What Is a Decentralized Autonomous Organization (DAO)?

What is Decentralized Autonomous Organization DAO

DAO, short for decentralized autonomous organizations, is often referred to as the next generation of organizational structure, where a community of like-minded people is working together towards a common interest, without a central authority figure leading the way.

DAOs are internet-native organizations collectively owned and managed by their members. They have built-in treasuries that are only accessible with the approval of their members. Decisions are made via proposals the group votes on during a specified period.

A DAO works without hierarchical management and can have a large number of purposes. Freelancer networks where contracts pool their funds to pay for software subscriptions, charitable organizations where members approve donations, and venture capital firms owned by a group are all possible with these organizations.

What Is a Decentralized Autonomous Organization (DAO)?

How do DAOs work?

A community can adopt a DAO and program it according to its own goals.

  • ?‍? Code is written in the form of smart contracts, which provide some sort of governance mechanism.
  • ?️ Members typically use governance tokens to vote on decisions made by the DAO, such as the allocation of funds.
  • ? In the case of many DAOs, the impact of a member’s vote can increase based on the amount they have contributed to the project.
  • ? The outcome can be based on the degree of participation as well as voting preference.

ALSO READ: What Are Central Bank Digital Currencies (CBDCs)?

Why do we need DAOs?

Starting an organization with someone that involves funding and money requires a lot of trust in the people you’re working with. But it’s hard to trust someone you’ve only ever interacted with on the internet. With DAOs you don’t need to trust anyone else in the group, just the DAO’s code, which is 100% transparent and verifiable by anyone.

What advantages do DAOs have?

  • Transparency – voting, funding decisions, and other actions are viewable by anyone.
  • More firepower – members across the world can contribute, giving DAOs lower barriers to entry than companies.
  • Cheaper – the concept has firmly taken root in the DeFi, and there are many tools—which can be used like Legos, so little needs to be built from scratch.
  • ?‍?‍?‍? Collaborative – giving everyone a voice pools mass knowledge for a proposal and enables experts to invest in the ecosystem they are building.

What disadvantages do DAOs have?

  • Flat structure – by not having a clear authority figure, or chain of command, decentralized organizations are slower to operate as decisions take longer to make.
  • Disagreements – when the community disagrees strongly, it could split the organization into two.
  • ?? No change – in some DAOs, those with the most tokens call the shots, so governance looks very similar to traditional organizations.
  • ⚖️ Legality – minefields abound in relation to token projects that might be deemed to be securities.

DAO examples

To help this make more sense, here are a few examples of how you could use a DAO:

  • A charity – you can accept membership and donations from anyone in the world and the group can decide how they want to spend donations.
  • A freelancer network – you could create a network of contractors who pool their funds for office spaces and software subscriptions.
  • Ventures and grants – you could create a venture fund that pools investment capital and votes on ventures to back. Repaid money could later be redistributed amongst DAO members.

Enthusiasts believe that DAOs will soon become more sophisticated. Trends include anonymity, progressive decentralization, and better incentives towards participation. Future DAOs may employ prediction markets, and begin voting and acting as delegators in other DAOs.Will DAOs start to change the way that companies operate and raise money? Soon you too might be a member of a DAO, voting on the right way for your business to move forward, without having a boss telling you what to do.

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