Demystifying Decentralized Autonomous Organizations
What is a DAO and how does it work
Recently, my girlfriend found a new job. But before she left her old one, the IT department was having a Hackathon. I wasn’t sure entirely what she meant, but it truly was the type of Hackathon I thought. Basically, for two days teams can work on whatever projects they want (while still working on the ticket queue). She explained that some groups chose work-based topics, like her team worked on automating a feature to resend files for a whole group instead of having to manually click a resend for each member. Other teams did projects for fun, such as one team that examined POAPs. During their presentation, they started explaining Decentralized Autonomous Organizations (DAOs). She told me it would be a great topic for one of my articles, so here we are.
In this article, we’re going to talk a little about Decentralized Autonomous Organizations. We’ll look at what they are, how they work, and some examples. I also think that discussing POAPs could be an interesting topic, but that will be a separate article. So watch out for that one as well. But for now and without any further delay, let’s take a look at DAOs.
What is a Decentralized Autonomous Organization
The concept of a Decentralized Autonomous Organization (DAO) is a structure that does not have a central governing body (Nathan Reiff, Investopedia). Instead, the members share a common goal to act in the interest of the entity. This means that instead of central authority, DAO distributes power across the token holders who cast votes. These token holders control the decision-making and management of the entity. The idea of DAOs is to promote oversight and management of an entity like a corporation but without a central authority (Reiff).
One of the first DAOs, and how you may have heard of DAOs, was created by developers to automate decisions and facilitate cryptocurrency transactions. DAOs were even inspired by the decentralization of cryptocurrencies (Reiff). In blockchain’s case, the DAO is software that offers a built-in model for the collective management of its code. To become a member of blockchain’s DAO, you first buy its cryptocurrency (kraken). This gives you a piece of the asset which you are then able to vote on the proposals and updates. As a regular stakeholder would, the vote would be proportional to the amount they have.
Because of the content, security is essentially the most important element of a decentralized autonomous organization. For example, the first DAO created on the Ethereum blockchain was followed with controversy, as hackers found loopholes in the code (kraken). With blockchain, money is often on the line, so security has to be prioritized.
With a little more background on what DAOs are, let’s take a quick comparison between them and traditional organizations.
Decentralized Autonomous Organizations vs Traditional Organizations
As a brief comparison, the most obvious difference starts with the structure. With a traditional organization, you have a hierarchical structure, while a DAO is a flat structure and fully democratized (ethereum). Depending on the structure, hierarchical organizations are often made by a sole party. However, sometimes voting may be offered. With a DAO, voting is required by members for any changes to be implemented, meaning no single person can make that decision. If voting is allowed in a traditional organization, those votes must be tallied internally and the outcome is handled manually. A DAO tallies the votes, but the outcome is implemented automatically. With that automation, services are also handled the same way. However, a traditional organization requires human handling or centrally controlled automation, which can be prone to manipulation. Finally, within a DAO all activity is transparent and fully public. On the other hand, traditional organizations can have some private activity that is limited to the public (ethereum).
Now that we’ve had the brief comparison, let’s talk more about how DAOs work.
How Do Decentralized Autonomous Organizations Work
The goal of DAOs is to mimic a company structure through its business rules (kraken). To implement this, DAOs rely on their smart contract, which are the rules, regulations, or agreements that are programmed to execute when certain conditions are met (ethereum). Like everything else, these rules are decided by the stakeholders. The treasury is part of that smart contract (ethereum). Because everything is public, no member can use money from the treasury or edit the code — which are the DAOs rules — without everyone else being made aware (ethereum).
We talked about taking votes, and that is how the smart contract can be changed. If you would want to change, add, or remove a rule, you would take a vote (Nathan Reiff, Investopedia). Additionally, to use the money from the treasury, you also would take a vote (Investopedia).
Essentially, DAOs work by utilizing a smart contract. Just to add this as it may be useful, let’s look at a few pros of DAOs.
Decentralized Autonomous Organization Pros
To keep this added section brief, here are just a few benefits of DAOs from Nathan Reiff (Investopedia):
- Decentralization — as we have talked about before, no one individual or board controls the decisions
- Publicity — all decisions and rules are made available to view by the public
- Participation — the stakeholders all share the decision process, so they can feel more empowered by their vote
- Community — because of the togetherness, people from all over the world can seamlessly join in building a single vision
Decentralized Autonomous Organization Cons
As a quick note, here are a few limitations to DAOs from Nathan Reiff (Investopedia):
- Security — because it is a digital platform, security can be a big risk as hackers try to exploit the system, but also the DAO has to watch the validity of how votes can be cast and how decisions are made
- Speed — because a vote is taken by stakeholders, there is a longer voting period as people may reside in different time zones or have other priorities
- Education — to fairly make a decision, the stakeholders need an explanation of the proposition being made, however, stakeholders may have different educational backgrounds or access to resources
- Inefficiency — this applies to both speed and education, because of the time it takes to educate stakeholders, or even onboard new ones, there’s the risk of too much time being spent in these areas
Now that we have learned what DAOs are, how they work, and seen a few pros and cons, let’s take a look at a few examples.
Examples of Decentralized Autonomous Organizations
Because blockchain is mentioned often when researching DAOs, we’ll see a lot of them on the list. But here are ten examples of decentralized autonomous organizations.
1. Dash
Dash is a project that became the driving force behind the success of DeFi. It is a digital payment option that offers faster transactions than other cryptocurrencies.
2. DAO Maker
DAO Maker is a growth solutions provider for new crypto startups. It was also a driving force behind several successful projects such as Infinity Pad (IPAD) and Orion Protocol (ORN).
3. Uniswap
Uniswap offers thousands of tradable crypto tokens and is the most popular decentralized crypto exchange globally.
4. BitDAO
BitDAO invests funds for the growth and support of other products and partners in the DeFi space. It is one of the largest DAOs determined to develop an ecosystem with a decentralized tokenized economy.
5. Aragon
Aragon is a popular DAO that allows other platforms to introduce their DAOs.
6. Decred
Decred is a top-rated platform that deals with DAO projects and has a native token, DCR, that works as a governance cryptocurrency.
7. 0X
0X is an open-source DAO on the Ethereum blockchain, which has shifted towards the DAO governance model and became 0X DAO.
8. Compound
Compound allows its holders to earn interest on their holdings by locking them in the platform pools and is also one of the most popular lending DAOs in the DeFi space.
9. Curve DAO
Curve DAO is an exchange liquidity pool on the Ethereum blockchain and is also the second most valuable DAO worldwide.
10. Aave
Aave allows people in the DeFi space to lend and borrow cryptocurrencies and is also the biggest open-sourced liquidity protocol in the world.
Hopefully, with a few examples, you will understand more about how DAOs are used as companies.
Conclusion
Today, we learned more about decentralized autonomous organizations (DAOs). First, we talked about what DAOs are. Next, we briefly compared DAOs and traditional organizations. After that, we looked at how DAOs work. We also briefly looked at just a few pros and a few cons of DAOs. Finally, we looked at ten popular examples of DAOs.
Hopefully, you learned a little about DAOs today. I certainly feel like I learned a lot about how they work, and how they differ from traditional organizations. Otherwise, I hope you enjoyed this article. As I mentioned before, I’ll also be writing about POAPs, so please consider reading that as well soon. Until then, cheers!
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References:
https://www.kraken.com/en-us/learn/what-is-decentralized-autonomous-organization-dao
