Being decentralized is one of the main characteristics of cryptocurrencies. This means organizations such as governments and banks cannot control them as they are distributed among networks, nodes, and computers.
In 2016, some developers used the idea behind the decentralization of cryptocurrencies and created a Decentralized Autonomous Organization, as a safe and convenient way to cooperate with people from all over the world who share the same point of view. It is more like a business that belongs to its members and is managed by all of them.
How does a DAO work?
A DAO is essentially a smart contract or a set of rules encoded in computer code deployed to a blockchain. Since its financial transaction record is also maintained on the blockchain, such an organization becomes transparent and not influenced by an entity.
In other words, a DAO is like a company with a blockchain protocol and without a CEO or CFO who might dodge the rules and authorize spending for their own benefit. Everything is available to everyone, and the rules on treasury allocations are encoded inside the DAO’s code.
Simply put, for future operations in a DAO, its community members create proposals about them and then vote on the proposals. Only proposals with some predetermined levels of consensus are accepted.
Why should we use a DAO?
Starting an organization requires funding, and it is a hard process for the people involved to trust each other with the investments. It is highly unlikely for people to trust each other as soon as they meet, and it becomes even harder when they only have the chance to cooperate and interact with one another over the internet.
A DAO solves this problem by eliminating the need for trusting the other members. The only thing that should be trusted is the DAO’s code, which is completely transparent and verifiable by all members. As a result, a DAO provides an unprecedented opportunity for global cooperation and fruitful collaboration.
What are the differences between a DAO and a conventional organization?
- DAOs are commonly flat and democratized while conventional organizations are hierarchical.
- There should be voting for any changes in DAOs where every group member has the right to express their opinion, in contrast to conventional organizations which are based on rules and structure.
- Activities in a DAO are completely trustable due to being based on a decentralized network called the blockchain. which makes the information public and unchangeable.
- In a DAO, available services are managed automatically through smart contracts in a decentralized manner. This process is very different from that of conventional organizations’ where management is carried out by a human that can manipulate certain factors.
Some examples of DAO
To make it more tangible, some examples of the use cases of DAOs are presented in this section.
1. Ventures and grants
Venture capital funds or grants can be created using the investments from the members, and then members can vote on which venture to support or grants to approve. Repaid money or benefits could later be redistributed among the DAO members.
As for a DAO charity, people from all over the world can join the group and donate as much as they like, but no one can decide on a specific way to spend the donations unless all the members reach a consensus.
Types of DAO Membership
DAO membership can regulate many key features of the DAO, such as the way that voting works. There are two general types of DAO membership.
1. Token-based membership
A token-based membership does not usually require any permissions depending on the token used. Most of the governance tokens can be purchased or sold on a decentralized exchange without the need for permissions. Other tokens must be earned by providing some proof-of-work as per the DAO’s rules. The possession of a token means that you are qualified for participation in the voting process.
MakerDAO is a well-known example of token-based membership. It launched with 1,000,000 tokens called MKR at its inception. MKRs, which are created and destroyed under different circumstances, are extensively available on decentralized exchanges. This means that anyone can buy the right to vote on the future of the Maker protocol and become a key member in shaping its future.
2. Share-based membership
A share-based DAO needs more permissions, but it is still considerably open. Anyone who wants to join the DAO can send a proposal by offering a tribute such as specific services, work, or tokens. Having shares denotes ownership and the right to participate in voting. As for those who want to exit, they can withdraw their share of the treasury and exit at any time. This kind of membership is usually used for organizations that are more human-centered such as investment clubs, charities, and worker collectives. In this model of DAO membership, the members also have the right to regulate tokens and protocols.
MolochDAO is an example of a share-based DAO which is concentrated on investment in Ethereum projects. The procedure of joining MolochDAO consists of submitting a proposal for membership which allows the group to assess if you have the qualifications and required capital for making the right judgments about investing in the projects.
DAO is a modern alternative to the hierarchical structure of traditional organizations. By distributing the authority and ownership among community members through smart contracts deployed to a blockchain network, a DAO enjoys transparency and verifiability making it fully trustable and its operations managed collectively.