Blockchain has led to the creation of a new type of organization known as DAO. These organizations are collectively operated and owned by their members. Even without knowing each other or having met personally, these members run the organization.
What is a DAO
DAO is the acronym for Decentralized Autonomous Organization. It is a new type of organization where the members own and operate it.
How is a DAO different from a traditional organization?
DAOs are managed by smart contracts.
Think of it as an organization whose operating manual is written in codes instead of a word document.
DAOs are transparent.
The records are stored in a blockchain. All the information are publicly available. Governance structures are auditable by anyone. Anyone can check the financials as well as the decisions taken.
DAOs are open and global.
Anyone can contribute to DAOs. To join a DAO you don’t need a fancy degree or access to a good network. You just need to have the required knowledge and can deliver the work.
DAOs are democratic.
The organization structure of the traditional organization is usually hierarchical. However, DAOs are usually flat and democratic. Unlike traditional organisations, there is no central authority to take decisions. Decisions in DAOs are taken collectively by voting on proposals.
For example, a member can propose a certain improvement in the product. The member charges a certain price. Other members can vote on the proposal whether they want the change to be implemented or not.
Voting is required from the members to implement any changes in a DAO. The outcome of the voting is implemented automatically. In traditional organizations, the decision is taken by the top management. rarely other junior members are a part of the decision.
However, in DAOs, governance is done by almost all the members instead of a few from the top management. DAOs are more democratic than traditional organizations.
DAOs create an incentive for their members to contribute without any formal title. These incentives help members work towards a common goal and keep the network safe.
How do DAOs work?
The smart contract forms the foundation of DAO. Smart contacts are a set of codes. Whenever the conditions mentioned in the code are fulfilled, the code automatically executes. This eliminates any need for a central intermediary.
Any action not covered in the smart contract will not go through. The rules of the contract can only be changed by group voting.
The group makes decisions collectively. When voting is done the action is executed automatically.
How to participate in voting?
DAO Membership determines how voting works. There are many ways to participate in voting.
Usually, participation is through the ownership of the native token of the DAO. Participation may not always be open to everyone. Restrictions such as minimum ownership of tokens are put in place. It is restricted to owners to prevent spamming.
Prospective members submit a proposal to join the DAO. The other members assess whether a prospective member has the necessary expertise. One cannot simply buy the tokens and become a member of such DAOs.
Vulnerability of DAOs
There are a few challenges faced by DAOs. Any changes in the DAOs needs the approval of the majority of members. If there is a bug in the code then it leaves the DAO vulnerable till the members approve and the code is fixed.
Example: A DAO named “The DAO” was hacked and 3.6 million Eth were stolen.
Few other challenges of DAOs
- DAOs can have a steep learning curve for beginners. DAOs can be overwhelming for newbies to understand.
- Attracting members to the community is a challenge and retaining them is even a bigger problem.
DAOs are still evolving. Strangers now work with each other without even knowing their names. They manage billions and cater to millions of users. With rapid innovations in the DAO space, traditional organizations can also try blockchain-based governance.