What Are Decentralized Autonomous Organizations (DOAs)?


Investor interest in blockchain technology has expanded beyond cryptocurrencies as the field develops. DAOs are a novel kind of organization created with blockchain technology. Perhaps you've heard about DAOs in connection with other popular terms like Web3 or NFTs. You may have even heard of the DAO that attempted but failed to obtain an original copy of the U.S. Constitution.

There is much more to these new organizational structures than just the top DAOs created to compete for fascinating niche acquisitions. What you should know is as follows.

What are DAOs?

The acronym DAO, or "decentralized autonomous organization development," is pronounced "dow." They are also referred to as decentralized autonomous corporations at times. Online groups called decentralized autonomous organizations (DAOs) frequently have members who have never met in person. How does that work, given that founder trust is crucial to a new company's success?

Although a DAO is launched with a definite aim, it is entirely decentralized, unlike a conventional corporate model. The organization can function without a central authority (such as a CEO, CFO, board of directors, etc.). The DAO's regulations are enforced by "smart contracts," or computer code published on a blockchain, the most popular of which is Ethereum (CRYPTO: ETH). These guidelines include clear instructions on how funds will be used and which initiatives will be taken on. DAO members must vote in favor of any rule modifications before implementation.

These smart contract-enforced norms' impartiality and openness enable DAOs to function in a decentralized manner.

 

A brief history of DAOs

You're on the right track if this organizational structure reminds you a lot of a cooperative. Businesses established as a grouping of independent people and small businesses with a common objective have existed for a very long time (for instance, perhaps you shop at your neighborhood farmers' co-op for food). The catch here is that cryptocurrencies' distributed ledger system, the blockchain, is also used to construct and run DAOs.

The first DAO, commonly known as The DAO, was created shortly after the Ethereum blockchain network was introduced in 2015. It was intended as a decentralized venture capital fund dedicated to funding Ethereum developer initiatives. The DAO had $150 million in investor funding by May 2016, but over the summer of 2016, hackers took advantage of security flaws. By the end of the year, The DAO's ownership tokens had been delisted from cryptocurrency exchanges after about a third of its cash was transferred to the hackers' account.

Since then, several security issues have been fixed, and the crypto and digital asset world has seen the emergence of numerous DAOs. DAOs are being used for a wide range of purposes. One of them, ConstitutionDAO, mentioned earlier, successfully raised close to $50 million to bid on an original copy of the US Constitution. A DAO is the platform Decentraland (CRYPTO: MANA) for selling virtual land parcels in the metaverse. The Ethereum-based cryptocurrency trading platform Uniswap and its Uniswap Protocol Token (CRYPTO: UNI) are also a part of a DAO. In actuality, a DAO is used to run the majority of decentralized finance (DeFi) platforms.

 

How DAOs work

DAOs work online, utilizing smart contracts to record the initial rules, choices, and organizational modifications. A token offering is often offered to investors after a development team creates the smart contract for the DAO to raise money. Although there are different models, such as share-based membership (a membership request is filed in return for something of value) or reputation-based membership, the tokens serve as a representation of ownership in the DAO (tokens representing ownership are earned via participation in the DAO).

The DAO is introduced on the blockchain after financing has been raised. The DAO's stakeholders are using voting to make choices. The DAO's original founders and smart contract developers are no longer the only ones with the authority to alter the organization.

Pros of using DAOs

  • Transparency and democratization: Owners know what to expect regarding DAO governance because the rules are in a smart contract. The DAO's owners vote on any modifications (new initiatives or the allocation of funds).

  • Goal- or task-specific: Unlike a more typical organizational structure, DAOs may move swiftly once deployed since they are designed to complete a specific task or purpose and because many operations are executed automatically. Members must approve any ventures into projects outside the initial scope of work.

  • Alignment of interests: In a traditional organization, problems can occasionally occur. For instance, executive leadership's objectives may not always coincide with stakeholders' interests in a corporation (investors, employees, customers, etc.). An executive team may make financially advantageous choices and not always with stakeholders' best interests in mind (for example, awards based on short-term stock price performance might lead to financially risky behavior).

  • Global reach: DAO creators can pique the interest of potential members and owners worldwide since DAOs are native to the internet. Furthermore, there is no need for trust between DAO members because governance is spelled out and upheld in the organization's code.

Cons of using DAOs

  • Blockchain technology is new: The co-op business model is not brand-new, but the technology twist in this case is. A blockchain development-savvy software engineering team is needed to write smart contracts for a DAO. The smart contract must be drafted and performed precisely because changes may only be made after a membership vote. Any security flaws in the DAO will be of interest to hackers as well.

  • Maybe not so democratic: Nothing inherently prohibits an interested party from collecting ownership of a DAO to concentrate voting power in themselves because voting power is vested in token holders.

  • Centralized leadership isn’t always bad: The world is complicated and rapidly evolving. A DAO may not be able to use its decentralized voting system to address issues rapidly enough, even if it only has one objective.

  • Lack of legal precedence: DAOs are subject to legal problems because they are online-only organizations. Legal concerns may affect the organization's governance or even result in legal problems because its operations may cross various jurisdictions (different states or nations).

  • DAOs might get pricey: Every company will accrue costs, and DAOs are no different. Similar to how NFT producers and purchasers pay "gas fees" on their products, using a Blockchain Technology Company to build a smart contract and record changes that have been voted on would result in fees paid to the blockchain's miners.
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