What is a DAO?
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What is a DAO?

If you've been following the world of blockchain technology, you've probably heard of something called DAO (Decentralized Autonomous Organization). Let's see how this technology works and why people use it.

The basics of how DAOs work

A DAO is software code, so to create a DAO, you need to write that software. The rules and policies of the organization are encoded in this software. At the time of writing, DAOs use the Ethereum blockchain. Ethereum is designed to do more than create cryptocurrencies and facilitate transactions. In fact, a core feature of Ethereum is smart contracts.

For our purposes here, all you need to know is that a smart contract, once activated, enforces the rules written in it and ensures that all entities that are parties to the contract adhere to the rules.

So the idea is to write your DAO like a smart contract, removing the need for centralized authority when managing people, money, and other organizational resources.

To be a member of the DAO, you must hold a token that represents your stake in the organization. These tokens allow DAO members to vote on decisions. The smart contract tallies the votes and then approves things like salary payments, capital expenditures, investments, and other similar actions.

Tokens are also a primary way for DAOs to receive their initial funding. Members invest in the DAO and obtain the token as a representation of their stake and voting rights. The initial funding phase is essentially the same as an ICO (Initial Coin Offering). This phase occurs before the deployment of the DAO, but after the writing of the smart contract.

Imagine a company where all employees own equal shares, there is no CEO, and a computer program announces what will happen after considering the opinions of each employee. It's a DAO, except the computer is a blockchain-based virtual machine that runs on the distributed computing power of crypto miners.

The advantages of a DAO

Business people raise their hands to ask questions during a conference.

DAOs have a few supposed benefits, although this is a new organizational model, only time will tell if these benefits materialize in any meaningful way.

The first is that DAOs are transparent. A DAO's smart contract code can be publicly audited. It is not possible to commit the types of fraud that are all too common in traditional businesses. Once the smart contract is activated, it cannot be changed. The changes must be added as a new smart contract, then members vote to have the funds transferred from the old DAO contract to the new one.

Additionally, the creators of a DAO have no more power than any other stakeholder once the smart contract is activated. Central authority is anathema to DAOs, and the design of DAOs effectively gives it a "flat" organizational design. There is no need to trust other humans if you trust the code, which you can browse before investing. There is no way the organization can work against the interests of stakeholders, as sometimes happens when a CEO goes his own way.

Another advantage of DAOs is that they reduce the cost of running an organization such as an investment firm. There is no need for most of the administration and management departments that traditional organizations have; the code takes care of these tasks automatically.

Any member of a DAO can submit a proposal, whether it's a new project idea, a proposed investment, or anything else. The whole group then reviews the proposal and votes on whether the organization should pursue it and make funds and resources available.

DAOs tap into the phenomenon known as the “wisdom of crowds,” which is the uncanny tendency of decision-making groups to make better decisions than individuals. Of course, sometimes the crowd can be less savvy than an individual!

Disadvantages of DAOs

A hooded hacker figure drawing bitcoin symbols with his hand.

Although DAOs sound wonderful in principle, there are still many challenges to overcome before they are widely feasible.

A major issue is security. Since the smart contract code is publicly visible, it is easier for hackers to find exploits or discover vulnerabilities. DAOs are tested before they are deployed, but bugs and errors occur in all programs in one form or another.

Since all stakeholders must vote to accept any code amendment, including bug fixes, it can take a long time to close security holes. The result can be devastating. One of the most infamous attacks happened to a (rather confusingly) named DAO The DAO. Hackers exploited a weakness in the DAO code and drained millions of dollars in Ethereum from it.

Flat-structured organizations are also not suitable for all types of businesses. This can work well for a collective of freelancers, group investors, charities, and creative organizations such as film production companies. It's hard to see anything like Apple, though, with a strong focus on decisive leadership, working as DAO.

The last major drawback of DAOs is that their legal recognition is limited or non-existent. They are legally recognized in the state of Wyoming, for example, but in most of the United States and the world they have no legal status. DAOs can even be seen as illegal securities transactions, circumventing the financial controls in place that govern public companies.

The future of DAOs

Whether the blockchain-powered version of a DAO we've seen so far represents the future of the concept is an open question. The larger idea of ​​having an organization run by transparent software and fairly owned by its members, however, is likely to remain compelling. With the rise of virtual organizations that exist only as a network of contributing individuals, there is room for a centralized version of the idea of ​​taking root or a version that uses a different type of decentralization. not based on blockchain concepts.

In the long term, automation is unlikely to go unnoticed, and organizational governance and management is unlikely to be any different.

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