As decentralized organizations, DAOs are run and managed by their community of members through blockchain technology. Any rule is embedded in the code of a DAO and users are the only ones who can set new rules or change the existing ones by voting.
The transparency and decentralization of blockchain make DAOs a reliable model for future organizations as the chance of corruption and manipulation is decreased significantly.
By reading this article, you will learn about DAOs, their features, and the pros and cons that they bring to the table.
You will also learn about some of the projects that adopted a DAO governance mode.
Decentralized Autonomous Organizations, or simply DAOs, are decentralized entities that usually run on a blockchain system. They are decentralized as there is no single entity that controls the whole organization.
Instead, a DAO is run and managed by its community of members. From the treasury of funds to rules and conditions, members of the organization control every aspect of a DAO.
This transparency reduces the chance of corruption or manipulation significantly as no single entity can run away with funds or change the rules of the platform overnight and at their own discretion.
The first DAO was developed on the Ethereum blockchain in 2016: The DAO. The DAO was the first decentralized fund that was controlled by its community.
The project managed to raise millions of dollars in its Initial Coin Offering (ICO), selling the native coin of the platform that would give its holder management rights.
However, the code of its smart contract was not as secure as it should be, causing one of the most well-known hacks in crypto and blockchain history.
The DAO’s hack eventually led to the famous Ethereum hard fork, giving life to Ethereum Classic we know today.
DAOs are built on smart contracts, a piece of code that runs on a blockchain network and will initiate an action when the required conditions are met.
To establish the foundation of a DAO, a group of community members craft the main rules and conditions and encode them in a smart contract.
After that, they have to raise funds for the DAO treasury. The core team usually achieves this by selling the native token of their DAO.
Users can buy these tokens and in return, receive voting rights which give them governance power in the ecosystem.
The rights that token holders gain are mostly dependent on the DAO and its rules.
In some DAOs, these rights are proportional to the number of tokens a member has while in others, the most active and loyal members would have more power over the decisions.
After fundraising, the smart contract will go live, making it impossible for the rules of the organization to change unless a consensus is reached through voting.
Additionally, no one will be able to spend the funds of the treasury without the collective consent of the community.
To change a rule or request funds for a specific purpose, members can raise their proposals and wait for the voting process to complete.
If the proposal is accepted by the majority of members, the smart contract will automatically approve the action.
Like any other concept, DAOs have their own benefits and limitations. Here are some of the important ones.
Compared to its traditional counterparts, a DAO brings multiple benefits to the table:
Members of a DAO can truly feel that they are a part of the organization as all the decisions are dependent on them.
DAOs don’t rely on a single entity or a central group and are organized and managed by their members collectively.
In this way, a DAO becomes secure against corruption.
DAOs operate on blockchain technology which makes them transparent and accessible to the public. Members can view the results of each proposal themselves.
DAOs are relatively new and come with their own limitations:
DAOs are a new concept that can be complicated for people to understand completely at first.
In order to gain membership in a DAO, users need to buy and hold tokens. They have to also learn how to vote on community proposals or propose their own.
Members of a DAO can be quite diverse, with different backgrounds.
A DAO should make sure to educate all its members about concepts, ideas, and incentives while considering their educational background, diversity, and accessibility to different resources.
The community should vote on every single decision related to the organization. The process may be time-consuming, making it longer for initiatives to go into action.
DAOs rely on their smart contracts, a piece of code that runs on a blockchain system.
It is quite important for the code to be robust and thoroughly audited as malicious actors are always looking for exploiting vulnerabilities and bugs.
Various crypto projects are built as a DAO from scratch or have it in their roadmap to become one in the future.
Let’s take a look at some of them:
Decentraland is a virtual-reality platform where players can own properties in form of NFTs.
Decentraland is governed by its own DAO, Decentraland DAO, which consists of “the most important smart contracts and assets” of the platform.
Owners of Lands, Names, or MANA, the native token of Decentraland, can participate in the governance of the platform.
Aave is a blockchain protocol that allows for lending and borrowing in a decentralized manner.
Aave was built on the Ethereum blockchain and is governed by its community of token holders.
The Aave community members can propose their suggestions or improvements by submitting Aave Request for Comments (ARCs).
Polkadot is another blockchain that has adopted the DAO model and is managed by its community.
DOT is the native token of the platform and its holders have full control over the network.