One of the defining characteristics of the crypto world is the presence of decentralization. This means that cryptocurrencies are not controlled by a single entity, such as a government or central bank, but rather distributed across many computers, networks, and nodes. In many cases, virtual currencies use this decentralized state to achieve a level of privacy and security not normally available for standard currencies and transactions.
But the crypto world takes this concept of decentralization to other applications as well.
Thanks to the invention of the Decentralized Autonomous Organization (DAO), now financial transactions and rules are coded on the blockchain, effectively eliminating the need for a central authority. So, in this way, descriptors stay “decentralized” and “autonomous.” In this article, we will have an in-depth look into the world of DAOs.
What Are DAOs and What Do They Do?
Decentralized autonomous organizations are organizations that do not have central leadership. The DAO is essentially an internet organization, collectively owned and operated by its members. In other words, a small number of people get together to create a group and then decide to raise capital (often, but not always, using an Ethereum wallet).
Imagine it as your own business, collectively owned and operated by its members. They have built a treasure that no one can access without the group’s approval. Decisions are made based on proposals and votes so that everyone in the organization can vote.
Everything in DAO is open, and the rules for spending are built into the DAO via codes. Therefore, no administrators are needed. This feature of DAOs eliminates the bureaucratic or hierarchical obstacles. DAOs operate through smart contracts.
In general, when purchasing DAO tokens using Ethereum, members can vote on rules and directly initiate changes that trigger smart contracts. Tokens play a decisive role in voting. In theory, all participants should be able to participate. This contributes to a more horizontal and transparent organizational structure.
While traditional organizations operate with hierarchies and different levels of bureaucracy, DAOs are not hierarchical. DAOs use economic mechanisms to align an organization’s interests with the interests of its members. This is done through game theory.
Formal contracts do not bind DAO members. Rather, they are linked by network incentives linked to common goals and consensus rules. Because DAOs operate without borders, different jurisdictions may apply. For example, in the Friends with Benefits DAO, where tokens are called $FWB, people with more than 75 tokens have more decision-making power and access to exclusive events like a concert by DJ Diplo.
For startups, launching a DAO can attract more investors and raise significant funds for startups. This is a lucrative option as it provides access to global investors without legal barriers. For the safety of your business, you can develop smart contracts with special provisions for participants.
Why Were DAOs Created?
The first Decentralized Autonomous Organization was created to operate as a venture capital fund for cryptocurrency and the decentralized space. Decentralized management lowers costs and theoretically gives investors more control and access in the crypto space. In 2016, some members of the Ethereum community announced the creation of DAO (earlier known as Genesis DAO). This was built as a smart contract on the Ethereum blockchain. The open-source coding framework was developed by Slock. It was distributed under the name “DAO” by the members of the Ethereum community.
The idea of decentralized autonomy is still evolving, as this is a relatively new phenomenon in the business world. DAOs are created to be completely transparent. This is done to make financial operations performed by a company visible to all shareholders and members of the DAO community. Similar to the underlying motivation of cryptocurrencies, DAO’s idea is to go beyond the traditional centralized control of a company to create a completely transparent organization with fully open behaviour and finances.
How are DAOs Made?
Imagine a system that allows you to set your own rules and organize yourself with others around the world, all encrypted on the blockchain, with the power to make autonomous decisions – DAO makes it happen. One important thing to note is that DAO cannot create products or develop code or hardware. However, once the community approves the employment contract, DAO can easily hire a contractor to perform all of these services.
DAO rules are set by the core team of community members using smart contracts. These smart contracts allow DAOs to process external information and execute commands based on it. All of this is done without any human intervention. DAOs are usually run by a stakeholder community that is incentivized through some token mechanism.
DAO rules and transaction records are stored on the blockchain and are totally transparent. The rules are usually determined by voting by a group of stakeholders. Decisions within the DAO are usually made through proposals. If the proposal is accepted by a majority of stakeholders (or meets another rule of the network), it will be implemented. These proposals are prominent and reviewable enough for the potential members to understand how they work.
Decentralized Applications (DApps) play an important role in activities related to DAO. DApp is a software product developed with the help of smart contracts, and DAO is essentially a variety of decentralized apps. While some DApps are created to perform cash management functions, DAO is designed as a decentralized platform. DAOs are created and deployed in the following three steps:
Creation of a Smart Contract
Developers need to create a smart contract behind the required DAO. While creating the smart contract, they must ensure all the necessities are fulfilled for the DAO to work properly after launch.
Way of Funding the DAO
After the creation of the smart contract, a way to receive funds and enact governance for the DAO has to be found. Generally, governance tokens are issued directly to users based on their past usage and contribution to convey voting rights.
Deployment on Blockchain
After fulfilling the previous two conditions, the DAO needs to be deployed on the chosen blockchain. After this stage, the DAO will be controlled by the stakeholders instead of its original creators.
Future of DAOs
Experts believe that DAOs will undermine traditional business structures. DAOs are used for a wide range of purposes. This includes investing, fundraising, borrowing, or purchasing NFTs without intermediaries, etc. For example, a DAO can accept donations from anyone in the world, and donors can decide how their donations are used. Automated governance rules can also help in achieving the most beneficial outcomes in the crypto market.
DAOs are largely immune to attacks and can provide users with a secure and reliable way to interact with strangers on the internet and a safe place to fund specific goals. This is one of the reasons that the Assets under Management (AUM) for DAO treasuries listed on DeepDAO saw a whopping rise to $16 billion in September 2021 from $380 million in January 2021.
It is clear that the future of DAOs is promising. You can read more about the DAOs on WazirX here.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.