Heard people talking about ‘DAOs’ but have no idea what it is? You’re not alone. In this blog we will simply define and explain it.
A Simple Definition Of A Dao
DAO stands for Decentralized Autonomous Organization. It is pronounced “dow”. DAOs are organizations that run on the blockchain for groups of people with a common goal. You can join one by buying the cryptocurrency of the blockchain it operates on. DAOs run democratically without a leader or central authority.
How Do Daos Work?
DAOs operate using smart contracts that are drawn up and determine the rules of the organization. They automatically execute whenever certain conditions are met. To become a part of a DAO, you normally need to purchase tokens of the cryptocurrency of the organization’s platform. Stakeholders then have voting rights and have a say in how the organization operates by way of member-submitted proposals. To avoid too many proposals, larger DAOs may require members to stake tokens in order to submit one. Members then vote on the proposal, with the number of votes members have proportional to the size of their stake in the DAO.
Why Do We Need Daos?
DAOs have emerged because they are a democratic model that precludes authorities with vested interests from making decisions in their own interests rather than those of the organization. There is no level of trust needed between parties because smart contracts always execute actions which are completely transparent and verifiable and have been agreed on by a majority of stakeholders. There is no CEO or hierarchy that can influence those decisions. Hence DAOs are not susceptible to the “principal-agent dilemma”. This is when there is a conflict in priorities between the principal (for instance the stakeholders of a traditional organization) and the agent (the CEO). DAOs are immune to the principal-agent dilemma because they operate on community governance.
Criticisms Of Daos
The lack of hierarchical structure which is one of a DAO’s greatest strengths can also be interpreted as its greatest weakness drawing criticism on several fronts.
False democracy – because voting power and control of any organization is proportional to the size of a member’s stake, determined parties can essentially buy control.
Voter fatigue – voting is not compulsory in a DAO and some suffer from apathy with member representation falling to as low as 10 percent.
Peer pressure – some votes within a DAO can resemble a popularity contest, more reflective of the person who puts forward a proposal rather than the strength of their proposal.
Open-source – because a DAO’s code is available for anyone to view, they can be vulnerable to bad actors or hackers who can search for and exploit a weakness in that code, as happened to “The DAO” in 2016.
What Was “The Dao”?
DAOs should not be confused with “The DAO”, an early incarnation of the protocol which was hacked on the Ethereum blockchain in 2016. Hackers stole $60m in Ether, Ethereum’s currency, exploiting a vulnerability in the code and forcing the cryptocurrency to fork – which basically means a new cryptocurrency had to be created on the back of the old code. The old hacked crypto is now sold as ethereum classic (ETC) while the new cryptocurrency is simply known as etherium (ETH).
Types Of Daos
There are many types of DAOs and not all are formed for financial purposes or monetary gain. Socialization is an important aspect of them.
Investment DAOs – also known as venture DAOs, members pool their money for the purpose of investment, sharing in the profits and losses, proportional to their stake.
Protocol DAOs – govern decentralized protocols, for instance maintaining a stablecoin pegged to the US dollar.
Philanthropy DAOs – gather funds and donate to charities decided by the users.
Grant DAOs – operate as above except they support DeFi projects.
Collector DAOs – acquire NFTs chosen by the members of the DAO. They may seek to acquire anything from artwork to a copy of the US Constitution which one DAO attempted.
Social DAOs – created purely to align people of similar interests, offering financial members exclusive opportunities.
How To Launch A Dao
A DAO can typically be launched in three straight-forward steps.
Smart contract creation – Developers create the smart contracts that will govern the DAO. After launch, the rules in these smart contracts can only be changed by stakeholders through the governance system.
Funding – Sell cryptocurrency tokens to interested parties, giving them participation and voting rights in the organization.
Deployment – The DAO is finally deployed on the blockchain.
How To Join A Dao
Joining a DAO is a simple process and just requires some basic software to access the blockchain.
Set up a crypto wallet – you will need to buy a stake in the DAO you are interested in joining, using the cryptocurrency of the blockchain it is on.
Find a DAO – Search for the DAO you wish to join. DeepDAO lists DAOs as well as their protocols and number of members.
Apply to join – Use the cryptocurrency required to buy the governance tokens of a DAO. There may also be an application process.
Test the waters – Engage with your new community. If you don’t like the organization you have joined, you can always sell your tokens and try another.
The Future Of Daos
DAOs are poised to play a significant role in the rise of Web3 as the benefits of blockchain gain greater traction and understanding around the world.The third iteration of the web, Web3, adds ownership to the ability to read and write online.And DAOs’ fundamental building block of decentralization puts the power back into the hands of the people.The rise of DAOs could be akin to an industrial revolution and they are poised to impact many industries and organizations including:
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