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Thought about a Blockchain-encoded system that allows you to collaborate with other individuals in different parts of the globe without knowing who they are? While this sounds like a daunting task, DAOs are making this seamless.

Wikipedia describes DAO (Decentralized Autonomous Organization) as an organization characterized by rules encoded as a transparent computer program, managed by the organization members, and not influenced by a central authority. No managers are required since the regulations are written directly into the code, eliminating any bureaucracy or hierarchy that could stand in the way.

The basics of DAO

A decentralized autonomous organization (DAO) is a system operating on a blockchain that provides users with a built-in paradigm for the communal control of its code.

DAOs vary from typical companies run by boards, committees and CEOs. DAOs employ a set of rules written down in code and enforced by the network of computers running a common system. This eliminates the need for supervision.

To become a member of a DAO, consumers need to first join the DAO by purchasing its cryptocurrency. Holding the asset then typically provides users with the ability to vote on proposals and updates, according to the amount they have.

BitShares, a virtual e-commerce network that connects merchants and consumers without a central authority, was the first successful example of a DAO. At that time, Bitshares was described as a decentralized autonomous business (DAC), a term invented by its creator, Dan Larimer.

The first DAO, founded on the Ethereum blockchain, was tarnished by controversy when hackers discovered a flaw in the code.

How does a DAO work?

In a decentralized autonomous organization (DAO), decisions are decided by an organization of its members collectively. A DAO may be joined in a variety of methods, the most prevalent of which is via the possession of a token.

DAOs work via smart contracts, which are simply bits of code that automatically execute if a set of conditions are satisfied. Smart contracts are used on various blockchains presently; however, Ethereum was the first to employ them.

These smart contracts set the DAO’s regulations. With a stake in a DAO, members can use their right to vote and impact the organization’s functioning by making proposals or proposing new forms of governance.

This strategy protects DAOs from being inundated with proposals: a proposal will only succeed if it has the approval of a majority of stakeholders. How that majority is chosen differs from DAO to DAO and is described in the smart contracts.

DAOs are self-governing and open to the public. As they are constructed on open-source blockchains, anybody may access their code. Because the blockchain records every financial transaction, anybody may check their own personal coffers.

In most cases, a DAO is launched in three phases.

Smart contract creation: It all starts with a developer or group of developers building the DAO’s smart contract. They may only modify the rules established by these contracts after launch through the governing structure. That means they must rigorously examine the contracts to ensure they don’t forget important details.

Funding: Once the smart contracts have been formed, the DAO must decide how to accept funding and how to implement governance. While these tokens are sold to generate revenue, these tokens also provide holders voting rights.

Deployment: After everything is in place, the DAO must be uploaded on the blockchain. From this point on, stakeholders decide on the sustainability of the organization. Even though the smart contracts were originally written by the organization’s founders, their influence on the project has dwindled.

Why do we need DAOs?

Being internet-native organizations, DAOs offer significant benefits over conventional corporations. One key benefit of DAOs is the absence of trust required between two parties. Because DAOs are decentralized, investors don’t have to put their faith in the individuals running them as they would in a typical organization.

Trusting that code is easy to accomplish since it’s publicly accessible and can be thoroughly tested before deployment. After being launched, every action a DAO makes needs to be authorized by the community and is entirely public and verifiable.

This kind of organization does not have a hierarchical structure. Yet, it offers all functionalities and thrives while being governed by stakeholders through its native token. The lack of a hierarchy means – any network stakeholders suggest ideas that the whole group will evaluate and improve upon. Internal conflicts are typically simply settled using the voting method, keeping with the smart contract’s pre-written parameters.

By enabling investors to pool assets, DAOs also provide people an opportunity to participate in early-stage firms and decentralized initiatives while sharing the risk or any benefits that may come out of them.

Every Dao addresses a different issue

It’s essential to consider that DAO is a broad concept that embraces a wide range of various sorts of organizations and businesses. Even if two collectives seem to be worlds apart, they are both DAOs.

Some well-known DAOs include the following:

• The PleasrDAO collects and invests in different NFTs.

• The HerStory DAO aggregates and supports initiatives by Black women and non-binary artists.

• DAO Komorebi supports female and nonbinary crypto entrepreneurs.

• The MetaCartel Venture DAO is another organization that invests in early-stage decentralized applications.

Disadvantages of DAOs

Decentralized autonomous groups aren’t ideal. They are a relatively new technology that has drawn significant criticism due to remaining worries surrounding legality, security, and structure.

MIT Technology Review has, for example, disclosed that it considers it a terrible idea to trust the people with key financial judgments. MIT seems to have never revised its position about DAOs, at least publicly. The DAO attack also sparked security worries since faults in smart contracts may be hard to correct even after they are identified.

DAOs may be scattered throughout several countries, and there’s no legal foundation for them. In the event of a legal dispute, the parties involved will have to grapple with a slew of local statutes.

In July 2017, for example, the United States Securities and Exchange Commission produced a report in which it found that The DAO offered securities in the form of tokens on the Ethereum blockchain without permission, breaking elements of securities legislation in the nation.

Conclusion

Prior to the end of 2019, the majority of the crypto community’s awareness of DAOs was likely limited to the DAO breach and the decentralized collateral funding platform Maker DAO.

However, the proliferation of decentralized finance (DeFi) protocols has increased the popularity of DAOs in recent times, as several yield farming and decentralized exchange (DEX) platforms rely on them for governance, including major names like Compound (COMP), yearn.finance (YFI), and Uniswap (UNI).