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All You Need To Know About DAOs

By January 21, 2021March 21st, 20225 minute read

When most of us imagine a future workplace scenario, we think of a hierarchical, centralized structure with a CEO, leadership, and management teams, and perhaps, a workforce that would be gradually replaced by AI and relevant technology. However, these scenarios don’t usually take into consideration how workers might use tech to make better decisions and collaborate with it in ways that make work more productive and meaningful  – maybe entirely foregoing the need for a management team at all.

But what if instead of technology replacing the workers, we could have organizations that are governed without leaders? Institutions that can run autonomously without requiring a central authority figure? 

Blockchains can enable exactly that: with a DAO or a Decentralized Autonomous Organization. 

In this post, we take a look at what DAOs are and how these organizations might work out. 

So, What Are DAOs?

To put it simply, a decentralized autonomous organization is an institution that, unlike traditional companies, is based on open source code and is governed by an entire community. 

As the title suggests, there is no centralization of power in a DAO. A decentralized autonomous organization follows the principles of collaboration and collective governance. Therefore, the inherent structure and mechanisms of a DAO are not centered around any kind of hierarchical management.

How Do DAOs Work?

A DAO has the blockchain tech working behind it, which presents a systematic, scalable way to develop a decentralized organization. With blockchain tech, a number of computers work together to split a problem into several pieces between themselves and solve those separately. 

Since any given problem’s difficulty level is so high that a single computer cannot solve more than 51% of it, the blockchain tech prevents any one user from having centralized power. 

Similarly, a decentralized autonomous organization can operate autonomously, without needing a singular authority figure to be in charge or enforce rules. Once a DAO is deployed, it can only be governed by a group of participants. So the operating system behind DAOs aims for open collaboration; additionally, with a decentralized autonomous organization, individuals/institutions can cooperate without knowing or trusting each other.  

A DAO utilizes smart contracts to work with external information and execute various commands. Therefore no human intervention is required. The community operating a DAO usually consists of stakeholders tapped through some sort of tokenization mechanism. 

In some ways, a decentralized autonomous organization operates in a similar fashion to a conventional organization. However, unlike traditional corporations, DAOs don’t work with a hierarchical structure. Instead, they aim to align the interests of the organization with those of its members.

The rules a DAO has to abide by, as well as all transaction records, are stored on the blockchain for the whole community of operators to see. Generally, all decisions regarding how a decentralized autonomous organization will be run are made through stakeholder proposals. The stakeholders present proposals and vote on the governance decisions, as well as the basic functional rules. Typically, if a majority of stakeholders vote on a proposal, it is then carried out.  

Examples of DAOs

The Bitcoin network might be considered the very first rudimentary version of a decentralized autonomous organization. The network follows a non-hierarchical, decentralized model and is coordinated by a consensus protocol. 

The Bitcoin tokens also provide an incentive for users to secure the network and make sure to keep Bitcoin operating as a DAO.

Another of the earliest examples – and perhaps most relevant – of a decentralized autonomous organization was known simply as “The DAO”. The DAO was constructed on top of the Ethereum blockchain and was made of complex smart contracts that were supposed to act as a decentralized venture fund. 

The DAO distributed governance tokens through an ICO (Initial Coin Offering), providing ownership stakes and voting rights in the decentralized fund. Unfortunately, only a short while after The DAO’s launch, about a third of the funds were drained out of it. Till date, this remains one of the largest hacks in the history of cryptocurrencies.

More complex DAOs than either Bitcoin or The DAO can be developed to serve a range of purposes, such as decentralized social media platforms, organizing automated fundraising campaigns (much like ICOs), or coordinating IoT operations (Internet of Things) devices.

How DAOs Solve Critical Challenges

As DAOs gain increased popularity and new use cases within large organizations, they present the opportunity to combine innovation and collective intelligence and solve some quite big issues many traditional organizations have faced. Here are a few challenges decentralized autonomous organizations have provided solutions to: 

  1. The Principal-Agent Dilemma: This issue arises when an individual/organization (the ‘agent’) is allowed to make decisions and take actions on behalf of another individual/organization (the ‘principal’). In this case, an agent might act in their own interest instead of taking into account the interests of the principal. 

The principal-agent dilemma might occur when elected officials represent citizens, brokers act on behalf of investors, or managers stand for shareholders. However, since a decentralized autonomous organization stores all information and transaction histories on its fundamental blockchain, it can allow a greater transparency level enabled by the blockchain tech. Moreover, with DAOs, incentives within an organization are aligned, and there is little chance of any information asymmetry, which further decreases any risks of the principal-agent dilemma happening.

  1. Lack of Innovation: The biggest problem with many traditional organizations is a serious lack of innovation. However, with tokenization, DAOs can align incentives for work with innovation and a company’s success. When people are rewarded for their contributions to collective decision-making that lead the company to achieve positive outcomes, the workplace is essentially turned into a meritocracy based on collective intelligence. 

DAOs encourage stakeholders to actually care about the organization’s goals – since they also align with their individual goals – and contribute to solving all problems a company might be facing, instead of just concerning themselves with the finite role for which they were initially hired.

  1. An Unfair Reward System: On a blockchain, when an entire problem is solved, each individual contributor receives a reward or an incentive for their part in coming up with the solution. DAOs can employ this very same method to collective intelligence and the governance of organizations. 

With a decentralized autonomous organization, stakeholders can present proposals on how to run the company, which is solving problems on a blockchain. These proposals can be for anything, from day to day to problems to the future goals of a corporation. All stakeholders can then participate in the process of voting or decision-making. After a consensus is reached, all contributors would be rewarded for participation based on how their individual contributions match up to the overall outcome.

There is seemingly an indefinite number of ways to customize DAOs to suit a range of purposes – a DAO can help an organization make the payments of employees and budgeting more transparent. It can enable governments to encourage direct participation in democratic decision-making and a lot more. What the future holds for decentralized autonomous organizations yet remains to be seen, but it’s quite safe to say that the path ahead sure looks bright.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
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