What is a DAO? Exploring the Future of Decentralized Governance

What is a DAO? A question which is normally asked around. A decentralized autonomous organization (DAO) is an entity that operates without central leadership.

DAO organizations form the backbone of decentralization, ensuring that decisions within a blockchain-based entity are made without relying on a central authority. Instead, the community participates in decision-making.

DAOs are powered by smart contracts. While DAOs can run on multiple platforms, they are primarily associated with the Ethereum blockchain.

In this article, we will dive deep into the DAO world. We will seek to understand what these organizations are, how they work, and how they impact decision-making in the crypto world.

Understanding DAOs?

A DAO is like an organization that runs on blockchain technology. Blockchain, also known as distributed ledger technology (DLT), runs on the ethos of decentralization.

DAOs are an extension of this by allowing the community to participate in making decisions for the projects created on a particular network.

Those seeking to participate in a DAO must buy the native tokens of the blockchain they intend to use. Those who buy and hold tokens will have the right to vote on critical issues related to the DAO. The strength of the vote depends on the amount of tokens held.

DAOs replace traditional corporate structures with smart contracts. Smart contracts are self-executing codes that will perform a function once set conditions are met.

While there are apparent challenges with DAOs, such as slow decision-making processes and security threats, these organizations represent a notable real-world use case for blockchain technology.

The History of DAOs

The history of DAOs started with “The DAO” in 2016. The Ethereum development team launched ” The DAO ” and acted as a venture capital fund. Those who own DAO tokens can secure profits by investing in the organization.

Despite being the first of its kind, the DAO saw significant success in raising $150 million worth of Ether (ETH) to support the development of the Ethereum ecosystem. Participants used to buy ETH before exchanging it for DAO tokens.

While its early days were a success, The DAO suffered a major hack that saw a malicious hacker steal more than $60M worth of Ether from The DAO’s wallet. The stolen funds were around 14% of the Ether in circulating supply.

The attack dealt a significant blow to the Ethereum ecosystem, which was only a year old. Ethereum developers later decided on a hard fork that reversed the Ethereum blockchain to an earlier time before the hack happened.

However, not all Ethereum developers agreed to the hard fork. The decision led to a split in the Ethereum ecosystem.

Some went ahead and supported the earlier version of the Ethereum network, which is now known as Ethereum Classic. The hard fork is now what is known as Ethereum.

Given such security risks, it is easy to see why DAOs are still on the slow-adoption journey despite offering much promise for decentralization.

How DAOs Work

A DAO organization works by allowing decisions to be made from the bottom-up. A DAO ensures that just one person does not own an organization. Instead, members participate in the organization to make decisions and perform other functions.

While there are many ways to participate in a DAO, the main one is owning tokens. The DAO will then run on a smart contract deployed across multiple blockchains.

The smart contracts supporting the DAO will set the rules. The DAO members will then get voting rights to influence the organization’s operations. The DAO also has a chance to come up with new governance proposals.

DAOs also focus on autonomy and transparency. These organizations are created using open-source blockchains, allowing anyone to view the code. The DAOs also enable people to audit built-in treasuries while the blockchain records transactions.

Benefits of DAOs

DAOs present a wide range of benefits to users and the entire cryptocurrency community. These benefits include the following:

Decentralization

The first benefit of DAOs is decentralization. Traditional organizations operate differently from DAOs by ensuring crucial decisions are made by a central entity.

However, this differs from DAOs, where the community jointly makes decisions affecting the ecosystem. This process ensures that the opinions of the community can count.

Transparency

The other benefit of DAOs is that they promote transparency, ensuring every member is held accountable. The votes on the DAO use blockchain technology, with every vote viewable by the public.

The DAO transactions are also available for anyone to view, encouraging community members to act in the community’s best interest.

Supported by the community

The other benefit of DAOs is that they are community-based. These platforms bring people together to work towards a unified objective. Each community member gets a chance to participate in the project.

The community also gets to share their ideas and propose ways forward to support the growth of the project in question.

Real-World Use Cases

The other benefit of DAOs is that they can achieve a use case in the real world. These platforms can support decentralized venture funds and social media platforms.

DAOs can also be used to support the functioning of the devices linked to the Internet of Things (IoT).

Examples of What is a DAO

The concept of a DAO has amassed interest across the cryptocurrency industry and beyond. Some of the most famous examples of a DAO include the following:

• MakerDAO – MakerDAO is one of the oldest DAOs. It operates as a decentralized finance (DeFi) project with a stablecoin collateralized by crypto assets known as DAI. The stablecoin is pegged to the US dollar.
• Aave – The other popular DAO is Aave. Aave is an Ethereum-based money market allowing users to borrow and lend multiple digital assets, including stablecoins and altcoins. Those holding AAVE tokens also govern the Aave protocol.
• Yearn.Finance – Yearn.Finance also boasts one of the most robust DAOs. It also operates as a DeFi platform with yield farming opportunities. It also runs as a DAO, with community members getting to make decisions and upgrade the protocol.

Limitations of DAOs

While DAOs offer immense benefits in terms of promoting decentralization, transparency, community participation, and use cases in the real world, they also have their limitations, which include the following:

Legal Challenges

DAOs also present legal challenges. The regulatory framework around DAOs remains to be determined in most countries. The uncertain legal framework is among the obstacles hindering the broader adoption of DAO platforms.

Security Risks

DAOs also pose a security risk. For instance, in 2016, the Ethereum DAO was hacked, with the attacker stealing $60M.

The attack forced the blockchain to roll back to a point before the exploit. This hack demonstrated that while DAOs offer unique benefits, they also present risks if not designed well.

In summary

A Decentralized Autonomous Organization (DAO) is a platform allowing community members to participate in governance and voting decisions. These organizations help in promoting decentralization, transparency, and community participation.

DAOs ensure that organizations are free from relying on traditional firms. Instead, the community participates in governance to achieve the best outcome for the network.

A DAO also helps protect the integrity of a network. It guarantees that an individual or entity can only change the structure of an organization with community support.

However, when structuring a DAO, developers must fill any gaps that could result in theft and loss of funds.

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