Imagine a coffee vending machine at a local shop. It can serve customers and collect money in the owner’s absence. However, the machine requires the intervention of the owner to complete some processes. For example, the owner has to be there to check if the machine is low and order more items. You will also have to pay for the electricity bills and collect the money. In this case, the machine is designed to reduce human intervention. However, the machine is dependent on human intervention to work properly.

What is a DAO ?

DAO is an acronym for decentralized autonomous organizations. DAOs are organizations that operate entirely without human intervention. Therefore, DAOs do not require a centralized authority.

DAOs are run by a set of self-executing codes designed by the people who started the organization. The codes are called smart contracts and are based on the blockchain network.

Smart contracts can do anything as long as they can be programmed. That means if a company’s board of directors can hire and fire, and establish executive compensation, a smart contract can perform such tasks. DAO is entirely autonomous.

How does DAO work ?

Every organization has a management structure that defines strategies, makes decisions, and creates and implements operation policies. In a typical organization, shareholders are the ones voting on the decisions that will define the future of the organization. The CEO’s role is to use the chain of command to implement the decisions effectively.

In centralized organizational setups, members are required to trust the leaders to make decisions on their behalf. This is where the challenge comes – trusting few people with power. If the leaders make a wrong decision, it will affect the entire organization. People with power in an organization can make mistakes in many ways. They can misuse funds, hire the wrong people, or show favoritism when dealing with employees.

DAOs are different from such an organization. Since they are autonomous, they do not require the CEO to operate. Instead, DAOs use blockchain-based smart contracts to create and implement policies. These smart contracts follow the if-then model, executing a set of instructions upon meeting all the requirements.

To create smart contracts, users agree on the common rules that will govern the organization. The rules are coded into a computer program and launched in the blockchain network to run automatically.

Any changes required in the organization are made through the smart contract. All governance issues and simple routine work required to run a DAO are handled by smart contracts.

Governance Tokens

Most DAOs have the governance token that powers the ecosystem. The holders of these tokens are the “shareholders” of their respective DAOs. These tokens enable members to propose and vote on changes to the organization. The power to influence the decisions depends on the number of votes a member has. The more tokens you have, the more influence you have over the organization’s decisions.

Often, the tokens have prices, and anyone interested in the DAO can buy them and join the team of decision-makers for the organization. Through voting, DAOs can improve to keep up with the changing operational environment. Token holders can vote on issues such as hiring and remunerations of employees.

Smart contracts are the foundational concept of the DAO. They ensure transparency within the organization. Additionally, they may have open codes, allowing the public to audit them. Therefore, it is easier to detect any potential vulnerability.

Governance tokens also give every member of a DAO a voice in the operation of the organization.

Benefits of DAO

DAOs have three major benefits over centralized organizations

First, they are trustless. Members of the organization do not have to trust a centralized leadership such as CEOs with the decision-making skills required to run the organization successfully. Every rule is automated and follows strict rules on the smart contract. Therefore, DAOs, unlike centralized organizations, are free from human error, springing from their judgment skills.

Secondly, DAOs are consistent. These organizations cannot shut down easily. In a centralized organization, the owner of the business may decide to close the business without the consent of other key stakeholders, such as the employees. This scenario is possible since centralized organizations vest much power in a few individuals. However, when it comes to DAOs, it is very difficult to close the business abruptly. Typically, not even a government sanction can affect the organization. For a government to shut down a DAO, they must first have a huge amount of the governance token, often 51% or more, submit a request, and vote it through. Such a case is nearly impossible.

Finally, DAOs are more transparent since they are based on the blockchain network and are open source.

DAO Applications

Just like conventional organizations, DAOs may have different purposes. They can be short time goals or long-term goals projects.

One example of a DAO is The DAO. This organization was created to be an automated and decentralized venture capital fund. The DAO was designed with open-end source code and without a typical management structure or board of directors.

The first effective DAO was the constitutionalDAO, which was launched in 2021. It was a short-term project formed in November 2021 to purchase an original copy of the United States Constitution. The group managed to raise $47 million in Ether crypto. However, they lost the bid to a bid of $43.2 million in Sotheby’s auction.

Some DAOs involve large and long-term projects, such as Mantra DAO, a DeFi platform offering various financial services such as staking, borrowing, and spending cryptocurrencies.

Decentralized exchange platforms (DEXs) also depend on DAOs for governance. DAOs can also be used by some metaverse projects, such as Decentraland.

Finally, DAOs can be applied for non-financial real-world applications such as voting.

What does the future of the DAO look like?

The hacking of The DAO, one of the earliest projects of this kind, created a mixed reaction among people concerning this type of organization. While many people still had faith in this novel form or organization, others became skeptical due to security issues. However, the rise in applications such as DeFi and DEXs protocols, particularly in 2020, resulted in a surge in interest in DAO technology. Additionally, the rise of NFTs and the metaverse has also increased the demand for DAOs.

More people and organizations are becoming more comfortable with DAO, as its use cases continue to grow. More DAOs may come up in other sectors as the trend is suggesting.