Are Codes Taking Over Human Jobs? DAOs Explained.
The worlds of investment, business, and creative industries are all being shaken up by a new type of organization. These organizations, lack a corporate headquarters, replace traditional hierarchies with flat management structures, are governed by crypto holders, and are built on blockchain rules that are automatically enforced. These new organizational structures are known as a DAOs.
A decentralized autonomous organization (DAO), is a business structure in which control is distributed rather than hierarchical.
Participants use governance tokens to vote on topics like fund allocation. DAOs are organized using smart contracts.
A decentralized autonomous corporation (DAO) is another name for a DAO (DAC).
See also: Decentralized Finance (DeFi) vs Centralized Finance (CeFi).
Why DAOs Are Becoming So Popular?
Decentralization is the buzzword of the century, and we are living in it.
Everyone wants the government to have less control over the systems and structures that affect them. Or, even better, more people want to be a part of the decision-making process when it comes to issues that affect them. This is the whole point of decentralization: less control, more grassroots participation, and, inevitably, lower entry barriers.
And this new decentralization culture is beginning to permeate all aspects of human life. Then there’s finance, and then there’s how businesses are run.
How DAOs Work.
Consider a self-driving car, then imagine it in the context of an organization; this is how DAOs operate. Participants in DAOs use smart contracts and governance tokens to reach a consensus on how the organization’s resources are allocated.
DAOs are designed to execute specific rules that will guide the company or organization from the start. According to Wikipedia, a DAO (Decentralized Autonomous Organization) is an organization whose rules are encoded in a transparent computer program and is controlled by its members rather than influenced by a central government. No managers are required because the rules are embedded in the code, removing any bureaucracy or hierarchy barriers.
DAOs are built on Ethereum smart contracts, which can be programmed to perform specific tasks only if certain criteria are met. These smart contracts are programmed to perform common business tasks automatically, such as only disbursing funds or hiring talent.
DAOs are seen by many as a way to guarantee democracy more firmly. Stakeholders can vote on issues such as adding new rules, changing existing rules, removing a member, etc. Once a DAO is created, it cannot be altered unless a certain number of people vote in favor of it. Because it has programmed rules, operates autonomously, and is coordinated through a consensual protocol, Bitcoin is widely regarded as the first fully functional DAO.
Why Run a Business On a Code?
Advocates argue that one of the inherent benefits of DAOs is that they allow for the creation of more equitable organizations than those run by humans.
In today’s business world, most companies have leaders who occasionally make unilateral decisions that affect the entire organization. This type of decision-making would be impossible with a DAO because stakeholders (i.e., company investors) would have more direct control over how the company should operate.
A unilateral decision occurs when only one of the groups, organizations, or countries involved in a given situation makes a unilateral decision or action without the consent of the others.
What Makes DAOs Appealing?
The following are some of the characteristics of a DAO:
1. No hierarchical management: Hierarchical management is not always present. Stakeholders, rather than leaders or managers, usually make decisions.
2. Transparent: Because the code is open-source, anyone can examine it. Anyone can look back in time on the blockchain to see how decisions were made.
3. Open access: Anyone with an internet connection can buy or hold DAO tokens, giving them voting power in the DAO.
4. Democratic changes: By voting on new proposals, investors can change the rules of a DAO.
5. Recruiting: Because it acts as a manager, a DAO could theoretically hire outside talent, as there are still some tasks that only humans can perform. For example, based on sensors reporting damage to the DAO, the driverless car in the DAO described above could automatically hire a repairman.
The First Real-World DAO
Yes. The most well-known attempt to form such an organization was called “The DAO.”
The DAO, which was launched in 2016, failed after only a few months, but it remains the most prominent example of what people think of when they hear about blockchain technology.
Slock.it, a German startup, launched “The DAO” in support of their decentralized version of Airbnb in May 2016. It was a huge success at the time, with a crowdfunding campaign raising over $150 million in Ethereum.
Unfortunately, the DAO code they used had a number of flaws. As a result, in June 2016, hackers were able to steal $50 million worth of Ethereum from the DAO before it was shut down. Despite the fact that the flaw was in the slock.it code rather than the underlying technology, the hack shook some people’s faith in the Ethereum coin and DAOs.
It’s simple to see how “unstoppable code” could be a security risk.
With The DAO, this was a problem. It turned out that there was a bug that allowed an exploiter to steal the organization’s funds. Observers watched as the attacker slowly drained the funds from The DAO, but they were powerless to stop it. The hacker was technically following the rules as they were implemented.
Ethereum’s lead builders reversed the transaction history to return funds to their rightful owners, causing a schism in the community. It’s still up for debate what the best course of action would be in a similar situation in the future.
What are some of the drawbacks of DAOs?
Unstoppable code, as demonstrated by The DAO, can be a problem. Changing its rules is difficult once the DAO is deployed. The same framework that prevents a person from changing the organization without community approval can also cause issues, the most significant of which is that any gaps in the framework are difficult to close. This could result in theft, financial loss, or other negative consequences.
Common examples of governance tokens for various DAOs include;
COMP, the Compound money market protocol’s governance token, is currently the largest governance token by market cap. Holders of the token can vote on major changes to Compound. COMP can also be delegated for voting purposes to others.
Synthetix’s native asset SNX is also another example; a decentralized Ethereum-based synthetic asset that can track real-world assets such as currencies, commodities, and more.
MKR, the governance token of MakerDAO, the popular DeFi borrowing and stablecoin project, is yet another example. Finally, another example of a governance token is LEND, Aave’s collateral and governance token.
