DAO is an amalgamation of Decentralized Autonomous Organizations. It is an organization construed by rules coded as a computer program, controlled by organizational members, and not by any central authority. Think of it as an internet-construed business. All the transactions and rules are maintained on a blockchain. It is an emerging form of legal structure. Every member within a DAO shares a common goal of working in the entity’s best interest. DAO has been popularized mainly by crypto enthusiasts through blockchain technology, following the bottoms-up management approach. “An intelligent way to work with vision-oriented folks!”
How does DAO work?
Decentralized Autonomous Organizations rely heavily on smart contracts and are encoded agreements. These agreements dictate decision-making based on the underlying activity on the blockchain. For instance, if a company is looking to circulate supply, and regulate the price of certain goods and services, then the members through DAO will venture into voting, with voting power based on the number of tokens they hold and make a decision.
The voting process is posted on the blockchain. Users must often select between exclusive options. Voting power is distributed as per the tokens held. A user with 100
tokens will hold more power than a user with 50 tokens. DAO enables members to act in the entity’s best interest since they are monetarily invested, and the voting is shown on the public platform to avoid any discrepancy.
The theory behind DAO practice is that members are incentivize to act in good faith since they are invested in the business monetarily and in the decision-making. DAOs have treasuries that are issue in exchange for fiat currency. The members decide how to use the funds.
Strengths of DAO
There are numerous reasons an organization may want to follow the DAO structure.
Here are a few benefits of the DAO structure:
- Decentralization: In this structure, the decisions concerning the organization are a collection of votes rather than a single authority or central authority outnumbering the peers. Here, a single member is not entitle to the decision-making. Hence, DAO decentralizes authority across a range of
- Participation: Undoubtedly, once the members within the entity are hand over the rights to the decision-making process, the individuals feel empowered as they feel connected to the entity and believe they hold power in all matters. DAO encourages users to burn tokens or cast votes in a way they think is best for their entity.
- Publicity: DAO uses blockchain technology to cast votes, which are publicly
viewable. Therefore, this ensures that the users act in the entity’s best interest as they
know their decision is viewable. Therefore, this benefits the organization and
discourages the members from acting against their entity.
- Community: The concept of DAO is to seamlessly encourage people from
across the globe to come together and build a single vision. Therefore, all it requires is a
stable net connection, and the token holders and owners can interact
irrespective of where they live.
Weaknesses of DAO
This is not a perfect world. Like everything else, DAO has certain limitations:
- Speed: A company run under the supervision of the CEO may need a single vote to get through all the decisions. However, with DAO, decision-making is a long process since it involves voting from the members, and every member needs to allow to vote. This requires a more extended voting period, considering various time zones.
- Education: Just like speed, a DAO is responsible for educating more people with respect to pending entity activity. With members/users coming from different natives, educational backgrounds, access to resources, and incentives it becomes challenging to educate about the growth strategies or in
general communication. However, with a single CEO, it is much easier to keep one updated with company developments.
- Inefficiency: The first two points prove that DAO runs a significant risk of inefficiency. With DAO, it takes much more time to discuss change than implement it. The need to coordinate with so many individuals is what bogs down DAO.
- Security: Security is a fundamental issue face by all digital platforms for blockchain. Hence, DAO requires significant technical expertise to be implement well, without which there may be chaos in voting and decision-making. DAOs can be exploited, leading to users leaving entities, treasuries
stolen, and vaults emptied.
How are DAOs different from traditional organizations?
Starting a new company, requires a lot of funding, which directly requires trust from the people you are working with. This is a challenging but highly tricky task, especially over the internet. Hence, this is where DAOs become helpful. All you need is a DAO code that is 100% verifiable and transparent, opening new opportunities for global collaborations.
|Fully Democratic and Usually Flat||Usually works in the hierarchy.|
|Voting by users is essential to making any changes or implementations.||One person or a small group of people is enough to make the decisions.|
|All activities are fully transparent and public.||All activities, especially decision-making ones, are usually private.|
|Services offered are handled in a decentralized way.||It requires human intervention and is prone to manipulation.|
Ethereum and DAOs
DAO is an Ethereum-based blockchain. It is the perfect foundation for various reasons:
- Ethereum’s network is distribute and establish well enough for organizations to trust.
- Smart contract code cannot modify by the owners, too, once it is life. Hence, this enables DAO to run by the rules it has been programme with.
- The Ethereum community has repeatedly proved to be more collaborative than competitive, making way for best practices and support systems to evolve quickly.
We are heading towards decentralized money and decision-making of the companies too. Therefore, DAO is progressing, adapting, and making its way to the future of decentralized company structures.