DAO: how a new form of business and project organization works (Part 1)
Together we continue to explore the world of crypto, Web3 and blockchain & its aspects. We will be your guide, your chaperone, into the heart of the future. Last week, we devoted our article to DeFi’s History, where we pointed out the most significant steps in its development. As you remember, we mentioned one important event in 2015, which was the creation and launch of one of the first DeFi projects on Ethereum — Maker DAO. Today we won’t be discussing Maker DAO’s history, since we’re more interested in understanding the DAO phenomenon in general. We will start with the definition of DAO and drive this theme to see how a new form of business and project organization works.
What is a DAO and how does it work?
DAO (short for “a decentralized autonomous organization”) is an organization where activities between participants are carried out by using automatic algorithms (most often these are smart contracts). Smart contracts establish the DAO’s rules.
The key feature of a DAO is that there is no hierarchy. All users have the same rights, so decisions on the organization’s development are made jointly by voting. To become a member of a particular DAO, you need to purchase governance tokens or NFTs. They can be freely bought and served on decentralized exchanges or NFT marketplaces, or even earned by providing liquidity or computing power for mining or staking.
In short, a DAO is a business management structure where participants act as business partners, making decisions together. However, the vote weight is determined by the number of tokens or NFTs, not users. For example, a DAO wants to implement a new rule that will be written into the smart contract, but without the vote of the participants who ultimately decide whether the new rule will help the development of the structure, the DAO cannot advance it on its own.
DAOs can be applied in many areas, including public administration, transport logistics, banking, automation, e-commerce and many others.
Pros and Cons
- Decentralization and transparency. A DAO does not require trust in intermediaries or protocol due to being open source.
- DAOs reduce the human factor to zero, getting rid of mediation, managers, lawyers, and bank employees.
- Autonomy. Once launched, the protocol works without intervention from governing bodies. Users perform transactions, and the smart contract monitors obligation fulfillment by all parties.
- DAOs are well suited for crowdfunding platforms, freelance exchanges, philanthropy and venture capital funding.
- A complete rejection of centralization at the moment seems to be a utopian idea, despite the technical feasibility,
- The proper motivation of DAO participants is still difficult to implement on a fully decentralized basis.
- Legal uncertainty hinders the use of the DAO. Lack of efficient KYC procedures to preserve the equality of DAO participants (avoid abuse of power) and anonymity due to the main crypto priority.
DAOs present a promising idea for a new organizational governance model, They could completely change the way corporate governance is conducted. Even now we can see successful DAO models: Uniswap, Decentraland, DASH, Maker DAO, Compound and some others. But as always, along with all the advantages, we can still note the most trigger factor — the lack of a legal framework. We hope that soon we will see an improved DAO model, perhaps it will merge with another model, thus forming a hybrid. Well, let’s wait and see.
In the meantime, living here and now, we’ll take a moment to remind you of another upcoming fascinating event, the release of the Hashbon Pass.
Hashbon Pass, or NFT Passport by Hashbon FiRe, is an NFT token and a decentralized protocol for reusable identity verification on blockchains such as Ethereum, BNB Chain, Polygon and other EVM-compatible networks. Our main mission is to facilitate a privacy-oriented KYC procedure. We’re helping businesses perform KYC procedures in a safe manner, the way it’s supposed to be done.