What Is A Decentralized Autonomous Organization?

Definition

A Decentralized Autonomous Organization (DAO) is a legal structure that has no central governing body and whose members share a common goal of acting in the best interest of the entity; and is in the emerging phase. Popularized by cryptocurrency enthusiasts and blockchain technology, DAOs are used to make decisions in a bottom-up approach.

History of DAOs

The DAO was an early understanding of modern day decentralized autonomous organizations. It was launched back in 2016. Got designed as an automated organization that functioned as a form of venture capital fund.

Those who owned DAO tokens could profit from the organization’s investments. Either by reaping dividends or benefiting from token price appreciation. The DAO was initially seen as a revolutionary project and raised $150 million in Ether (ETH). One of the largest crowdfunding efforts at the time.

The DAO was launched on April 30, 2016. Ethereum protocol engineer Christoph Jentzsch released the open source code for an Ethereum-based investment organization. Investors bought DAO tokens by moving Ether into its smart contracts.

Days after the token sale, some developers expressed concern. That a flaw in The DAO’s smart contracts could allow malicious actors to drain its funds. While a management proposal was submitted to fix the bug, the attacker took advantage of it. Siphoned over $60 million worth of ETH from the DAO wallet.

The initial circulation

At the time, around 14% of all ETH in circulation was invested in The DAO. The hack was a significant blow to the DAO in general and the then-year-old Ethereum network. A debate ensued in the Ethereum community as everyone tried to figure out what to do. Initially, Ethereum co-founder Vitalik Buterin proposed a soft fork that would block an attacker’s address and prevent them from moving funds.

The attacker, or someone impersonating them, then responded to this proposal, claiming that the funds were obtained “legally” according to the rules of the smart contract. They were ready to take action against anyone who tried to seize the funds.

The hacker even threatened to bribe ETH miners with some of the stolen funds to thwart the soft fork attempt. In the debate that followed, a hard fork was identified as the solution. This hard fork was implemented to return the history of the Ethereum network to the time before the DAO hack and redistribute the stolen funds into a smart contract that allowed investors to withdraw them. Those who disagreed with this move rejected the hard fork and supported an earlier version of the network, known as Ethereum Classic (ETC).

How do we understand Decentralized Autonomous Organizations (DAOs)?

One of the main features of digital currencies is that they are decentralized. This means that they are not controlled by any single institution or individual, such as a government or central bank, but are instead distributed among different computers, networks, and nodes. In many cases, virtual currencies take advantage of this decentralized state to achieve a level of privacy and security that is usually unavailable to standard currencies and their transactions.

Inspired by the decentralization of cryptocurrencies, a group of developers came up with the idea of ​​a Decentralized Autonomous Organization, or DAO, in 2016.

The concept of a DAO is to support the oversight and governance of a corporation-like entity. However, the key to DAOs is the lack of a central authority. It’s a collective group of leaders and participants acts as a governing body.

Working of a DAO

A DAO is an organization where decisions are made from the bottom up; the organization is owned by a collective of members. We can participate in a DAO, usually through token ownership.

DAOs work using smart contracts, which are essentially pieces of code that automatically execute whenever a set of criteria is met. Smart contracts are deployed on many blockchains today, although Ethereum was the first to use them.

These contracts set the rules of the DAO. Those who have a stake in the DAO then gain voting rights and can influence the organization’s functioning by deciding on new management proposals or creating new management proposals.

This model prevents DAOs from being spammed with proposals: A proposal only passes if a majority of stakeholders approve it. The determination of majority varies from DAO to DAO and is specified in smart contracts.

DAOs are fully autonomous and transparent. Because they are built on open-source blockchains, their code can be viewed by anyone. Anyone can also audit their built-in cash registers as the blockchain records all financial transactions.

The need of DAO in today’s world

As Internet organizations, DAOs have several advantages over traditional organizations. One significant advantage of DAOs is the lack of trust between two parties. While a traditional organization requires a lot of trust in the people behind it—especially for the benefit of investors—with a DAO, you only need to trust the code.

It’s easier to trust this code because it’s publicly available and can be thoroughly tested before it’s run. Every action the DAO takes after launch must be approved by the community and is completely transparent and verifiable.

Such an organization has no hierarchical structure. However, it can still perform tasks and grow even if stakeholders are controlling through its native token. The absence of hierarchy means that any stakeholder can come up with an innovative idea that the whole group will consider and improve. Internal disputes are often easily resolved through a voting system in accordance with pre-written rules in the smart contract.

By allowing investors to pool funds, DAOs also give them a chance to invest in fledgling startups and decentralized projects while sharing the risk or any profits that may flow from them.

The various disadvantages of DAOs

The decisions often take longer because there are more people voting. Alos, educating users is often a greater burden because the collective constituencies are diverse with varying levels of education and knowledge. It takes more time to cast votes or gather users due to the decentralized nature of the entity.

The major disadvantage is, serious abuse, such as theft of treasury reserves, is possible if DAO security is not properly implementing and maintaining.