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What is a decentralized autonomous organization (DAO)?

What is a decentralized autonomous organization (DAO)?

Most crypto projects replicate the standard operating scheme of regular companies or financial structures. However, some projects instead of a central management point have a collective mind, where each participant is entitled to propose his or her vision of the project's development. In recent years, this management model has become increasingly popular, giving rise to a separate trend, namely, decentralized autonomous organizations (DАО). Find out what it is, how it works, and its pros and cons in our article.

DAO, or Decentralized Autonomous Organization, is a specialized system in blockchain managed through software code. Simply put, DAO is an operating machine that performs assigned tasks specified in smart contracts. The key feature is that there is no central hub in management that makes uniform decisions with no advice from the participants.

Decentralized autonomous organization has no hierarchy, so all ecosystem members have equal rights to vote for changes in protocols.

Key features of DAO:

  • Collective decision-making;
  • The control node is the program;
  • All participants of the system have the same rights.

Within the ecosystem, all members make decisions collectively. For example, one of them proposes an improvement to the decentralized protocol, and then a vote takes place. If the rest of the community approves the improvement, it will be adopted for implementation.

Developers have no opportunity to make changes on their own without approval, since there is a principle of one-tier architecture. This approach stands in stark contrast to the system under which government members are elected in a state: people can vote for candidates, but they do not participate in the adoption of laws and regulations.

In DAO, any changes that might improve the protocol are put to a public vote, so the decision to adopt them isn't delegated to a single person.

Decentralized autonomous organization is designed so that the manager's role is assigned to the program: following a public vote of the community, the execution of the relevant assignment (changes in the protocol) is transferred to this control node. The latter acts as an executor, not as a founder.

All information data is stored in blockchain, and every community user can check what is happening on the network. This approach ensures not only decentralization, but also full transparency of the system.

In DAO, all members have equal rights and powers, so a single-tier architecture is maintained. For example, traditional companies always feature a hierarchy, i.e., from the highest level (CEO, manager, top manager) with the most authority to the lowest level (typical employee) with the minimum permissible rights.

The main mission of DAO in the crypto industry is to involve users in the active management and development of a specific platform ecosystem. Moreover, there can be relevant rewards for participating in the vote.

Features of DAO operation

Decentralized autonomous organization is a combination of program code and integrated rules linked to the control structure. This approach is implemented through smart contracts, which allows organizing an effective mechanism of operation. A smart contract is a special program that is executed by all blockchain nodes involved so as to organize the correct interaction between cryptocurrency owners. All terms and conditions are specified in the blockchain.

Any proposal to improve or change the protocol is voted on by system participants with native tokens involved. Today, the DAO model is based on the number of tokens that determine the power of each community member's vote.

The voting procedure is carried out in two forms:

  • A dedicated DAO service;
  • An independent platform (e.g., Snapshot or Tally).

All members of a decentralized, autonomous organization work together, adhering to the rules of a smart contract and the overall mission of the ecosystem. All rules are transparent due to the blockchain's fixation of information.

DAO members are divided into two groups:

  • Membership via tokens - all coins are in free circulation on decentralized crypto-exchanges and act as a management tool. Tokens give their owners the right to vote in the DAO. Coins can be obtained via exchange (e.g., by providing useful services to a decentralized autonomous organization);
  • Membership via shares - such DAOs are not always accessible to potential members. Each new candidate undergoes verification, upon the results of which he gets permission to join the team (there is a membership fee in cryptocurrency).

DAO classification

Today's decentralized autonomous organizations include the following types:

  • The classic version, where token holders are granted the right to vote and determine the development of the ecosystem (MakerDAO, Olympus, 1inch);
  • Crypto investment projects (collective asset financing);
  • Activities aimed at investing or collecting NFTs (for example, PleasrDAO);
  • Work with grants (MolochDAO);
  • Informational - they are engaged in creating alternatives to Google Search technology, checking the quality of information;
  • Educational - for example, OdysseyDAO aims to promote Web3 learning and ensure its accessibility;
  • Social - focus on important community initiatives, invest in ideas and useful projects (Seed Club is a striking example);
  • Analytical - collecting data on various decentralized autonomous organizations and further analysis by quantitative and qualitative parameters;
  • Legal - aimed at improving jurisprudence to merge the legal sphere and smart contracts.

Pros and cons of DAO

The main advantages include the following:

  • Autonomous operation mode
  • There is no hierarchy, all participants are equal;
  • Transparency in decision-making;
  • Information transparency;
  • Full interaction between the participants to achieve a common goal;
  • Quick decision-making.

But DAO also have some drawbacks:

  • Lack of legal regulation;
  • Risk of hacker attacks;
  • Controversy among participants, which may slow down the decision-making process.

Historical background: the origins of the DAO and its development prospects

The emergence of Ethereum as the world's first blockchain platform can be rightly seen as the moment when decentralized autonomous organizations emerged. Thanks to smart contracts, it was possible to create autonomous systems controlled by a special program rather than by a person, thus immediately solving the problem of data manipulation.

Development of the DAO concept dates back to 2013, but it was only in 2016 that the first full-fledged The DAO crypto project was launched, with nearly 14 percent of all existing ETHs invested in it. The goal of the system was to create a community-managed venture capital fund to invest in interesting projects on a voting system.

However, three months later, the project was hacked and lost $60 million. Although short-lived, it paved the way for a new field of decentralized communities.

In 2021, the state of Wyoming passed a law that recognized DAOs as a new form of company operation. That same year there was a surge in investment DAOs that directed their funds to NFTs and cryptocurrencies.

To date, the full DAO concept as a structure with decentralization, autonomous operation, tokenized shares and open transactions via publicly verifiable code has been achieved. It can be adapted to any organization or even generate profits by introducing it into public administration and transportation logistics, as well as transforming banks and e-commerce field.

Top DAOs

MakerDAO

It is the first cryptocurrency platform that started issuing stablecoins which means cryptocurrencies backed by real money. Being based on the Ethereum blockchain, it is also one of the largest credit protocols in decentralized finance.

Creation date: 2014

DAO purpose: stablecoin issuance, crediting

Token: DAI stablecoin, MKR governance token

Uniswap

It is an open-source protocol and at the same time a crypto-exchange for ETH and ERC-20 tokens with no reference to the traditional order-book model.

All tokens are combined in smart contracts, so liquidity pools are created, and participants can exchange assets.

Creation date: 2017

DAO purpose: cryptocurrency exchange

Token: UNI

Compound

One of the largest credit protocols where interest rates are generated by an algorithm based on the supply and demand ratio. The platform is an open money market where users can place their virtual assets and borrow other cryptocurrencies.

Creation date: 2018

DAO purpose: crypto assets allocating, crediting

Token: COMP

DASH

It is a fork (branch) of the Bitcoin blockchain, introducing the concept of masternodes ("supernodes") with extended powers. The platform aims to increase user privacy and speed up transactions with lower fees.

Creation date: 2014

DAO purpose: increasing user privacy, speeding up transactions

Token: DSH 

 

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