What is a DAO (Decentralized Autonomous Organization)?
Imagine a society in which there is no centralized leadership such as a king, prime minister or president. Instead, every member of the society participates in decision making, at least to some extent. This is what a Decentralized Autonomous Organization looks like. However a DAO is based on a computer program known as a smart contract. This smart contract determines how things are done within the organization.
Therefore by definition, a DAO is an organization or entity without a central leadership, but is rather governed by decisions made by the community based on certain rules written on a blockchain (smart contract). These are mainly based on the internet and decisions are made by voting of the members. DAOs find applications in online platforms such as freelancer networks and charitable organizations.
How DAOs work
DAOs are a digital version of any physical organization. Instead of having a central leadership such as a CEO however, decisions are made by the community through proposals that are subjected to a vote by the community. All members have a share of tokens that give them a stake in the governance of the organization. The tokens can be used to vote on critical decisions such as implementation of new rules in the community and in the case of blockchain projects, for decisions on new improvements to the project.
Differences between a DAO and a traditional organization
DAOs bear a striking resemblance to traditional organizations, they have very striking differences as well. First, while traditional organizations have hierarchies, DAOs don’t have such hierarchies. Instead, decisions are made from the bottom up by the community, every member of which has a say on how the organization is governed.
Secondly, while a traditional organization cannot run without humans actively involved, a DAO can run without any such intervention. This is why it is called an autonomous organization. They run on computer programs, remember?
DAOs are also more transparent than traditional organizations. For instance, while funds management in a traditional organization may be entrusted to just a few members of the organizations, funding models on DAOs are fully transparent and every member of such an organization can verify what is happening at any point in time.
Steps in creating a DAO
Before a DAO can become functional, there are components that must be put in place. These are done in steps as described below.
Writing the smart contract
All DAOs are based on a set of rules written in a smart contract. The rules are then embedded in the blockchain and the network is governed based on these rules. The rules define for instance who can submit a proposal for changes to the governing principles as well as who can vote and how much their votes count. The smart contract is therefore the first thing that must be in place for the successful take-off of a DAO.
Creating a token
Every DAO has a native token, like a property that the community members share. This serves as a source of funding for the project and is also the basis for decision making on changes to the rules of the community. No DAO can operate without this critical aspect of the process. Those interested in joining the community then acquire such tokens by purchasing or airdrops, which makes them bonafide members of the community and confers on them the right to vote and contribute in decision making.
This is the final stage of the process. Deployment is done after the project has raised enough funds to deploy the project. This is what happens during ICOs where projects raise funds by selling their native tokens before launch. After this stage, decisions are taken through votes from the community members who hold the tokens.
Examples of DAOs
While DAOs are considered to be digital versions of traditional organizations, the concept has been used to build crypto projects, particularly in the DeFi ecosystem. For example, many DeFi projects such as Aragon use this method of governance to manage the Aragon protocol. DeFi projects that use this method of governance allow token holders to make decisions on major changes to the protocol through voting.
Not only in DeFi but also any cryptocurrency project is considered to be a DAO. The following are examples of DAOs in crypto and other applications.
Bitcoin was the first cryptocurrency created and the first typical DAO to ever exist because of its structure. The network is fully decentralized and transactions are confirmed by miners and cannot be reversed. The miners serve as the community that votes to authenticate transactions and no one person can take a decision on the network, not even Satoshi Nakamoto the creator of Bitcoin. Looking at DAO in the modern context of community governance however makes Bitcoin not suitable to be referred to as one. For it to truly be a DAO, it means every Bitcoin holder would have a say on how the network is run and that is not likely to happen.
This is a decentralized crypto lending platform. It can also be considered as a typical DAO by its structure. Built on the Ethereum blockchain it is the protocol upon which the DAI stablecoin was designed. The project is working towards becoming a perfect DAO by giving full autonomy to the holders of MKR, the native token for the network, the power to vote and make critical decisions on the network, and more inclusion for those with less MKR.
Uniswap is one of the first DeFi projects in the crypto space. It is also a typical example of a DAO. The protocol has a native token known as UNI which was airdropped to the Uniswap community in 2020. It is however not yet a perfect DAO as most of the community members are not allowed to submit proposals for changes in the protocol because they do not hold sufficient amounts of UNI. This has become a concern, but when resolved and a lot more people can submit proposals and vote, the protocol will become more of a DAO than it currently is.