What is a Decentralized Autonomous Organization (DAO)?
A DAO stands for decentralized autonomous organization. To help us understand that concept let’s talk about vending machines. Yes, vending machines. As they currently work they would NOT be considered a DAO, but what would have to change for them to become one?
You probably know how a vending machine works. You give money to the machine and it gives you whatever snack you have selected. It’s a wonderful middleman for your food cravings.
This advanced technological box still needs humans to run it though. The humans have to pay the electric bill, check the supply locker for current levels, order more products to restock, then after the product arrives someone still has to physically restock the machine. The final step is for someone to collect the money and maybe replace some quarters.
So even though vending machines are made to reduce human intervention, it still very much requires human intervention to keep the system running. A DAO’s goal is to be completely autonomous and to run itself. How? Keep reading.
Definition
As we stated above a DAO is an acronym that stands for decentralized autonomous organization. It’s roughly an organization ruled by code agreed upon by the people who started the DAO.
Smart contracts can do just about anything if you’re smart enough to program them to do so. Curious what a smart contract is? Check out our article on that here. For example, instead of asking for a raise from your boss or trying to decide who to hire from a list of applicants, a smart contract will simply do these tasks based on predefined rules in the code, making the whole organization self-sustainable or autonomous.
Let’s go back to the vending machine example I used in the beginning. If a vending machine was a DAO, then every part of the process where a human was needed would simply be replaced with code, or at least a code version of humans: robots!
First, we would make sure that the vending machine could automatically check the supply locker for products that are low on stock. Then if some are below a predefined threshold we would make sure that it could send its server the information of what products needed to restock. Finally, when the stock arrived, a robot would restock the machine with a new product and also take the cash out to deposit to a bank somewhere. Our vending machine could then run in perpetuity with no human intervention. Basically, the system would run itself. In reality, this doesn’t seem possible, but it is essentially how a Dao works. But what if things needed to change or the DAO for the vending machine needed an upgrade? Is it possible? Yes, but before we talk about that let's talk about how non-DAO’s currently make decisions and “upgrades.”
Big companies like Apple, NetFlix, and Walmart have board meetings, and at these board meetings shareholders of the companies will meet together and they get to vote and make decisions for the company. And then the CEO of this company gets to make sure that the decisions are followed through, using the chain of command in that company.
In a DAO, there is no CEO. Instead, once a decision is made, the code of a platform is changed or updated so that the entire company immediately reflects the vote. Ok, ok, you are probably noticing that a human would have to make this change, so it isn’t without human intervention, because how could the code improve itself? We’ll talk about that more later.
Improvements and benefits
DAOs can continually improve and grow because their shareholders can submit and vote on changes to them. Usually, in the world of crypto, a DAO may launch with a few million tokens with every token equally one vote, which means whoever holds the most tokens can have the largest votes. This gives the tokens a price and it also gives them a use. It also allows the DAO to improve, make changes, and evolve, as the world evolves. The system isn’t perfect since it gives more voting power to the people who can afford to pay for it, but that is how currently how a typical DAO voting system works. Since the ideas behind DAO’s are constantly changing this may be updated in the future.
In a more complete DAO, this would also include hiring, voting on a salary, and then employing developers within the autonomous organization. It then typically pays them with cryptocurrency. In the case of a vending machine, the DAO system may vote that if that vending machine makes any profits, it would be redistributed to shareholders of its native DAO token according to the percentage they hold.
With such direct profit sharing potential, this is what makes holding a DAO token much more valuable than other typical crypto tokens.
In fact, this is exactly how KogeCoin works. KogeCoin is the governance token of KogeFarm. Holders can vote upon proposals submitted by KogeCoin holders. Several months ago a DAO participant voted that KogeFarm should reward the governance token holders (holders of KogeCoin) with the profit of KogeFarm. The vote passed and starting in May 2022, 50% of profits from KogeFarm will be distributed to KogeCoin holders in the form of USDC. Since KogeFarm is an example of a DAO (it’s not perfect, not everything is automated yet), there could be many new updates based on KogeCoin holders’ proposals and votes.
A DAO is trustless
So what are some of the benefits of a DAO? A DAO is trustless and this is perhaps the biggest benefit of a DAO. You do not need to trust any CEO, manager, or leader with their decision-making skills. The DAO system, or the whole organization, will continue no matter if a major developer stops working on the project, or even if the funding goes away because the smart contracts will still be in place and governance holders can propose and vote on what to do.
Alive forever
Another benefit is that they cannot be shut down. In the case of major corporations agencies like the CIA or FBI can step in and be like “We’re shutting you down!” or even, “give us all the information you have on this guy”, and if you’re in the United States, you’d be forced to comply.
In a DAO, the only way they could make this happen is if they had a very large amount of tokens and then submitted a proposal to be voted on, and then went through the voting process fairly. In other words, a government cannot skip the line.
Open-source
A DAO is open-source, which means that its code is out there for anyone to look at, and even improve upon. Open source projects are usually much more reliable simply because other programmers can help the main developers find bugs in their code and propose ways to fix them.
Attack vulnerability
Now even though there are a ton of benefits to a DAO, I’m gonna go over two downsides of them. The first downside is that they are vulnerable to attacks. Since anyone can look at the code, it also means attackers can look at it. If these attackers know intimately how the code works, they can take the time to test and refine an attack before deploying it.
No business secrets
The second downside is that there are no business secrets. Research and development is usually a process that corporations have spent a lot of money and time on without any significant return. They do this in hopes that one day it will pay off, and the payoff would be big because no other company has the advantage of the knowledge they have been refining through this process. In a DAO, though, business secrets are difficult to keep secret since the code is all open-source, and anyone can look at how the DAO is set up.
So far, we’ve been over a lot of the theoretical stuff of how a DAO should work. Here are some real-life examples of DAO’s and their official web pages: MakerDAO, Aragon, MetaCartel, Gitcoin, Dash, and The DAO.
Now, I’m going to go over the story of The DAO, which I think is something that you should know.
The DAO
Probably the most famous (perhaps infamous is a better term?) DAO is one called The DAO. It’s a venture capital fund created in 2016 that was well known for its failure. Around 20,000 investors pooled around 150 million dollars into this project. In short, the account of The DAO was hacked, and 60 million dollars worth of Ethereum was lost due to the attackers.
Now, this is actually why we have Ethereum and Ethereum Classic. Ethereum Classic is the original blockchain that still has the money hacked and the current Ethereum is the hard forked version. If you want to know more about this story, check it out here.
Conclusion
A perfectly structured DAO allows every investor to shape the organization. There’s no hierarchical structure, which means every innovative idea can be put forward by anyone and considered by the entire organization.
However, DAOs, just like pretty much everything else connected to cryptocurrencies, are extremely new and, to some extent, revolutionary technology. So do your research and don’t just jump in without thinking.
If you have any other questions about DAOs, please stop by the KogeFarm Telegram or Discord communities, where you’ll always find someone willing to help you out.
