In this Article:1. What is a DAO?2. Why do we need DAOs and How do they work?3. What are the Core Constituents of a DAO?4. What are the different models for DAO Membership?5. What are the Advantages of DAOs?6. What are the Challenges faced by DAOs?7. Conclusion
In today’s technology-driven world, blockchain technology has emerged as the go-to tool. Blockchain has many applications and thus it has carved a special place for itself across a wide range of industries, including healthcare, retail, social media, etc. Blockchain has introduced Decentralized Autonomous organizations (DAOs), which had significantly reduced the need for centralized coordination and manual intervention. DAOs are like an interest-native businesses that are collectively owned by their members and bring about high transparency, full automation, and cost savings.
What is a DAO?
A Decentralized Autonomous Organization is an entity that as the name suggests functions without any centralized authority. These organizations are backed by blockchain technology. The control of DAO does not lie with a single person but rather among all its participants, who use governance tokens to vote on various rules or changes in the organization. The whole organization is automated, and it stores rules and processes in code. These codes are protected by self-executing smart contracts. Once a rule is published through smart contracts, these are impossible to change except by vote. DAOs acts as an open-source entity, where all the activities and transactions can be viewed by any DAO participant sitting in any corner of the world. DAO is becoming widely popular all around the world for promoting digital democracy and creating unique funding opportunities. For example, PleasrDAO is an organization that has a portfolio of multimillion-dollar assets, and it recently bought the original “Doge” meme Non-Fungible Token (NFT) for a whooping sum of $4 million. Many experts and members of the crypto community are predicting that DAOs will be the next big trend among the mainstream investors with many more entities from all types of sectors deciding to shift to a decentralized way of managing their businesses.
Why do we need DAOs and How do they work?
It is not easy to start an organization with someone, involving big fundings and large sums of money. Association with other people in activities involving money demands too much trust in the people you are working with. While it is difficult to trust someone with whom you have only interacted through the internet, DAOs make sure that you only need to place your trust on its Code and not on anyone else in the organization. DAO codes are 100% straightforward, transparent, and can be easily verified by anyone.
DAO makes use of computer codes to store information and rules. These codes are designed in such a way that computers can take over much of the decision-making and operations by themselves. However, the final control and decision lie with the members of the DAO. These members enjoy voting power, just like in any other corporation, to dictate the general direction of the organization and accept or decline new initiatives. The primary objective of DAO is to bring the benefits of blockchain technology to management. As DAO is controlled by members from different parts of the world, it is not much influenced by the central government of a country.
What are the Core Constituents of a DAO?
Though the mechanism of a specific DAO may vary across different blockchain projects, there are 3 key stages that any DAO is required to undergo to be launched properly. These 3 core constituents of any DAO are:
- Smart Contract Integration: While setting up a DAO, it becomes necessary to clearly define and encode a DAO’s rules and regulations through a series of smart contracts. The establishment of a sustainable and flexible DAO requires carefully setting the smart tokens.
- Token Creation: Due consideration needs to be given to the development of native tokens for the DAO. These tokens are used in voting and are also used to incentivize a particular activity within the DAO.
- DAO Deployment: The deployment of a DAO demands enough funding and if this term is fulfilled, then all the proposed decisions are taken by the members through a consensus vote. All the token holders become the stakeholder of the DAO and thus they gain the right to put forward proposals concerning the future of the DAO.
What are the different models for DAO Membership?
Broadly there are 2 different models for DAO membership. These are as follows:
- Token-based membership: Usually DAO membership is entirely permissionless and is dependent on the token utilized by the participants. These tokens can be exchanged in a decentralized trade and can also be procured through liquidity or other evidence of work. Under this membership model, simply holding the token grants the member access to voting. This model is typically used to govern broad decentralized protocols or tokens themselves.
- Share-based membership: Under this model, the DAOs are more permissions as compared to token-based membership, but still, they are quite open. Potential members can join a DAO by submitting a proposal and by offering some value in the form of tokens or work. In share-based membership, shares represent direct voting power and ownership. Members are free to exit at any time from these DAO with their proportionate share of the treasury. This model of membership is quite useful and common for closer-knit, human-centric organizations like charities, investment clubs, etc.
What are the Advantages of DAOs?
Users all around the globe are recognizing the potential benefits of DAOs. DAOs offers multiple benefits to their users such as:
- High-level of Transparency: DAOs are recognized as a completely transparent organization, where all activities like voting, funding, etc. can be viewed by each and every participant. Each activity on DAO is automatically recorded on a secure blockchain with full protection.
- Fair Access & Inclusion: In DAOs, all participants or members have an equal say and chance in participating in the activities of the organization. All the stakeholders can submit their proposals and vote on the changes proposed by others, irrespective of their position in the company. DAO demonstrates how a digital democracy looks like.
- Full Automation: The activities and processes taking place within DAOs are fully automated with the help of smart contracts, which define the rules of a DAO. There is no requirement for a third party to complete a procedure within a DAO.
What are the Challenges faced by DAOs?
Nothing in this world is free of limitations, and thus DAOs also suffer from the following drawbacks:
- Delays in Decision-making: As there is no central authority in a DAO, this may lead to delay in decision-making within the organization. Many times, the token holders also take undue advantage by delaying the process of decision-making. These delays can impede the work progress of the organization.
- Legal Hurdles: Presently, no clear legal status is given to a DAO. Also, the legality to which these organizations are subject varies from jurisdiction to jurisdiction.
- Complex Codes and bug fixing: The codes used by a DAO may be too complex, which further makes it difficult to fix any kind of bugs occurring in these codes. This is next to impossible to alter or fix these codes after they have been uploaded. In the event of any bug in the codes, the entire code has to be rewritten from scratch, which is a cumbersome process.
DAOs are an exciting idea, and it has the potential to revolutionize the way we see the traditional organization. The core principle of DAO has sparked interest among plenty of industries and has proven to be the driving force behind real innovation and enhanced efficiency. It is believed that in the coming years, DAO is supposed to play a significant role in our future society in bringing about fairer and more transparent management.