What is a DAO and how do they work?

A Decentralized Autonomous Organization (DAO) is a community-led entity with no central authority. It is not controlled by a single institution like a government or central bank, but instead are divided among a variety of computers, networks, and nodes.

A comparison between DAO and a traditional organization:

DAO

  • Usually automatic and decentralized

A Traditional Organization

  • Usually a typical management structure or board of directors

How do they work?

Rules are voted upon by the community and written into the DAO’s smart contracts. These rules can be changed through subsequent voting, making DAOs highly adaptable. They are also transparent and open, no one can change the rules of a DAO without the community’s consent.

There are various ways to participate in a DAO, usually through the ownership of a token. You can buy DAO tokens to participate in voting on proposals, other governance activities or access exclusive utilities.

DAO tokens can also be used to incentivize certain behaviors, by completing some tasks beneficial to the DAO. These tokens can then be used to vote on proposals or access exclusive benefits.

Pros and Cons of a DAO

PRONS

  • Decentralization, planning and decision making, are distributed or delegated away from a central, authoritative location or group

CONS

  • Reduce the speed of decision making, if every decision needs to be voted on by the majority of stakeholders, the extra coordination can be a challenge

What is an example of a DAO?

There are few examples of the established DAOs in crypto as follows:

MakerDAO

MakerDAO is a decentralized organization built on Ethereum to allow lending and borrowing of cryptocurrencies without the need for a middle man. DAI and MKR are currencies to regulate the value of loans.

Uniswap

Uniswap is an automated ethereum-based crypto exchange with its own governance token, UNI.

Aave

One of a number of emerging DeFi cryptocurrencies, Aave is a decentralized lending system that allows users to lend, borrow and earn interest on crypto assets, all without middlemen.

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