DAO stands for decentralized autonomous organization, which is software built on a blockchain that has no central authority. It is a collection of smart contracts that can do anything and you can build your own if you are smart enough to write it down and run the program on the blockchain platform.
DAO is collectively owned by its members and wherein the decisions are made by members themselves. The system cannot be accessed by anyone but members of the DAO.
Any new proposal on decision and policies are implemented by consensus. So that all members get their say. The whole system majorly runs on the Ethereum blockchain. Smart contracts are the backbone of DAO, they run after certain conditions are met which are stored on the blockchain.
The use of DAOs can eliminate centralized control and plagued governance mechanisms, as they offer increased transparency and audibility. This can provide an automated and programmed management layer that can be used across industries and use cases.
Let’s understand it better in steps
Step 1: It always starts with an idea and a group of people writes smart contracts. Once the contract is live on the Ethereum network, changes can only be proposed by voting. The contract automatically fails if the rules are violated.
Step 2: This is where the pitching of ideas takes place in front of the investors. The members now decide to invest in the DAO and sign the membership; When the funding period ends, it proceeds to the third step.
Step 3: Now a proposal is put before the members on how DAO will work and the complete framework is revealed to the members.
People will now make proposals on how to spend the money on DAO and how members could vote to approve those proposals. The DAO can continuously improve and grow, just like people, because their shareholders can vote and change them.
If the DAO makes any profit, it can now distribute all the profits to all its members holding the tokens.
Benefits of DAOs
Trustless: You don’t need to trust any CEO, manager, or any person with decision-making skills. The program of the whole organization will keep working, even if the main developer leaves the organization or there is no funding.
Always live: In the case of any big corporation, the government and any agency can shut it down. With DAOs, it only is possible if a member holding a large number of tokens decides so and submits a proposal to change the rule as per his wants.
Open source: A DAO is also always open source, their code is open for anyone to use. Open source projects are much more reliable, simply because other programmers can find bugs in their codes and even propose ways to fix them.
Downsides of DAOs
Prone to attacks: DAOs are vulnerable to attacks. Since anyone can look at the code, hackers/attackers can read and understand the codes on how they can enter the DAO. Hackers can know how the code works and reengineer and test it before deploying it to make sure that their code works. If it does, then DAOs could be attacked.
No business secrets: As DAO is open source, there are no business secrets, anyone can study the code and generate competition based on the DAO’s alleged flaws.
However, there are many cases of successful DAOs out there. Some examples are Uniswap, Maker, Aave, Dash, ApeCoin, and Compound, among others, which have a market capitalization of over $12.53 billion with 24 hours trading volume of over $1.45 billion, according to CoinMarketCap.com.
With the usage of DAO increasing, in the days to come, it will have significant implications for data processing, government, healthcare, law enforcement, voting, community management, charity, and digital businesses, among other industries.