DAO — A Complete Guide to Beginners

On this Article:

  • What is a DAO?
  • How do DAOs govern?
  • All about DAOs
  • A comparison to understand DAOs
  • A comparison to understand DAOs
  • DAOs can be complicated an vary.
  • How does a DAO work?
  • Pros and Cons of DAO
  • Top 5 DAOs
  • 1. Gitcoin
  • 2. Aragon
  • 3. Digix
  • 4. MolochDAO
  • 5. Abird
  • Are DAOs really decentralized?

What is a DAO?

How do DAOs govern?

A decentralized autonomous organization uses blockchain to facilitate the self-application of rules or protocols. Of course, blockchain smart contracts store these rules, while network tokens encourage users to secure the network and vote on the rules.

  • In addition, developers define the tokenomics of governance — as monetization so that there is a proper balance between rewards and punishment for malicious behavior.
  • Developers launch blockchain-powered DAO , preferably having the same token shares as the rest of the interested parties. That way there is no power imbalance. However, most developers release their stakes over time.

All about DAOs

The first DAO was created in 2016, called “The DAO”, running on the blockchain Ethereum. Unfortunately, during this early stage of development, DAO had an exploit that hackers … exploited. This resulted in the Ethereum bifurcation due to $150 million in ETH locked in the DAO pools allocated for Ethereum development.

A Comparison to Understand DAOs

Bitcoin

Represents the most basic DAO precepts. Fundamentally, blockchain is a peer-to-peer (P2P) network that allows users open access to execute transactions, validate them and add new blocks. In other words, Bitcoin is an autonomous and decentralized organization of nodes. However, it is not a decentralized autonomous organization because Bitcoin lacks the complex governance rules that are characteristic of DAOs .

Ethereum

It represents 2nd generation blockchains because it offers smart contract capability. Smart contracts are necessary ingredients for DAOs to be possible. However, Ethereum itself is not a DAO, but a framework for developing DAO projects. For example, just like Unreal Engine 4, it is not a game, but a framework for creating video games.

Uniswap

It is the first DeFi protocol to have pioneered Automated Market Makers (AMMs), which made it the most popular decentralized exchange (DEX). Currently, Uniswap holds $6.8 billion of TVL (total blocked amount) in liquidity pools by liquidity providers (yield producers). In addition, the network has its own UNI governance token, which is used to vote on improvements and fund liquidity pools. As such, Uniswap is a complete DAO, but you need to own 1% of UNI’s total supply to propose new governance rules or adjust existing ones.

DAOs can be Complicated and Vary

When comparing Uniswap with MakerDAO, it’s clear that the rules make all the difference. As the Uniswap protocol instituted the requirement to own 1% of the UNI supply, it effectively prevented more than 90% of users from participating in directing the development of the network. On the other hand, MakerDAO’s foundation is about to dissolve in the coming months.

How does a DAO work?

Pros and Cons of DAO

A strong case could be argued that evenly distributed voting power is not positive. Just take a look at the Pareto Principle to understand why this is so. Economist Vilfredo Pareto noticed a recurring pattern in his studies of entire sectors of the economy.

Top 5 DAOs

Outside of the previously mentioned MakerDAO, which is the biggest and most popular DAO, here are some other noteworthy DAO candidates.

1. Gitcoin

2. Aragon

3. Digix

4. MolochDAO

5. Aave

Are DAOs really decentralized?

Decentralized autonomous organizations serve more as open-source access to non-trusting organizations, rather than being purely decentralized systems. After all, apart from voting in general elections, there aren’t many environments in which the equal distribution of votes is beneficial.

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