What Is A Decentralized Autonomous Organization (DAO)?

Decentralized autonomous organizations (DAO) seem to be an emerging trend that most enthusiasts are unfamiliar with. Here is what you need to know about a DAO and other factors that affect its operations.

The rate of interest in decentralized finance (DeFi) has become hugely explosive in several years after the iteration of the DeFi concept and it is almost close to reaching a mainstream appeal. Being a decentralized finance-inclined development, a decentralized autonomous organization (DAO) appears to have become famous and continues gaining recognition at a rapid rate.

One of the integral facts about DeFi is its ability to facilitate a governance process in the financial space without the need for a central body. This concept proved appealing to the economy as many nations start to dive into the DeFi space.

Due to the widespread acceptance of the ecosystem, various projects started to evolve with the primary aim of facilitating the system of decentralized governance and enhancing it to reach mainstream adoption. DAO is one such project developed to boost the concept of decentralized governance. What does DAO really mean?

DAO Overview

A decentralized autonomous organization (DAO) is a non-centrally governed virtual entity that is cumulatively owned and managed by the members based on particular rules enforced on a blockchain. They are an internet community that has its decisions made with the consent of each member.

DAO gets rid of the need for any central leadership like the government or central bank. They possess built-in treasuries that cannot be accessed unless collectively approved by all the members of the organization. Thus, democratizing its decision-making process, the group is compelled to vote on a proposal before the decisions can be made over a particular period.

How Do DAOs Work?

As stated previously, DAOs are internet organizations that operate entirely under the concept of decentralization. Thus, they work as decentralized and community-led entities operated without any central authority.

DAOs work with a particular set of rules that are laid by smart contracts. Therefore, it is correct to say that DAOs work with the use of smart contracts. The rules that are enforced by smart contracts are stipulated and mandatory. They cannot be changed except when they are voted upon by the DAO’s core community members.

Smart contracts normally facilitate the functionalities of decentralized automated organizations by offering them a set of rules to work upon when making important decisions. DAOs, as their name implies, have proven to be extremely transparent and autonomous. This is due to their codes being visible to everyone since they are developed on open-source networks. They also have built-in treasuries that are open to all public audits.

Acquisition of DAO’s native tokens by the various users of the ecosystem plays an integral role in spiking the growth of the project. As stated earlier, the development of DAOs cannot be completed without developing smart contracts that have the core details of the project.

Nevertheless, getting funds to back up the project is also as expedient as the smart contracts creations. It enables the DAOs to raise funds to finance the project. Acquiring funds plays a major role in financing and establishing the early stage of DAO projects and assists in sustaining and growth of the projects in the long term.

Additionally, the act of acquiring funds from the token holders enables a DAO to determine its governance. In that context, the users who acquire the DAO native tokens are entitled to voting rights on the project.

However, tokens held by users are used to quantify the extent to which they can vote over proposals. This indicates that the more a user gets the native token of the DAO, the more they become privileged to vote.

What Makes DAOs Unique?

DAOs work in full efficiency with a democratic model of governance. They can be used for various financial activities without having to involve third-party intermediaries or any central body. Some of the financial operations include charity, borrowing, fundraising, investment, buying NFTs, and much more.

DAOs offer a great avenue for developers from various parts of the world to cooperate and organize without any form of familiarity. They come together over the internet and set up their rules and regulations while democratizing their decision-making process.

These stipulated rules of a decentralized autonomous organization (DAO) and all of its financial transactions are recorded on an open-source blockchain. That is because DAOs are entirely transparent and public. Therefore, any types of adjustments made to the rules become noticeable to everyone, posing investors and users with lesser risks.

Examples Of DAOs

A great example of a top-rated DAO is Dash (DASH). Dash is a payments-focused digital asset that deploys a governance model that expressly lets stakeholders vote on its treasury management.

Other examples of decentralized autonomous organizations include Curve DAO (CRV), Compound (COMP), SushiSwap (SUSHI), Uniswap (UNI), Maker (MKR), Synthetix (SYN), Aave (AAVE), and many others.

DAO’s Advantages

DAOs offer many advantages to users considering their exclusive operations and functionalities coupled with the mode of operation. Some of the benefits that come with using DAOs include:

• Democratized system of governance guarantees that the interest of all stakeholders is considered when adjusting the protocol. That way, all the token holders can contribute to the development of the DAO;
• Possessing an automated, decentralized, and fully transparent nature that enables users to gain total ownership of maintaining their system;
• A reward mechanism that enables the DAO token holders to earn a real portion of the Transaction volumes on the exchange.

DAO’s Shortcomings

One of the major downsides associated with DAOs is that they are facing legal and regulatory criticism since they do not have any regulatory clarity structure due to the structure these DAOs possess. In that context, investors might face risks of the uncertain nature and outcome of their investment.

Moreover, DAOs are prone to cyber-attacks since the set of rules governing the protocol is established through smart contracts. In the cases where these smart contracts become hacked or malfunction, security becomes changed and may result in a huge loss of money.

The Takeaway

Decentralized autonomous organizations with the model they adopt normally facilitate and boost the system of decentralized finance. Due to that, they are making the decentralized finance industry more attractive to the public as a way of pushing DeFi to reach mainstream adoption.

As DAOs continue advancing and most of the vulnerabilities get fixed, it is clear that a growing number of enthusiasts will start to dive into the sector with institutions also venturing into DAOs.