A decentralized autonomous organization (DAO) is an organization represented by a set of rules encoded as a program in a computer system. The program is transparent and is meant to be controlled by members, free from any influence from the central governance. In a nutshell, DAOs are member-owned communities and are entirely independent of centralized leadership.
All program rules and financial transaction records of this organization are maintained on a Blockchain. Can you imagine being in an organization with other people worldwide without knowing each other, making individualized decisions, and establishing your own rules autonomously encoded on a blockchain? DAOs are making it real.
All rules established by the organizational members are embedded into the code without the need for managers, thus eliminating hierarchy or bureaucracy hurdles.
What is the philosophy behind DAOs?
Most current internet users are looking forward to starting or joining social organizations, eagerly seeking to answer the question:
How can we interact and exchange values in a safe online environment?
Blockchain enables the safe exchange of values and automated trusted transactions across the world. But users want a system where they can organize themselves effectively and safely while working with like-minded folks.
Basically, Bitcoin is considered the first fully functional DAO. It functions autonomously, has programmed rules, and is coordinated via a consensual protocol. There are several other DAOs, but not all have reached Bitcoin's level.
For example, German startup Slock.it launched what was creatively called "The DAO" in May 2016 to support a decentralized version of Airbnb. The program was a great success in its early days, with an appealing crowdfunding campaign that accumulated more than $150 million worth of Ethereum.
Unfortunately, the program got issues a few months after launch. In June 2016, the DAO was hacked, and $50 million worth of Ethereum was siphoned off before it was stopped. The fault was associated with the Slock.it codes rather than the underlying technology. Regardless of the source, members began losing trust in Ethereum and DAOs.
What is the current state of DAOs?
Due to the evolution of Decentralized Finance (DeFi) in 2020, the DAO technology started healing. Many people have subscribed to the program, and it's slowly regaining ground.
Now that you know what DAOs are, it is prudent to understand their background and underlying characteristics to get a clearer picture of what is slowly but steadily turning the traditional forms of organizations upside down.
What makes DAOs unique?
All DAO rules and financial transactions are recorded and maintained on a blockchain. It eliminates the need for third parties in transactions, which means faster processing through smart contracts smart contracts. The smart contract in this realm represents the organization's rules and storage.
DAOs are public and transparent, and no one can tamper with the rules without all members noticing. We are used to numerous companies being backed by legal status. The DAOs can perfectly run without it because they can be structured as a general partnership.
Unlike the traditional organizations, the DAOs have significantly democratized organizational operations. The members should vote for every change in DAOs before implementing it, instead of being implemented by the sole party.
They are mainly funded through crowdfunding, which issues tokens for every transaction. In traditional companies, governance is based on the Board of Directors, executives, activist investors, etc. In DAOs, governance is entirely based on community.
All DAOs operations are entirely transparent, community-based, and global. In contrast, operations in traditional companies are private, and only organizational managers can know and make changes and are not always global.
What makes a fully functional DAO?
Not all DAOs are fully functional or trustworthy. A completely functional one should contain the following elements:
- Funding tokens that can be used to reward certain member activities
- A set of operating rules
- Equal voting rights to enable users to establish rules
- A solid and secure structure to allow members to configure the organization
A major potential problem with the DAO's voting system is that even if an investor spots a security loophole in the coding, no one can correct it until most members vote. This potentially slow voting process may give hackers humble time to invade the program.
How are DAOs being used today?
DAOs are versatile. They can be used for many functions such as charity, investment, buying, or borrowing NFTs. All processes are done without intermediaries. For example, they can accept donations from anybody anywhere, and members can agree on how to spend them.
Do you know you can become a co-owner of an Artist's song using cryptocurrency through an internet-based organization? Imagine Jenney DAO acquired the first NFT through this program, an original song of 3LAU and Steve Aoki, in May 2021. This metaverse organization can allow members to fractionally own NFTs.
How сan you become a member of an existing DAO?
Are you looking to join a DAO? Follow these practical tips to get started.
1. Establish your goals
DAOs are mission-driven. Before joining them, set your goals based on your expertise and passions.
2. Find the best DAO that fits your goals.
3. Join the community
You can only get a better sense of the organization's culture by participating in its community. The best entry point in the DAO community is through the DAO's Discord. Here, you begin by introducing yourself, engaging in conversations, and then learning how to contribute.
Generally, DAOs have unique appeals and benefits. They offer democratized governance, pooled resources, and transparency and can allow members to make cash and real-life impacts. However, be aware of the potential loss in cases where code goes wrong.
DAOs' legal liability, status, and regulation
The precise legal status of DAOs is generally unclear and varies by jurisdiction. They were first recognized as legal entities in the United States, specifically by Wyoming, in July 2021. In previous approaches, the U.S. Securities and Exchange Commission branded some Blockchain-based companies illegal entities that offer unregistered securities. However, based on their functionalities, DAOs are considered general partnerships that can operate without legal status.