Posted on 6 December 2022 | Updated on 3 April 2023
Imagine working in an office where you and your co-workers have equal power to plan and make decisions regarding certain processes and the occurrence of some programs or changes. Wouldn’t it feel great?
Well, that’s what being in a DAO feels like! So, let’s dive in and understand how awesome DAOs are!
The following are what we’ll cover in this blog:
Introduction to DAOs
The term ‘DAO’ is short for Decentralized Autonomous Organization. It’s a system where people control the organization in a distributed manner.
In contrast to conventional offices, the structure of these decentralized autonomous organizations is such that the power is spread out horizontally instead of following a hierarchy of power. Everyone works together in unison for the growth of the company.
But would this all be possible in a centralized web platform? Mostly not.
So, where does a DAO exist? In Web3 spaces. Spaces with decentralized identities and decentralized finance. A space where Smart Contracts deploy on the blockchain and work is as smooth as butter!
Now, who would have come up with such a concept? Dan Larimer in 2015!
The Concept of Decentralized Autonomous Organizations
Proposed by Dan Larimer in 2015, DAOs were primarily introduced to maintain portfolios of crypto-traders. In turn, this forum-like organization accumulates value and profit for the members.
The concept was to establish a forum or an organization in a Web3 space. A forum in web3 where investment funds are secure, open communication occurs, and trust is firm.
Moreover, individuals can buy DAO tokens that give them access and privilege to the organizations’ activities and roles. Members can also exit at any time by selling their tokens. Selling tokens, in turn, offers liquidity to individuals while providing security to all members of the blockchain.
Further, the capital pool gets managed by capital inflation and deflation such that the DAO tokens behave as a stablecoin.
Stablecoins are an essential intermediate between traditional currency and cryptocurrency. They ensure you have not lost the value of your crypto token in comparison to the traditional market.
Purpose of DAOs
The need and purpose of Decentralized Autonomous Organizations are simple – to be a venture capital fund in a decentral area that is open, transparent, and safe.
So, you have a mode of decentralized finance and have control over your assets. You can say bye-bye to the trust issues you have when you’re going to keep your money safe. It’s all well written in a programming code that is adhered to as law. Yup, the code is the law.
And in this scenario, it’s easy to operate your finances from anywhere in the world. You are free to collaborate and work with anyone globally for new projects and businesses.
Functioning of Decentralized Autonomous Organizations
Now, you may wonder how does a DAO function with such a structure and where? The answer is simple, on the blockchain network indeed!
Within a blockchain, all communication is encrypted between the two parties. The message is relayed and recorded in an open space. It’s a decentral space that respects honesty and trust.
Smart Contracts are small pieces of autonomous code lines that execute functions written within and make decisions based on the activities occurring on the blockchain.
Thus, DAOs rely on Smart Contracts to function smoothly and aptly under circumstances, especially when it comes to decision-making and implementing protocols based on votes occurring within the system.
In addition, Smart Contracts also take care of executing functions like bots on Discords to provide all members, new and old, rules to follow, update or increase the supply of Tokens, burn a certain amount of tokens if necessary and follow commands as requested.
It also issues select rewards to the existing token holders.
Importance of DAOs
DAOs are amazing organizations when you think about it. With a 6-member DAO, it could even be called the Avengers!
But in all honesty, DAOs are a great way to maintain commercial relations, manage finance, and have an equal voice in a space where you have equal authority with everyone.
Further, DAOs ensure that although Smart Contracts rule majority of the decision-making is based on activities occurring on the blockchain. The final call is always with the one behind the computer system.
These decentral organizations also promote fairness in governance through autonomy, apart from striping us of our confidence in centralized institutions by being a decentral open space.
Merits and Demerits of DAOs
DAOs are a great way to maintain the decentral nature and make sure the governance is secure. Nonetheless, it comes with some downsides such as high risk to volatility of cryptocurrencies. So, let’s take a look into the various merits and demerits of Decentralized Autonomous Organizations.
Merits of DAO
- Transparency: DAOs are transparent as all transactions are present on the blockchain. This ensures that all members have access to the same information, and there is no need for a central authority to verify transactions.
- Decentralized governance: DAOs operate on a decentralized governance model, which allows members to vote and make decisions without the need for a centralized authority.
- Efficiency: DAOs are highly efficient as they automate several processes that would otherwise require manpower. This reduces the time and cost of running the organization.
- Accessibility: DAOs are open to anyone with an internet connection, which makes them accessible to a large number of people around the world.
- Security: DAOs are highly secure as they operate on a blockchain, which is resistant to hacking and fraud.
Demerits of DAOs:
- Lack of regulation: DAOs do not have any government or financial institution regulations, which means that there is no legal recourse if something goes wrong.
- High risk: DAOs are highly speculative and carry a high level of risk as they are subject to the volatility of cryptocurrencies and other digital assets.
- Technical expertise: DAOs require technical expertise to operate and participate in. This may limit participation to those who have the necessary skills.
- Governance challenges: DAOs may face governance challenges as members may not always agree on the direction of the organization.
- Lack of accountability: DAOs are not accountable to anyone, which means that members may act in their own self-interest rather than in the best interests of the organization.
Decentralized Autonomous organizations are organizations on a decentral, open, Web3 platform. These organizations came to being as venture capital funds for DeFi.
A DAO could alternatively be an organization or a community of people.
They function toward decentralized finance through decentralized identities and Smart Contracts that run the organization.
These Web3 organizations have specialized DAO tokens that permit you as a member of the organization to make decisions and voice your opinion.
These tokens can be staked or burned as per commands, and new issuances occur as per requests on the blockchain. DAO tokens may be traded for other tokens and the price varies as per market value, so these tokens also behave as stablecoins.
Smart Contracts ensure the smooth functioning of the organization while humans have the utmost power to make decisions for the greater good of the organization.