What is DAO?
The abbreviation “DAO” means Decentralized Autonomous Organization. DAO is a specific form of organization in which the coordination of activities between participants is carried out without centralized control, but using automatic algorithms. In the crypto industry, DAO is usually based on smart contracts, so the real infrastructure for DAO appeared thanks to Ethereum. Today, when Ethereum has many alternatives, it is possible to build a DAO on any blockchain that supports smart contracts. Examples include Pokadot, Solana, Cardano.
The idea of DAO is much more radical than the idea of cryptocurrencies — here we are talking not only about the decentralized issue of money, but also about a decentralized management system. Smart contracts technology has the potential to eliminate the need for banks, courts, and credit institutions.
DAO can mean both a type of organizational structure and organization with a similar name, launched in April 2016. It was a venture capital crowdfunding platform powered by Ethereum smart contracts. In June 2016, a vulnerability was found in open source code posted on GitHub and hackers managed to steal about 3.6 million ETH, which at that time was about $50 million. Subsequently, this led to the fact that in 2016 the project tokens were removed from circulation on the Poloniex and Kraken exchanges.
DAO is a governing body, not the whole project
There is a vulgar understanding of the DAO, when a decentralized autonomous organization refers to the entire project that is managed with the help of a DAO, therefore, Dash cryptocurrency, the Steemit blockchain media platform, the Decentraland metaverse, decentralized crypto exchanges (DEX) are often mistakenly attributed there. However, it is more correct to understand DAO as a decentralized governance infrastructure.
For example, it would be wrong to call decentralized crypto exchange Uniswap DAO, but its decentralized governing body https://gov.uniswap.org/ IS a DAO. Similarly, Decentraland itself is not a DAO, but its decentralized governance infrastructure https://dao.decentraland.org/en/ IS a DAO.
Since the DAO model does not assume a centralized hierarchy, it relies on alternative approaches such as token-based membership. Typically, these governance tokens can be freely bought and sold on decentralized exchanges or earned by providing liquidity or computing power for mining or staking. In any case, by owning governance tokens, you get access to voting, which determines the organization’s development strategy.
Pros and cons
In theory, the DAO idea has many strengths. Management automation allows you to get rid of a huge staff of managers, lawyers and bureaucrats, to minimize the human factor, corruption and abuse of power.
In practice, the complete rejection of centralization, despite the technical feasibility, is still a rather utopian idea.
For example, you can have a fully decentralized online store that will sell digital products like games, art, music. DAO is also well suited for crowdfunding platforms, freelance exchanges, philanthropy and venture capital funding. However, such things as logistics, author authentication, even the proper motivation of DAO participants are still difficult to implement on a fully decentralized basis. Most DAOs remain in the niche of fintech, media platforms, games and metaverses, but do not enter the real sector. In addition, if a vulnerability is found in the original code, then it will be much more difficult to prevent theft than in a centralized organization.
Decentralized autonomous organizations now have great potential, but so far it is difficult for them to go beyond the digital space.
The DAO could become one of the key approaches to enable businesses to raise funds and resolve legal issues without the mediation of centralized institutions. This allows you to bypass both bureaucratic difficulties and create a reputation as a “people’s” enterprise. The question is, can such a model of organization exist outside of the digital space? We’ll see in the near future.
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