give people as much freedom and privacy as they wanted, these DAOs are just proof of the success of the crypto space.
What are DAOs used for?
Now that we know what a DAO is, let’s talk about how we can apply this model in real-world situations. Of course, the majority of the DAOs we have now would be in the business of making a profit, but a few others have visions they’re working towards.
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As organizations, DAOs will pay their members via dividends with a payout that could be improved by looking for people willing to invest in your idea. Individuals who’ve never met each other can efficiently run a profitable organization, all while keeping their projects secure. Projects can include things like group NFT purchases, investments, or even lending crypto.
As we mentioned before, the members’ investment in the DAO’s token can either give their votes more weight or give them access to exclusive perks. This makes it perfect for groups looking for investors from all over the world thanks to the reach and anonymity offered by cryptocurrencies. That said, anyone looking to create a fund for philanthropic purposes will find that DAOs actually fit the bill nicely. Services are handled automatically by the smart contracts, making sure that funds go where they’re meant to go.
Potential issues with DAOs
As with most things, some issues may be present, especially with innovations as new as DAOs. The most glaring examples of this are the hackers and their kind who still find ways to breach security.
This is exactly what happened in June 2016 when hackers attacked a DAO based on vulnerabilities that were discussed earlier that year. This DAO was the first of its kind, a project by a few crypto enthusiasts who relished the idea of a decentralized organization.
The attackers from this hack were able to get away with 3.6 million ETH, at the time worth about $50 million USD. This threatened the DAO’s existence, with many calling for its disbanding after investors worried about the liability they had in the actions of the DAO as a whole.
Examples of popular DAOs
Nowadays, the loopholes exploited in that first DAO have long been addressed, allowing more and more groups to create their own DAO for others to join or invest in.
MakerDAO is a popular one, mainly for the fact that its token, MKR, is available on most decentralized exchanges. This means that anyone curious enough to get themselves MKR tokens are allowed to participate in the DAO through voting. Originally the Maker Foundation, the foremost champions of DAOs, operations were turned over to MakerDAO in late 2021.
MolochDAO, meanwhile, is a DAO focused on investing in Ethereum-based projects. This DAO operates more formally, requiring interested participants to submit a proposal along with an offering of tokens or work.
The future of DAOs
DAOs provide a different approach to something we take for granted—organizations. With the automation and security offered by smart contracts, we are only now able to effectively attempt to decentralize the way we do business.
We’re already seeing more and more startups make use of the advantages offered by DAOs. At this point, all we need to do is to wait and see how far people can take this idea. With all these advancements in the crypto space, it won’t be long before we can achieve better innovation adoption all around.