What are DAOs?

Decentralized Autonomous Organization

DAO (Decentralized Autonomous Organization) is a type of autonomous organization that is decentralized. Unlike traditional organizations (such as Facebook, Google, etc.), they may run autonomously without human interaction by using code-coded rules.

DAOs are a very broad issue; they range from blockchains to DeFi protocols that use an on-chain governance model, to groups that use on-chain voting and proposal procedures in a variety of sectors. However, they all have the property that members of the DAO may readily view and check the organization’s suggestions and activities, as well as participate in DAO decisions.

Basically, DAO is a community of individuals same beliefs.

Members have the right to vote on administrative decisions, which is one of the DAO’s features.

Create flexible processes by flattening the hierarchy.

Allocate resources to accomplish the key purpose.

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.

This opens up so many new opportunities for global collaboration and coordination.

A comparison between Dao and a traditional organization

DAO

  • Usually flat, and fully democratized.
  • Voting required by members for any changes to be implemented.
  • Votes tallied, and outcome implemented automatically without trusted intermediary.
  • Services offered are handled automatically in a decentralized manner (for example distribution of philanthropic funds).
  • All activity is transparent and fully public.

A traditional organization

  • Usually hierarchical.
  • Depending on structure, changes can be demanded from a sole party, or voting may be offered.
  • If voting allowed, votes are tallied internally, and outcome of voting must be handled manually.
  • Requires human handling, or centrally controlled automation, prone to manipulation.
  • Activity is typically private, and limited to the public.

DAO examples

To help this make more sense, here’s 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.

DAO membership

There are different models for DAO membership. Membership can determine how voting works and other key parts of the DAO.

Token-based membership

Usually fully permissionless, depending on the token used. Mostly these governance tokens can be traded permissionlessly on a decentralized exchange. Others must be earned through providing liquidity or some other ‘proof-of-work’. Either way, simply holding the token grants access to voting.

Typically used to govern broad decentralized protocols and/or tokens themselves.

A famous example is MakerDAO — MakerDAO’s token MKR is widely available on decentralized exchanges. So anyone can buy into having voting power on the Maker protocol’s future.

Share-based membership

Share-based DAOs are more permissioned, but still quite open. Any prospective members can submit a proposal to join the DAO, usually offering tribute of some value in the form of tokens or work. Shares represent direct voting power and ownership. Members can exit at anytime with their proportionate share of the treasury.

Typically used for more closer-knit, human-centric organizations like charities, worker collectives, and investment clubs. Can also govern protocols and tokens as well.

MolochDAO is a famous example — MolochDAO is focused on funding Ethereum projects. They require a proposal for membership so the group can assess whether you have the necessary expertise and capital to make informed judgments about potential grantees. You can’t just buy access to the DAO on the open market.

How do DAOs work?

The backbone of a DAO is its smart contract. The contract defines the rules of the organization and holds the group’s treasury. Once the contract is live on Ethereum, no one can change the rules except by a vote. If anyone tries to do something that’s not covered by the rules and logic in the code, it will fail. And because the treasury is defined by the smart contract too that means no one can spend the money without the group’s approval either. This means that DAOs don’t need a central authority. Instead the group makes decisions collectively and payments are authorized automatically when votes pass.

This is possible because smart contracts are tamper-proof once they go live on Ethereum. You can’t just edit the code (the DAOs rules) without people noticing because everything is public.

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