What is a DAO?
Among the major features of cryptocurrencies and tokens is their decentralized nature. Decentralization refers to the fact that cryptocurrencies and tokens are not controlled by one institution like a government, central bank, or even an organization, but instead are distributed among many computers and networks.
A Decentralized Autonomous Organization (DAO) is a virtual organization that runs on rules encoded in smart contracts that are transparent, controlled collectively by the organization members who are physically distributed and not influenced by central authorities. In that sense, a DAO is very different from a traditional organization which is typically governed by a small number of board members, executives, and closed committees.
“In a DAO, all decision-making processes, funding, and voting rights are managed through the use of smart contracts as well. Because all transactions are executed on the blockchain, DAO allows for transparency. Participating in a DAO is usually done by purchasing its governance token. Holding these Tokens allows users to vote for suggestions and updates to the DAO in proportion to the amount they hold.”
- One Member of the FantOHM DAO Discord Server
A DAO aligns and achieves common goals by incentivizing its participating members who ensure the smooth running of its day-to-day operations. Let us understand some of the key attributes of a DAO in detail.
DAO financial transactions and rules are recorded on a blockchain, eliminating the necessity for a third party in a financial transaction. Smart contracts can simplify transactions. DAO’s firmness is a smart contract.
As opposed to traditional organizations which raise capital by going public or borrowing, a DAO raises capital by crowdfunding through the purchase of its native token. In FantOHM, $FHM is the native token.
Members & Ownership
DAO’s investors are also its owners and operators. However, in traditional organizations, whoever owns the largest stake controls the organization and has the final say in decision-making.
In a traditional organization, there is often a hierarchical, top-down structure. This leaves a very narrow scope for two-way communication.
DAOs, in general, are very flat relative to traditional organizations. There are no CEOs calling the shots. They are replaced by a system that lets all members propose and vote on changes to the DAO. Again, smart contracts make this possible.
Contributing to the growth of DAO is easy owing to its nature as a decentralized entity. Anyone can contribute and participate in the operations of a DAO. DAOs typically encourage one-to-one communication through discord channels or any other means. Conversely, traditional organizations follow a strict hierarchical structure that is often tedious and demotivating.
In traditional organizations, employees are governed by legal contracts, but in a DAO, smart contracts are used instead.
Anyone who owns a DAO native token can participate in its functioning and has voting rights. This is not the case with traditional organizations.
DAO solves the principal-agent problem, where the agent’s interests don’t always align with those of the principal or the primary stakeholder.
DAOs, as a concept and even a technology, have the potential to transform how businesses operate.
In practice, not every DAO is decentralized or autonomous, so it is best to think of DAOs as internet-based organizations whose members collectively own and control them. Although it is still early in the evolution of DAOs, the concept is no longer a fantasy. These organizations manage billions of dollars in capital, provide products and services to millions of people, and provide new ways for people to earn income.