If you have been involved in the cryptocurrency space then you have probably heard of the term DAO. Although a simple concept, it is a vital component of the industry.
In this article, I will be covering all aspects of decentralized autonomous organizations (DAOs) so that you can navigate the space with ease. So without further ado, let’s jump right in.
A decentralized autonomous organization (DAO) is a community-managed blockchain platform.
What are DAOs?
A decentralized autonomous organization (DAO) is a community-owned blockchain platform. This emerging technology removes the need for an intermediary by dispersing the power among a decentralized network of participants.
In essence, it is a method of organizing people across geographical locations to vote on a shared mission. Thanks to the use of blockchain technology this is all done transparently. This removes various bureaucratic hurdles and highlights any malicious activity.
How do DAOs work?
The underlying structure of DAOs is supported by smart contracts. In essence, they hold the rules for the organization. This dictates the development of the project as well as the use of the treasury.
Additionally, all smart contract information is stored on the blockchain which is essentially a distributed ledger. This stores a complete history of transactions and proposals. It is completely transparent and immutable meaning it cannot be deleted or changed.
Lastly, changes to the smart contract only take effect based on a vote. This is done by community members and voting power is usually designated to token holders. The more governance tokens an individual has the greater the voting power they have.
To learn more about governance tokens, click here to read my previous article.
Benefits of DAOs
Decentralization – as DAOs are secured by a vast network of computers they are free from the control of intermediaries. In this system, development and security are democratized as opposed to a central authority governing the platform.
In traditional companies, a CEO or board of directors had the final say, however DAOs delegate this power to the community. Ultimately, this makes them more democratic. Not to mention, there is not a single point of failure and it ensures censorship resistants.
Community – DAOs facilitate a community outlook. Collaboration and discussions are encouraged and there is a financial incentive attached as each member holds a stake in the organization. Moreover, there is no geographical restriction to them which improves network effects dramatically.
Permissionless – ultimately anyone can participate in DAOs. All an individual needs is a computer, an internet connection, and the relevant tokens.
Transparency – as mentioned previously, the use of blockchain technology creates a completely transparent system. This incentives good behavior as all actions is visible to the community. Moreover, it records a complete history of development that facilitates auditing.
Disadvantages of DAOs
Speed – as DAOs use a democratized voting system this slows down the development process considerably. Every time a proposal is made each member of the community is given the option to vote.
As opposed to traditional companies this takes significantly more time and coordination. Not to mention, the time difference between participants needs to be taken into account.
Security – like most blockchain platforms there is an inherent security problem. This ranges from phishing scams to hacks.
For instance, if there are bugs in the smart contract then they can be exploited leaving the project with an empty treasury or skewed voting. At the end of the day, DAOs require expert technical knowledge that brings risk if not implemented correctly.
Skewed voting – as voting power is directly proportional to the number of tokens an individual holds this can skew voting power to a select few. As a result, they can shift the development of the proposal in their favor which often comes at the detriment of the wider community.
Regulation – in most countries the regulatory framework for DAOs is not clearly defined. They lack clear rules on management and taxation.
When it comes to more centralized companies they have a hierarchal structure with individuals being held accountable if something goes wrong. However, DAOs have a flat structure which makes it difficult to enforce the regulation.
Simply put, investment DAOs democratize investing. Instead of a single entity controlling the capital flows a group has shared control.
One example of this is when the crypto community formed a ConstitutionDAO. It amassed over $40 million in Ethereum and placed a bid on a rare copy of the United States constitution.
This creates a new way for organizations to raise capital. Rather than relying on venture capital firms and seed rounds they can raise funds via the community.
Moreover, shared ownership lowers the barrier to entry for community members as shown by the ConsitutionDAO.
If you want to view this article in a more visual format then please check out my video below:
Overall, DAOs have created a new way for communities to organize. Ultimately, it has democratized the structure of organizations while facilitating collaboration.
That’s not to say it’s without its risks. From regulation to security, there are several weaknesses. However, the technology is still in its infancy and it will only improve with time. I hope you found this article useful and thanks for reading.
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