What are DAOs?
A DAO, or Decentralized Autonomous Organization, is a group of members who share a common goal or interest. The group has no leader or governing body; power is distributed across all the organization’s members. This governing structure is known as the bottom-up management approach. These DAOs operate based on a voting model, where members vote on different actions. DAOs first began as a result of cryptocurrencies themselves. The decentralized aspect of cryptocurrency inspired the creation of DAOs, more specifically The DAO. Lacking a governing body, these organizations are completely decentralized. This internet organization has many unique aspects. Let’s dive deeper into DAOs.
How do they work?
DAOs, as aforementioned, work based on a bottom-up management approach. To participate in a DAO, a user must own their tokens. Before going into participation, let’s describe how a DAO is actually built.
A DAO’s operations run based on smart contracts. Decisions are made through voting, and DAOs automate the voting process, automatically executing based on the result of the vote. To initiate a vote, members must make a proposal, which only reaches voting when the majority of stakeholders approve the proposal. The majority of stakeholders are unique to each DAO, as specified in the smart contracts that make up the DAO. In the voting process, members vote on whether to move forward with the proposal or reject it. Voting power in DAOs is based on the number of tokens held by each user. For example, a user who holds 1,000 tokens has 10x the voting power of a user who has only 100 tokens. This voting system also helps to ensure that voters act in good faith. A user who has many tokens invested in the DAO would have an interest in having the DAO do better, not worse; otherwise, they will also be penalized. These proposals can take a wide variety of forms: using money from the treasury, transferring tokens, altering the DAO system, etc.
Benefits of DAOs
- Decentralization: While other organizations have a leader or governing body, DAOs have no such system. They are decentralized, so members must vote on proposals. This distributes the power in the DAO across all the members, unlike in other systems.
- Publicity: In the voting process, the votes made by each member are displayed publicly. This has the effect of making voters vote for the best of the community; otherwise, actions that go against the community will harm the voter’s reputation. Thus, the community benefits from the publicity of voting.
Limitations of DAOs
- Inefficiency: In the creation of a DAO, there has to be a system to educate members, discuss goals and interests, gain more members, etc. Thus, with the number of tasks a DAO has to do, the focus of a DAO may be compromised, and change isn’t implemented.
- Security: DAOs are very complex and difficult to manage. This leaves the DAO open to security issues. There are many aspects of a DAO that are subject to potential issues, like voting, decision-making, etc. The DAO, for example, was hacked and this led to more than $50 million worth of ETH being stolen.
If you want to learn more, check out the links below:
Decentralized Autonomous Organization (DAO): Definition, Purpose, and Example
What is a decentralized autonomous organization, and how does a DAO work?
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