Lesson 7 of 10
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7. What is DAO, and how does it work?

DAO, is nothing more than a Decentralized Autonomous Organization. The very name tells us a lot. DAO is the concept of an organization that is managed fully democratically. When any decision is made, those involved vote and debate together. Importantly, any such vote is anonymous. Usually in such cases, users are identified by a given blockchain token. It is the blockchain that allows the organization to make decisions quickly and democratically.

The second definition you will encounter in the crypto world is more complicated. It tells us that a DAO is a form of smart contract, managed by codes and computer programs. The whole thing works through rules, based on token management.  As the name also suggests, DAO units are fully decentralized and autonomous. No ‘third’ person can make decisions or impose their opinion on others. Autonomy gives it the ability to function independently on many levels.

DAOs are like online businesses that are jointly owned and managed by their members. They have built-in vaults that no one is allowed to access without the group’s permission. Decisions are governed by proposals and votes to ensure every member of the organization has a voice. No CEO can authorize spending on their whims, and there is no question of a dodgy finance director manipulating the books. Everything is transparent, and spending policies are integrated into the DAO through its code.

How did the DAO come about?authorize

The Dao was originally intended to be a funding tool for projects on Ethereum. The project “The Dao” was created in 2016, at the initiative of the blockchain start-up Slock.it’s team, and is so far the best-known example of this type of organization. TheDAO project’s function was threefold: to evaluate projects submitted to it; to decide together with DAO token holders on the funding of these projects; to distribute the associated risks and rewards.

During its ‘crowdsale’, TheDAO became in 2016 the largest crowdfunding campaign of all time, exceeding $160 million raised in almost four weeks. However, on 17 June 2016 TheDAO fell victim to a large-scale attack (a hacker exploited a vulnerability in the code) that brought its development to a halt. TheDAO was therefore a (brief) experiment that shed light on the challenges that remain to be solved for this type of project to thrive.

This hack resulted in a new consensus accepted by the majority. The new blockchain was then called Ethereum and the old blockchain was renamed Ethereum Classic.

How does the DAO work?

What is certain is that the DAO uses smart contracts. This allows an organization to work with external information and execute commands. Everything takes place in a fully decentralized system. We have no third-party interference here. Smart contracts in DAO are expressed in program or application forms, based on the blockchain. It is such a smart contract for a given entity. The computer code sets the terms of the contract and executes them using the blockchain network. The contract contains a set of rules by which the group operates and stores its assets. As in a traditional contract, for the aforementioned smart contracts to exist, we need two parties – principals and contractors. With smart contracts, we can perform specific activities without interference from third parties. A simple scheme is used there. If we have event A, action B is applied. Action and reaction. Of course – all transactions and records that occur in the DAO are based on the blockchain.

Decentralized Organizations have no hierarchy. This is why they are so attractive. They use certain economic mechanisms in their operation so that the interests of the organization are aligned with those of the members of the ecosystem. The users of the entity are not bound to it by any contract. They just have a common goal and motivation, bound by consensus rules. By contrast, as I’m sure you already know, such rules are enshrined in open – source software. In most systems fully based on blockchain technology, DAO is controlled by the user community.

So, why is DAO so attractive? Because it enables everyone to work together openly, without having to get to know each other or build trust.

However, such an entity also needs to be quality funded. In DAO, funding is based on crowdsourcing, based on tokens. As a new member of the community, you buy a token and gain a financial stake in the unit, along with voting rights in matters concerning it. The funds you deposit goes into the organization’s treasury. Decentralized autonomous organizations do not have a bank account. There is usually a MultiSig wallet, which requires approval from multiple people before any transaction can take place.

DAO forms

●    Investment – users of the system share a common cryptocurrency wallet and the group decides what to invest in, e.g., a new tokenization project or NFT.

●     Grants – with their funds, they can support the creators of a given project or application.

●  Social – a good example is guilds in MMO games. Members meet and spend time together developing their passions.

●      Media – audiences decide on the content to be delivered by their creators.

●      Design – looking for developers or other staff for projects related to Web3.

As you can see for yourself, the possibilities for DAO applications are many. All the processes that take place in this type of organization are written in advance in code. This is a great convenience.

