DAO – With the rise of Decentralized finance (DeFi), there has been more discussion of DAOs, a term that is commonly used in the crypto and blockchain space.
DAO supporters claim they are the next step toward a decentralized future, but what exactly is a DAO and how do they work? In this article, I will be giving a quick review of what the Decentralized Autonomous Organizations are and how they work.
What Is DAO?
A decentralized autonomous organization (DAO) is a blockchain-based software that provides users with a built-in model for collectively managing its code.
DAOs are not the same as traditional organizations governed by boards, committees, and executives. DAOs, rather than being governed by a small group, are governed by a set of rules written in code and enforced by a network of computers running a shared software.
Being a Decentralized organization, it is an entity with no central leadership. Decisions get made from the bottom-up, governed by a community organized around a specific set of rules enforced on a blockchain.
How Does DAO Work?
The DAO’s rules are established by a core team of community members using smart contracts. These smart contracts lay the groundwork for how the DAO will function. They are highly visible, verifiable, and publicly auditable, allowing any potential member to fully understand how the protocol will work at each stage.
Once these rules have been formally written onto the blockchain, the DAO must determine how to receive funding and how to bestow governance.
Typically, this is accomplished through token issuance, in which the protocol sells tokens to raise funds and replenish the DAO treasury.
Token holders receive voting rights in exchange for their fiat, which is usually proportional to their holdings. The DAO is ready for deployment once funding is completed.
Once the code has been pushed into production, it can no longer be changed without a consensus reached through member voting. That is, no special authority has the authority to change the DAO’s rules; it is entirely up to the community of token holders to decide.
Steps For Launching a DAO
A DAO is created and launched in three steps:
Creating the smart contract: The developers of the DAO code the smart contract(s) that will dictate the rules of the group and decide on the group’s purpose. This stage involves extensive testing of the code because it can only be changed through group voting once the DAO is launched.
Raising funds: DAOs run on their shared cache of currency, which has to be raised from its members. It’s here that people buy into the group if they support its mission, agreeing to purchase a certain amount of tokens in exchange for a stake. Governance rules can also be established in this phase.
Launch: The DAO’s code is deployed onto the blockchain. From here on out, it can only be changed via collective voting by the stakeholders. The original developers no longer retain control of the project.
Membership can influence how voting works and other important aspects of the DAO. There are various DAO membership models;
Depending on the token used, usually, this is completely permissionless. These governance tokens can typically be traded without permission on a decentralized exchange. Others must be earned by providing liquidity or some other form of ‘proof-of-work.’ In either case, simply holding the token allows you to vote.
Reputation is proof of participation in the DAO and grants voting power. Unlike token or share-based membership, reputation-based DAOs do not give contributors ownership.
DAO members must earn reputation through participation; it cannot be bought, transferred, or delegated.
On-chain voting is permissionless, and prospective members are free to submit proposals to join the DAO and request reputation and tokens as a reward for their contributions.
Share-based DAOs are more restricted but still fairly open. Any prospective member can submit a proposal to join the DAO, usually offering a token or work in exchange for membership. Shares represent ownership and direct voting power. Members can withdraw their proportionate share of the treasury at any time.
Top 5 DAOs To Look Out For
There are various other DAOs on the globe but the below list of DAOs should be taken very seriously;
DAOhaus: DAOhaus is a no-code platform for launching and running DAOs. It is owned and operated by the community. If you’re interested in starting your own DAO or exploring the vibrant landscape, look no further.
MakerDAO: If you would like to contribute to the protocol that introduced the world’s first unbiased stable coin, DAI, you can get involved in governance by voting on changes to the Maker protocol.
RaidGuild: This service-based DAO stemmed from the MetaCartel network and is deeply entrenched in the Web3 world. If you’re looking to offer up your developer, marketing, or design skills to the guild, they’re looking for quality talent to continue slaying product demons.
Conclusion On Decentralized Autonomous Organizations
DAOs are “a powerful alignment engine that collapses the categories of user or buyer, company or team and investor into a single aligned group that cares about a specific artifact or experience.”
DAOs, as internet-native organizations, have the potential to completely transform corporate governance. As the concept matures and the legal gray area in which they operate is clarified, an increasing number of organizations may adopt a DAO model to help govern some of their activities.