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What is DAO? Learn the concept and practical application of DAO

What is DAO?

A DAO or a decentralized autonomous organization is a community-led entity without a central authority. Fully autonomous and transparent with smart contract that sets ground rules, implements agreed decisions and at any point, proposals, votes can be publicly audited.

Through DAO Landscape 2021 with the following segments: DAO Operating Systems, Protocol DAOs, Investment DAOs, Grants DAOs, Service DAOs, Social DAOs, Collector DAOs, Media DAOs. There are now over 100 DAOs managing over $10 billion in assets.

DAO-Landscape
Source: Mirror, Coopahtroopa

How does DAO work?

DAO aims to follow a corporate structure where rules and regulations are built using open source code and are enforced through the use of smart contracts. Smart contracts are agreements that are programmed to execute if and when certain conditions are met.

To align the interests of both the organization and the members, the DAO encourages a distributed network of users. One of the key features of a DAO is that internal funding is used to incentivize and ensure that the organization runs smoothly:

  • Funding phase:
    • Once the initial rules are established and programmed into smart contracts, DAOs typically enter a funding phase where anyone who wants access can participate.
  • Governance:
    • At the end of the funding period, the DAO is considered up and running. All important decisions surrounding the organization are made by users who reach consensus on recommendations.
    • By owning and locking cryptocurrencies into the voting contract, users have the ability to vote on proposals, with the voting weight proportional to the number of cryptocurrencies locked.
    • Proposals are then made based on predefined network consensus rules, and voters are rewarded with extra crypto for participating.

What makes DAOs different?

DAOs differ from traditional organizations:

  • Instead of being governed by a group, DAOs use a set of rules written in code and enforced by a network of computers running shared software.
  • To become a member of a DAO, a person first joins the DAO by purchasing its cryptocurrency. Then, holding typically gives users the right to vote on proposals and updates. And of course it is proportional to the amount of the holder.

BitShares was the first successful example of a DAO. It is a virtual e-commerce platform that links sellers and customers without a central authority. At the time, Bitshares was considered a decentralized autonomous company (DAC), a term coined by founder Dan Larimer.

In particular, the first DAO created on the Ethereum blockchain, named The DAO, was hotly contested because hackers found a vulnerability.

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Advantages and disadvantages of DAO

Advantages

  • Thanks to blockchain technology, organizations can create an environment for peer-to-peer collaboration among members without having to rely on a centralized entity.
  • With the DAO model, the code is the only thing needed to create trust, as it is transparent and public. Every member can check it.
  • Another outstanding advantage of DAOs is their non-decentralization. All members are on equal footing. DAO allows anyone to collaborate globally, regardless of location, race, social status, etc. Blockchain technology allows equal access to company resources and voting processes. Rules and contracts are executed automatically.

Disadvantages

  • DAO is a new technology that needs to address a number of challenges for widespread adoption. For example, it's hard to fix bugs and loopholes in the code after it's published. In fact, it cannot be changed, so it must be completely rewritten when online. The code is publicly available so anyone can access, detect problems and hack the system.
  • While smart contracts and participatory governance reduce the technical costs of an organization's management and operations, achieving group consensus can be a challenge.
  • The management model requires DAO members to be constantly involved in activities. Many participants may have difficulty gathering and processing information to make informed decisions, which can affect voting outcomes and the future of the organization.
  • Another major concern is closely connected with the regulatory framework. Since DAOs can be distributed among different jurisdictions, it can be complicated to deal with laws in different jurisdictions.

Practical application of DAO

Cryptocurrency project

The DAO is still a fairly stub. It is possible to list several blockchain projects that demonstrate its tenets: Bitcoin, Bitshares, Dash, MarkerDAO, uniswap, BitDAO,…

  • Bitcoin: The first rudimentary DAO because it operates entirely under a consensus protocol that coordinates the behavior of a large network.
  • Bitshares: This organization prides itself on technology that is ahead of its time. By providing self-management with enhanced voting system, 3 seconds processing time and built-in defi platform.
  • Dash: Operations based on the monetary incentive of stakeholders, known as Masternodes. Those who become members vote when they buy DASH. The structure allows all members to participate and make decisions according to set rules.
  • MakerDAO: The name tell everythings. MakerDAO is part of a larger system, the Maker Protocol. It is a DAO that uses a combination of crypto assets (Dai and MKR). Dai is this stablecoin that allows transactions to be performed without the involvement of third parties such as banks or governments. MKR is a token that gives holders the right to vote…
  • uniswap: Uniswap issues native governance token UNI. Thereby, becoming a decentralized, community-owned protocol.
  • BitDAO: BIT is a governance token with the right to propose and vote. BitDAO's goal is to build a decentralized crypto economy available to everyone. A protocol managed by the BIT holder.
top knife token
Top DAO Tokens by Market Capitalization

Wider use case

In addition to the DAO being adopted by crypto companies or financial operations, it is much more than that:

  • Government: DAO will strengthen audit, voting, contract performance monitoring, bidding and many processes, etc.
  • Nonprofits: Allows individuals to anonymously receive donations and accepts members from anywhere in the world. Members can vote on how the money raised will be used.
  • Company Audit: Improves auditing by enabling automated project management, improved tracking, and better security.

The future of DAO

The DAO has a long way to go before it achieves full mainstream adoption. Not all DAOs are efficient. In fact, most DAOs will be idle for a long time.

Just like investing in cryptocurrency there is always the possibility that the value of the governance token for a DAO could be zero.

However, the DAO is arguably the next “big trend” of the crypto market. Billionaire investor Mark Cuban has also said he sees value in DAOs in a tweet in May that read: "The future of corporations may be different as DAOs take over legacy businesses, …DAO enabled entrepreneurs can earn $,…”

The recent wave of institutional, mainstream investment in DAOs is also a sign of growth coming when in August Syndicate, a community-based investment system that simplifies the creation of DAOs, raised a $8M Series A funding round due to Andreessen Horowitz (a16z) leader.

And you, do you think this is the next investment trend? Please consider the article as information and not investment advice.

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