DAO – advantages

You have already noticed that the concept of DAO is very fascinating. It’s application solves most of the problems associated with the functioning of modern organizations. We know that there are no perfect things, but a precisely constructed decentralized organization gives the investor many advantages. 

Advantages:

●   No hierarchy. Anyone can share their ideas with the users of the system. And it will be considered by the rest of the organization.

●   The rules are clear and transparent. They are enshrined in smart contracts. Every investor must first familiarize himself with them before joining the organization.

●  A transparent and democratic voting system that leaves no room for quarrels or disputes between users.

●   The investor does not lose funds to submit a proposal and vote, which occurs in traditional organizations. It thus eliminates all inefficiencies.

●     Transparency, by recording all financial transactions on the blockchain.

● Clarity, because everyone has an overview of the transactions in the blockchain.

Disadvantages of DAO

●      The technology is very young and not fully developed.

●   They are vulnerable to hacker attacks. A prime example is The DAO, where hackers have taken funds out by following the rules. This is why it is so important to design the system in detail and with precision.

●   Lack of clear and regulated legislation.

DAO versus traditional organization

In a DAO, the community rules, whereas in traditional organizations managers, the board, or investors do. In building your career, you’ve certainly encountered more than once or twice that only senior employees have full access to information. And only they know what is going on. In a DAO, it’s quite the opposite. All operations are transparent and available to all users of the unit. No one will spend money without the approval of the rest, as we already mentioned. Beautiful, isn’t it? Any internal disputes are resolved by voting and predetermined rules. Mistakes, manipulation, corruption – they don’t exist in DAO. Decentralized

Autonomous organizations vs Classical organization – the differences:

DAOCOMPANY
Governed by majority, democratically. No hierarchy.CEO, executives, board of directors, presidents. Hierarchy.
Transparent and autonomous.Only the ‘top’ has access to all the information.
Fully democratic – all changes and decisions are determined by the community.Only part of the workforce, usually the most senior, decides on the company.
Trust in code and smart contract.You have to trust your colleagues.
Very difficult to manipulate at any level. Manipulation, gamesmanship, corruption, stabbing, bickering.
Open to all.You have to go through a recruitment process that is not always fair and ends with a happy ending.
Automatic transactions.A man and his skills are required for the transaction.

Examples of interesting DAOs in the cryptocurrency market

  1. Maker DAO – an investment platform that offers various interactions between investors and entrepreneurs. It aims to redefine venture capital for the masses by providing scalable technology and financial backing to tokenized startups. This venture capital fund was first developed in 2017.
  2. Curve – It is an Ethereum-based decentralized exchange specializing in stablecoins. This specificity allows it to offer extremely low fees (0.04%), reduced slippage and virtually no unsustainable losses for liquidity providers.
  3. My Neighbor Alice –  is a multiplayer construction game where the user can buy and own virtual islands, collect and build exciting objects and meet new friends. Participants can take part in the management process through a decentralized autonomous organization (DAO), with proposals and voting structures (e.g., operations and project development). Voting incentives will be introduced to encourage voter participation.

Summary

Decentralized Autonomous Organizations originate from Web3. You already know how they work. You also know that they’re a relatively new concept, not really known to everyone. On one point, they can be compared to blockchain – they will soon revolutionize the traditional model of companies. With DAOs, it is possible to coordinate activities on a wholly different level. It is a new management structure, introducing automation, democracy and full transparency. It’s also an ideal way to prevent manipulation at every level. I like to compare DAO to a secret garden. It’s a kind of gateway that opens up a different, fascinating world, providing the opportunity for inspiring global collaboration on other levels.

DAO – interesting facts

●      DAO has a very infamous beginning.

●   It gained its notoriety in 2016 when The DAO was hacked. 3.6 ETH was lost at the time.

●      The attack led to a split between the Ethereum blockchain.

●      After the attacks, no one heard from the DAO.

● Decentralized organizations are having their big comeback with the emergence of MakerDAO.

●    MakerDAO is an open-source community that manages the stablecoin DAI.

●     Maker led to the popularization of the DAO structure.

●  There is interest in DAOs because of the balances they manage. These come from holding some projects’ native data tokens.

● Interestingly – some DAOs have more than USD billion (BE) of inactive capital.