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What are DAOs & How Do They Work | DAOs Explained with Examples

What are DAOs


One of the major advantages of digital assets like crypto is that they are decentralized. This implies that these digital assets are not under the control of a single institution such as a central bank or government. Rather, they are divided among various computers, nodes, and networks. Several times, these digital assets use their decentralized status to attain privacy levels and security that is primarily not available to other standard currencies and transactions. 

This decentralized nature of the digital assets inspired a group of developers to come up with the idea of the decentralized autonomous organization (DAO) in 2016. So, let’s deep dive into the meaning of DAO, what a DAO is and how it works, and some famous examples of DAOs. 

What is a DAO? 

As stated earlier, DAO stands for Decentralized autonomous organization (DAO). This organization does not have a centralized leadership. The decisions are taken by the community at large and these decisions are governed by a set of rules enforced on the blockchain forming the backbone of this DAO. 

Early men had tribes, future men will have DAOs. However, the only difference is there’s no leader, it’s all about community. These internet native organizations manage and own their members. They have their built-in treasuries accessible only to their members. Decisions are made through proposals during periodic meetings. Democracy moved just turned digital. 

In a DAO there is no hierarchical structure and it can have various purposes. It can be charitable organizations where members contribute and donate, freelancer networks where contracts pool their fundings to pay for the software, or a venture capital firm collectively owned by a group. These are several examples of DAO.

Did you know? India also has a DAO working towards its betterment, named the SuperTeam

Before we start our discussion on How DAO works, let’s understand the difference between any DAO and The DAO. The DAO was the first such organization ever created. The DAO was basically a project founded in 2016 which ultimately failed leading to the forking of Ethereum to Ethereum Classic.

How does a Decentralized autonomous organization (DAO) work? 

As mentioned earlier the decisions in a DAO are taken by the community. These organizations follow a bottom-up approach. There are numerous ways to participate in a DAO and it’s usually by taking ownership of the native DAO token. 

DAOs operate with the help of smart contracts, which are codes running on their own whenever a certain event is triggered. These days, smart contracts form a very important aspect of several blockchains. It was Ethereum that introduced smart contracts. 

The smart contracts are used to establish the rules of the DAO. The native DAO tokens owners receive voting rights and also have the authority to decide how an organization should function along with submitting new governance proposals

This mechanism of DAO comes in handy while protecting the DAO from getting spammed with new proposals. A proposal is passed only if the majority of the stakeholders vote in favor of it. This majority varies from one DAO to the other and is specified within the smart contract of the DAO. 

These internet-based organizations are completely transparent and autonomous. Since these DAOs are open-source the code of the same is visible to the public. The built-in treasuries can also be audited since the blockchain shall be recording all the financial transactions. 

Additional Read: Best DAO Crypto Projects 2022

Why DAOs Matter? DAOs Explained with Examples

There are several advantages of DAO being an internet-based organization. According to experts, the primary advantage of a DAO is the lack of trust required between any two parties. While to work in a traditional organization, there has to be a sense of trust among people, especially among the investors in the case of DAO, it’s only the code that you need to trust. 

Every action within a DAO after its launch is carried out after the decision taken by the community. This makes the entire decision-making process verifiable as well as super transparent. Since there is no hierarchical structure within these organizations, one can easily assign tasks to themselves and contribute to the growth of the DAO. This absence of hierarchy also provides a sense of ownership to every stakeholder where every one of them can put forward an innovative idea and the entire group decides whether to improve upon it or not. The voting system also comes in handy while solving internal disputes that are in accordance with the rules established within the smart contract. 

Investors can also become a part of the early-stage startup since DAOs allow investors to pool funds. The risk of the project or the profits of the same are equally distributed among the shareholders. 

Although several people consider Bitcoin as the earliest DAO however, it is far away from the actual standards of a DAO. Dash, was one of the first true DAO since the project has a governance mechanism allowing stakeholders to vote and use its treasury. Another such example of DAO is Uniswap

Additional Read: Uniswap vs PancakeSwap: Comparative analysis 

How to Launch a DAO in 3 Steps

Step 1 – Creation of Smart Contract

Initially, a developer or a group of them first needs to create a smart contract that shall serve as the backbone of the DAO. After launching it, these set rules can only be changed with the help of an established governance system. These smart contracts must be extensively looked at in case any important detail is missed out. 

Step 2 – Raise Funding

Once the smart contract is established, the DAO must decide on a way to seek funding and how to carry out the governance. More often than not, these tokens are sold to raise funds and also provide voting rights to the holders. 

Step 3 – Deploy on Blockchain

Once the above steps are complete, the DAO now has to be deployed on a blockchain network. After this point, the future of the organization now lies in the hands of the stakeholders. The creator of the organization no longer can influence the way the project works any more than the other stakeholders. 

Summing it Up!

DAOs are a super effective and extremely safe method to work with like-minded folks across the globe. As internet-based organizations, DAOs certainly have the potential to change the way corporate governance functions. However, the concept is extremely new and there are a few gray areas that still need to have clarity. Experts believe that as the concept matures, more and more organizations will adopt the principles of DAO and govern their activities. 

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