DAO: What are Decentralized Autonomous Organizations?

Imagine that there is an independent vending machine, which gives you the ability to rearrange the goods inside it and allows you to modify the mechanism of its operation, once you enter the money, instead of giving you one of the goods in return. This is roughly how Decentralized Autonomous Organizations (DAO) work.

The main idea behind decentralized autonomous organizations is to create a company or organization that can function completely without hierarchical management.

The independent governance model has been popularized in the cryptocurrency community since Bitcoin was able to eliminate intermediaries in financial transactions.

How do decentralized autonomous organizations work?

Initially, Bitcoin was considered the first independent organization to operate completely decentralized, thanks to a set of pre-programmed rules and functions, coordinated through a distributed consensus protocol.

Since then, smart contracts have been used on the Ethereum network, making the creation of DAO more public and shaping their current appearance.

What do DAO need to function fully?

First and foremost, there needs to be a set of rules and functions on which the organization will be built. These rules are encoded into a smart contract, which is essentially a computer program that exists independently on the Internet.

Once the rules are coded and the smart contracts are ready, the DAOs enter the funding phase, which is a very important phase for two reasons.

  • First, so that the DAO can have some kind of internal ownership, which is represented by tokens that the organization can spend or use as a reward for carrying out some internal activities.
  • Second, investing in the organization helps give users voting rights and the ability to influence how the organization works.

After the end of the funding period and the launch of the DAO, the organization becomes completely autonomous and completely independent from creators and other parties.

DAOs are open source, meaning anyone can view the code.

Moreover, all the rules and financial transactions conducted by the organization are recorded on blockchain networks, making these organizations completely transparent, and their data cannot be tampered with.

Once an organization is launched, all decisions about where and how to spend its money are made by consensus.

Anyone who has bought a stake in the organization can make suggestions about its future. To prevent receiving too many proposals, some organizations require a cash deposit.

Implementing the motions requires a majority vote, and the percentage required can vary depending on the organization and its code.

Essentially, DAOs enable people to exchange money with each other, and donate to any charitable organization, without the need for an intermediary.

One of the main problems with the voting system adopted by decentralized organizations is the inability to remedy security vulnerabilities unless a majority votes to do so.

Furthermore, hackers can exploit the same software vulnerabilities that the community is trying to address during the time period required for voting.

It should be noted that DAOs are not able to create a product, write code, or modify it.

The only way to do this is to contract with a contractor or programmer to perform the required tasks through a majority vote on that, while the smart contract takes care of paying the programmer’s wages when the task is completed correctly.

How and why can you become a DAO contributor?

Investing in DAOs is relatively easy, especially if you know how to buy Ethereum or Bitcoin and already have a wallet.

All you have to do is buy DAO tokens, which is somewhat similar to buying shares of a company.

Once the funding phase closes, you will be able to submit proposals, vote on others’ proposals, and perhaps even make some profits. The amount of tokens purchased is related to the amount of voting power you will receive.

Before you invest, you should be sure of exactly what you are getting. DAOs are completely transparent and their core code is always open source, which means you have the opportunity to review the core code and ensure it is error-free.

What are decentralized applications (dApps)?

Decentralized applications are applications that run on the Ethereum blockchain and are supported by smart contracts. The main difference between them and regular applications is that decentralized applications are completely independent, immune to censorship, do not require an intermediary to run, and cannot be stopped.

In other words, these applications allow users to connect directly to services, and give them full control over the information and data they share.

DAOs are an ambitious breed of decentralized applications. As explained in the Ethereum whitepaper, these organizations fall under other categories that include voting and governance systems.

The story behind DAO

DAO is the name of a decentralized autonomous organization created by the team behind the German smart lock startup slock.it, which allows people to share their belongings through a decentralized version of Airbnb.

DAO was launched in May 2016 and began to be funded through the sale of tokens. Somehow, the project managed to become the most successful crowdfunding campaign in history, having raised more than $150 million.

DAO’s code wasn’t perfect, and because it was open source and available to everyone, someone found a bug that could be exploited.

So, on June 17th, unknown hackers began withdrawing funds from Dow and transferring them to another decentralized autonomous organization that managed to copy Dow’s structure. Before the drain of funds was stopped, hackers managed to steal more than $50 million in Ether.

Despite the fact that DAO lost a lot of money due to the code, this theft was an important milestone in the history of DAO development, as it exposed potential vulnerabilities and thus helped DAOs address them and avoid them in the future.

Advantages of decentralized autonomous organizations

It cannot be denied that the concept of decentralized autonomous organizations is very exciting, as these organizations strive to address all the mistakes that negatively affect how modern organizations are managed, as perfectly structured decentralized autonomous organizations give every investor the opportunity to influence the organization.

Moreover, there is no hierarchical structure in these organizations, which means that anyone can come up with any innovative idea, which may be adopted by the organization in the future.

Having a set of pre-written rules, which every investor knows before joining the organization, along with a voting system, leaves no room for quarreling at all.

In addition to the above, since submitting and voting on proposals requires investors to spend specific amounts of money, investors evaluate their decisions well before submitting them, to avoid wasting time discussing ineffective solutions.

Finally, since all laws and financial transactions are recorded on the blockchain, the structure of organizations is available to everyone, making them transparent.

Disadvantages and criticisms of decentralized autonomous organizations

Decentralized Autonomous Organizations are a new and somewhat revolutionary technology, as are all technologies associated with cryptocurrencies.

For example, MIT Technology Review finds that entrusting important financial decisions to the masses is a bad idea and will likely yield no returns.

Aside from the conservative view that investments should not be given to the masses, there are other concerns surrounding decentralized autonomous organizations.

The most pressing problem, especially after the DAO hack, is the security problem associated with the principle of unstoppable code.

During the attack, investors watched their money being stolen without being able to do anything, as the attacker was practically following the rules.

However, such attacks can be avoided if the code is well laid out and error-free.

Finally, in order for startups that operate as decentralized autonomous organizations to conduct business outside of blockchain networks, and communicate with the physical world of financial instruments and intellectual property, they must adopt some type of legal framework.

Legal uncertainty is a problem that has been inherent in the cryptocurrency space since the beginning, as the technology behind it is new and radically different.

Examples of decentralized autonomous organizations

Essentially, any autonomous organization with a decentralized administrative system can be considered a decentralized autonomous organization (DAO).

This makes all decentralized cryptocurrency networks practically independent decentralized organizations, especially given the initial crowdfunding period that precedes the official launch.

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