DAO-Understanding the Basics

One of the most exciting concepts to emerge from the Cryptocurrency industry are DAOs. In 2016, a group of developers, inspired by the decentralization of cryptocurrencies, devised the concept of a decentralized autonomous organization, or DAO.  DAOs address a long-standing governance issue and are not administered by a single, centralized authority but rather by members of the community. The lack of a centralized authority is what makes a DAO unique. Let us deep dive into the details of DAO, how it is different from traditional organizations and its relevance in today’s crypto world.

What is DAO?

A DAO, or “Decentralized Autonomous Organization,” is a community-led entity with no central authority. It is fully autonomous and transparent. With no central authority, the power is shared among token holders who cast votes as a group. Token holders engage in the management and decision-making of an entity in a decentralized autonomous organization. Since the DAO posts all votes and activities on a blockchain, everyone can see what people do.

According to Wikipedia, a DAO (Decentralized Autonomous Organization) is an organization represented by rules encoded as a transparent computer program, controlled by the members of the organization, and uninfluenced by a central government. Because the rules are embedded in the code, no managers are required, eliminating any bureaucracy or hierarchy barriers.

A DAO is ultimately run exclusively by its individual members, who jointly decide on important project issues including technical advancements and treasury allocations. Bitcoin is widely regarded as the first fully functional DAO, as it has pre-programmed rules, operates autonomously, and is coordinated via a consensus protocol. Every member of a DAO often works toward a common objective and makes an effort to behave in the entity’s best interests in the absence of a central governing body.

Difference between Traditional Organizations and DAOs

In Traditional Organization, all employees are subject to employment contracts that govern their interactions with the business. Their rights and obligations are governed by written agreements and upheld by a legal contract.

DAOs, on the other hand, involve a group of individuals operating in accordance with an open-source protocol that self-enforces its rules. A DAO’s members are not formally bonded together by a legal entity or by formal legal contracts. Incentives linked to network tokens and completely open rules on the Blockchain network are used to steer them instead. No bilateral agreements exist. The protocol or smart contract, which governs all network participants’ behavior, is the single controlling law. Like DApps, DAOs, have the same benefits as blockchain and smart contracts.

Unlike traditional companies, which are structured top-down, with many layers of management and bureaucratic coordination, DAOs provide an operating system for people who may live in different geographical areas, speak different languages, and thus fall under different jurisdictions. All agreements are made using smart contracts rather than traditional legal contracts, which are self-enforcing when a majority of network actors agree on them. Once activated, this entity is separate from its originator and cannot be censored by a single entity, but rather by a predetermined majority of the organization’s members.

How DAOs Work

Smart contracts are crucial to DAOs. Through the use of smart contracts, the DAO’s rules are set by a core group of community members. These smart contracts spell out the basic rules of operation for the DAO. They are very clear, easy to verify, and open to public auditing so that any potential member may completely comprehend how the protocol is to work at every stage. The DAO will need to choose how to acquire financing and provide governance once these rules have been formally recorded on the blockchain.

These logically coded agreements specify how decisions should be made in light of underlying blockchain activity. The voting process for DAOs is posted on a blockchain. Users’ voting power is frequently split among them according to the quantity of tokens they possess. The idea behind this technique is that individuals who have a greater financial stake in the DAO are encouraged to act honestly.

Tokens that can be issued in exchange for fiat currency are frequently stored in the treasuries of DAOs. Members of the DAO can vote on how those funds are used. For instance, DAOs that want to buy rare NFTs may choose whether to trade treasury funds for assets.

How Does DAO Make Money?

A DAO first raises money by exchanging fiat currency for its native token. This native token represents distribution of ownership and voting power among members. The native token’s value will rise if a DAO is successful. The DAO can then issue tokens in the future with a higher value to raise additional funds. If the members elect to support such actions, a DAO may also invest in assets. A DAO can, for instance, purchase businesses, NFTs, or other tokens. The value of the DAO rises if those assets experience an increase in value.

The original song by Steve Aoki and 3LAU became Jenny DAO’s first NFT in May 2021. This DAO is a metaverse company that offers fractional ownership of NFTs. The NFTs will be purchased under its members’ control, and the Unicly protocol’s smart contracts will be in charge of the vault where these NFTs will be stored.

Bottomline

Due to the growing popularity of Decentralized Finance (DeFi) during 2020, there has been renewed interest in DAOs. Many analysts and industry insiders agree that DAO is growing in popularity and may eventually displace certain traditional businesses.

We at Crypto Current Report will keep an close eye and stay on top of any developments on Web 3.0, Blockchain, NFTs, and smart contracts that can have an impact on how consumers engage with them. DAOs are not yet widely used, although they do appear to be gaining popularity among many creators.