Decentralized autonomous organizations (DAO) – How do they work?

The world has seen massive transformations in the way things are done since the introduction of bitcoin and blockchain technology. The incorporation of blockchain technology into the digital world has accelerated the digital space’s advancements and growth toward complete decentralization. Beginning with the use of decentralized currencies such as cryptocurrencies and progressing to the adoption of decentralized applications, decentralized finance (Defi), and now decentralized autonomous organizations.

What exactly is a Decentralized Autonomous Organization (DAO)?

A decentralized autonomous organization, or DAO, is an organization that runs on code rather than having a centralized body overseeing DAO activities. The term “decentralized autonomous organization” refers to a group of people who agree to follow predetermined rules for a common goal. Smart contracts, which are algorithms that run when certain criteria are met, are used to write these rules into the organization’s code.

Instead of having a centralized head in charge, the DAO is designed so that decisions are made by all members of the organization. It realizes the concept of people reclaiming their power. It was created for non-governmental organizations (NGOs) that receive funding to run their operations.

Every participant in the DAO makes all of the DAO’s decisions collectively. In general, community members make proposals for how the protocol should operate in the future, and then vote on each proposal. Proposals that reach a predetermined level of consensus are then accepted and enforced by the smart contract’s rules.

Decentralized Autonomous Organizations: A Brief History

Although most people argue that bitcoin was the first DAO because it is based on community participation and consensus agreements between node operators who have never met before. In contrast, the DAO was intended to be a decentralized and automated organization. It operated as an open-source venture capital fund, with no traditional management structure or board of directors. The DAO was unaffiliated with any nation-state to be fully decentralized, even though it used the Ethereum network.

Following a month of crowdfunding and governance token sales, the DAO went live in April 2016. The DAO was the largest crowdfunding campaign ever launched at the time, raising over $150 million upon its launch.

The DAO’s creators believed that by putting the DAO on the blockchain, they could create an equally beneficial organization free of human error and mismanagement of investor funds by delegating decision-making authority to an automated system and a crowdsourced process. The DAO is a decentralized autonomous organization (DAO) that uses Ether to allow investors to send money anonymously from anywhere on the planet. The DAO would then issue governance tokens to those who purchased them, allowing them to vote on potential projects.

According to The Economist, by May 2016, The DAO had amassed a significant portion of all ether tokens issued up to that point (up to 14%, according to a report).

The DAO, on the other hand, had some flaws and vulnerabilities. These flaws were eventually exploited by hackers in June 2016, resulting in a loss of over 3.6 million ether (worth approximately $50 million at the time). The DAO was unable to recover from this setback because the smart contract lacked any precautionary rules. However, there have been several attempts since then to create a successful DAO, with significant progress so far, as the strength of any DAO is determined by the strength of its smart contract.

How does a DAO operate?

Smart contract codes are used to operate the decentralized autonomous organization. Smart contracts, which are chunks of code that execute automatically when a set of criteria is met, are used by DAOs. Although Ethereum was the first to use smart contracts, they are now used on a variety of blockchains.

The smart contract code contains the rules that govern the DAO, and it is this code that governs the organization’s entire operations, which are only executable if these predetermined criteria are met.

Users with governance tokens are automatically given voting rights in the DAO’s decision-making process, allowing them to participate in the DAO’s decision-making process. The voting process is conducted electronically, and each voter casts his or her vote using his or her governance tokens. After the voting process is completed, participants are rewarded with more governance tokens.

Creating a DAO: A Step-by-Step Guide

Creating a DAO can be broken down into three simple steps.

1. Create the smart contract: The first step in creating a DAO is to create the smart contract, which will contain the organization’s code and rules. Because the code can only be changed through group voting once the DAO is launched, this stage requires extensive testing.
2. Funding: Because the DAO is based on currency, this stage is critical. Funds are raised from individual members and investors interested in the mission and vision of the DAO, committing to buy a certain number of tokens in exchange for a stake During this phase, governance rules can also be established.
3. Following completion, the DAO’s code is deployed onto the blockchain. It can only be changed once it has been launched through collective voting by stakeholders. The project is no longer under the control of its original developers.

The Advantages of DAO

• DAOs provide transparency by allowing all members of the organization to make decisions. Decentralization has cultivated the concept of trust, and with DAOs, you don’t have to be concerned about the people behind the organization or whether or not they have a hidden agenda. The smart contract serves as a benchmark against which everyone is measured, and every transaction is immutably recorded on the blockchain.
• The organization’s decisions are made by its members, so there is no central body in charge. All members of the DAO are given right to be part of the decision making process of the organization.
  Applications of DAO

Although decentralized autonomous organizations are still somewhat new in the ecosystem, there have already been several industries in which they can be applied.

So far, DAOs are being used for many purposes, such as

• Investment
• Charity
• Fundraising
• Borrowing, or buying NFTs
• Voting etc

And all without intermediaries. So you can have a better idea. For example, a DAO can accept donations from anyone around the world and the members can decide how to spend donations.

Examples of top DAO

The adoption of the possibilities of decentralized organizations in creating better ways to manage public processes has led to the creation of more DAOs. There are over 100 DAOs in existence. However, some of the top decentralized autonomous organizations, including

1. MarkerDAO
2. Faith tribe
3. Paragon
4. Gains Associates
5. Tangible
6. Gaming and DAOs

Conclusion

Just as NFT is the futuristic or digitized version of owning property rights, Metaverse is a digitized world, and DAOs are the blockchain and digitized version of organizations. Decentralized autonomous organizations have evolved into a distinct concept that is gaining traction. Some projects are still attempting to achieve complete decentralization via the DAO model, but it is worth noting that they are only a few years old and have yet to achieve their final goals and objectives.

DAOs, as internet-native organizations, have the potential to completely transform corporate governance. As the concept matures and the legal gray area in which they operate is clarified, an increasing number of organizations may adopt a DAO model to help govern some of their activities.