DAOs are an emerging form of legal structure that has no central governing body and whose members share a common goal to act in the best interest of the entity.
Popularized through cryptocurrency enthusiasts and blockchain technology, DAOs are used to make decisions in a bottom-up management approach.
What Is a DAO?
A DAO, or decentralized autonomous organization, is a non-centralized community-led entity. It’s completely transparent and automated.
Smart contracts are used to establish the ground rules, execute the negotiated decisions, and manage proposals and voting.
Furthermore, a DAO is governed by its individual members, who make crucial decisions about the project’s future, such as technical updates and treasury allocations, by voting.
In general, members of the community propose ideas for the protocol’s future operations and then vote on each proposal. that reach a certain level of consensus are then approved and imposed by the smart contract’s rules.
In this approach, corporate hierarchical systems are replaced with community collaboration. That way, each and every DAO member is in charge of the organization.
The convergence of incentives contributes to the efficiency of this system. That’s because it’s in the best interests of every individual to vote honestly and only approve ideas that benefit the organization.
A healthy, strong protocol will attract additional users, increasing the value of the tokens that each DAO member possesses. As the protocol grows in popularity, so will the token holders.
Now we know what a DAO is, but how does a DAO work?
How Does a DAO Work?
DAOs operate on the principle of smart contracts, which serve as the underlying architecture, along with blockchain technology. These smart contracts are in charge of running a DAO without the need for human interaction.
Smart contracts are created by the core crew of community members. Thanks to their verifiability and transparency, the organization can be evaluated by any member to obtain a thorough grasp of its protocol operation at every stage.
Like most Crypto projects, DAOs need funding to function properly.
The token issuance method is commonly used to raise cash, in which the protocol offers tokens in return for funds. Token holders are granted voting power based on their token ownership.
DAO stakeholders make the rules, which are then stored on the blockchain, just like transaction records. One of the most notable features of DAOs is that once the programs are developed and implemented, they can’t be modified, and no member has any special power to do so.
Any changes that are made must first be voted on by members, and then the exact changes in question are implemented. If a change is required, it’s usually suggested in the form of a proposal. The changes are enacted when the proposal receives a majority of votes from stakeholders or when it meets a specific set of conditions in the network consensus rules.
The way decentralized autonomous organization work differ from most regular organizations in that they’re decentralized. Furthermore, unlike traditional organizations, DAOs don’t have a hierarchy and are instead driven by economic factors.
There are no legal contracts that bind DAO members to them. Instead, all members share the same vision, which binds them to the consensus norms. The rules are transparent since they are written in open-source code that governs the organization.
