What is DAO?
A Decentralized Autonomous Organization (DAO) is a decentralized system, built on blockchain technology, where a group of people can collaborate, make decisions and manage a decentralized organization through smart contracts, without the need for intermediaries or centralized decision-making entities. The rules and decision-making processes are encoded in the form of smart contracts and are executed automatically, reducing the risk of human error and fraud. The rules of a DAO are transparent, auditable and cannot be altered without the agreement of the majority of its members.
The decentralization of a DAO usually means that it is democratized rather than hierarchical. For example, all changes to be implemented are voted on by all participants, rather than by a single group of decision-makers. All votes are automatically tallied and executed by the software, rather than relying on human intervention. This eliminates the possibility of vote counts being mismanaged or manipulated, resulting in transparency and full visibility.
By removing the need to trust other participants in the DAO, this means that it can consist of many people who don’t know each other and would otherwise be unable to coordinate their common goals. In other words, you can transcend any physical boundaries and be sure that all parties are working for the good of the project itself.
How to create a DAO?
Many projects in the crypto space have a DAO behind them, as this is usually one of the best ways to keep the governance of the project fair, transparent, and accessible to all who wish to participate. However, like any organization, a DAO needs to be set up and funded before it can reach the wider audience it is intended to reach. Here are the three key stages in creating a DAO:
- The first step is always to figure out what the smart contract underlying the DAO needs to do – and then create it. These rulesets are often very large and cover a myriad of things; forgetting to set something up in the first phase of development means that it can be changed later by voting alone, which can be a long and tedious process, especially if the forgotten rule is important to the health of the network itself. This code also needs to be tested and retested to make sure nothing slips through the cracks.
- The next phase is to secure funding for the launch of the DAO, but also for its ongoing operation. This is often done through token sales, which also handle the governance side of the process-in most cases, the amount of tokens you own correlates to your voting power within the organization. This is not unlike a shareholder type of relationship, which is why DAOs translate so well into the decentralized finance (DeFi) world.
- Finally, the DAO itself must be launched. Once it is launched on the blockchain, there are no changes that the founding team can make without the input of the other participants or token holders. This is when all the rules go into effect, including the governance of the DAO. In other words, this is when the DAO is truly created.
After that, the DAO runs as predicted, and any changes are voted on by the entire network.
Potential drawbacks of DAOs
While DAOs are intended to be an improvement on existing hierarchical structures, they are far from perfect. One of the most commonly cited problems is that many traditional financial institutions believe that the masses should not be trusted with important financial decisions.
In addition, DAOs are largely unregulated and tend to be spread across many jurisdictions, which makes resolving potential legal issues extremely complicated at best, or even impossible.
Finally, as the DAO example proved, once a DAO is up and running (in other words, deployed on the blockchain), changing even life-threatening bugs in the code can be a slow and costly process, giving bad actors plenty of time to act. Even the most trivial bug, which would otherwise be fixed in a matter of hours, must go through the same voting process.
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