A decentralized autonomous organization (DAO) is an entity with no central leadership. The organization is made up of a community that is brought together by a set of rules on a blockchain.
In DAOs, all the members are involved in management. Other entities have hierarchical management. DAOs have treasuries that can only be accessed with the members’ approval.
Decisions in the organization are made from the bottom to the top through proposals which are voted on.
Picture it as a vending machine which is completely self-sustainable. When the machine is low on stock, a code sends a signal to request more items, and automatically deposits the cash in the machine. No humans are needed to run it; hence autonomy.
Decentralized Autonomous Organizations are created for various reasons such as charity or freelance networks. They are transparent and built on open-source blockchains. This means anyone on the system can view their code.
How Does a DAO Work?
To join a DAO, you will need to have ownership of a token. DAOs work using smart contracts which establish the rules of the DAO. Those with a stake get voting rights and influence how the organization works.
They make decisions on proposals or come up with new proposals.
A proposal will only pass when the majority of stakeholders approve it.
Why Do We Need DAOs?
DAOs have several benefits over traditional organizations. For instance, traditional organizations require a lot of trust in the parties involved, mostly on behalf of investors. In DAOs, however, only the code needs to be trusted.
This is easier to do since the code is publicly available and can be thoroughly tested before a launch. Moreover, every action has to be approved by members of the community; hence transparency.
Despite not having a hierarchical structure, DAOs can still accomplish tasks under the control of stakeholders. Since there is no centralized management, any stakeholder can table an idea that the entire community will consider.
Internal disputes in a DAO are normally solved through a voting system, in line with the rules in the smart contract.
Moreover, DAOs allow investors to pool funds and give them a chance to invest in early-stage startups and projects while sharing the risks and profits.
Cons of DAOs
DAOs are a new technology that has attracted criticism due to concerns about their legality and security. Experts consider it a bad idea to trust several people with important financial decisions.
Moreover, DAOs can be spread across multiple jurisdictions and there is barely a legal framework for them.
In the case a legal issue arises, it will require all those involved to deal with numerous regional laws in a legal battle.
For instance, in 2017, The DAO, one of the first-ever DAOs, rubbed shoulders with the United States Securities and Exchange Commission (SEC).
SEC issued a report stating that The DAO sold securities in the form of tokens on Ethereum without authorization. This was a violation of securities law in the country.
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