What is a DAO?
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Imagine an autonomous transportation company. Let’s call it Smartlyft. A group of developers and investors has created Smartlyft, and unlike centralized transportation companies like Uber, Smartlyft is governed by codes. There are no people involved once the codes are released. The developers set up a series of smart contracts on an open blockchain. The smart contracts will be responsible for driving the cars and collecting payments from people who board these self-driving cars. The smart contracts will also be responsible for detecting and fixing any malfunction in the cars. The smart contract will use the payments collected to fix the cars, buy spare parts, and do general maintenance and at the end of each quarter, the smart contract will distribute profits realized to all company members. This illustration is similar to the concept of DAOs. We’ll talk about what a DAO is, how it works, and some of its pros and cons. Let’s get started!
What is a DAO?
A DAO is short for Decentralized Autonomous Organization. Put simply, a DAO is an internet-native organization that has no central leadership. Instead, It is owned and governed by its members. A DAO is fully autonomous, which means it runs on a smart contract that automatically executes without human intervention. It is also decentralized, which means that there’s no central authority that makes decisions on behalf of members. Instead, decisions are governed by proposals and are made by every member of the DAO.
How do DOAs work?
DAOs are run by smart contracts agreed upon by its members. A smart contract is a piece of self-executing code deployed on the blockchain. It automatically executes when a set of criteria are met. The smart contract defines a DAO’s regulations and holds the DAO’s treasury. Anyone can view the smart contract of a DAO because DAOs are built on open-source blockchains. Once the contract is deployed on the blockchain, no one can change the rules except by a vote. And if anyone tries to do something that is not encoded in the smart contract, it will fail. Also, it is impossible to start editing the contract without other members noticing because everything is transparent. In addition, because the smart contract holds the treasury of a DAO, funds can’t be spent without members’ approval. And since this smart contract is built on the blockchain, anyone can also audit the treasury of a DAO.
How DAOs are set up
Smart Contract Creation
Using our illustration of Smartlyft, let’s expand on how a DAO is set up. A developer or group of developers must first create the smart contract behind the autonomous transport company. They must carefully examine and double-check every part of the contract for bugs. Because after launch, everything will be out of their hands, they can only change the rules set by the contracts through a governance system.
Next, the developers need to determine a way to be funded. Most times, tokens of the DAO are sold to investors and members to raise funds. Now let’s say the token of Smartlyft is called $LYFT. $LYFT will be sold to investors, and every holder will be a stakeholder and would have voting rights in the company.
Finally, Smartlyft is deployed on the blockchain. From the moment of the deployment, the future of Smartlyft will be decided by every stakeholder. The developers who created the smart contract can no longer influence the future of Smartlyft.
Advantages of DAOs
Now let’s consider some advantages DAOS may have over centralized companies.
The biggest advantage of DAOs is that they are trustless. Shareholders do not need to trust other shareholders. They only need to trust in the smart contract. Trusting the code is easier because it is transparent and cannot be changed by anyone without a voting system.
DAOs can’t be shut down
The government can shut down a centralized company. But a DAO cannot be shut down. The only way to effect any change is if the government acquires a large amount of the tokens, proposes a change, and then goes through the voting process. Just like everybody else.
DAOs are open-source
The smart contract of a DAO is out there on the blockchain for anyone to see. This ensures that anyone can look at it, detect some bugs, if there are any, and even propose ways to fix them.
No hierarchical structure
DAOs have no CEO, CFO, or CMO common in a centralized system. Any stakeholder can propose an innovative idea that the rest of the members will consider and vote upon.
Disadvantages of DAOs
Even though DAOs have lots of advantages, there are cons too.
No business secrets
The first disadvantage is that there are no business secrets. Everything is out in the open for everyone and competitors to see.
The other downside is the smart contract is open-source. Although this ensures transparency, it also means that DAOs are vulnerable to attacks.
In conclusion, DAOs are internet-native organizations run by smart contracts and do not need human input. They are trustless and open-source. DAOs are extremely new and revolutionary technology.