What is a DAO in Crypto: A Definition, its Purpose, and an Example

The term "DAO" is one of many frequently used acronyms but has little to no definition as Web3 and the blockchain has become increasingly commonplace.  

Decentralized autonomous organizations (DAOs) are akin to clubs for cryptocurrency enthusiasts, with the exception that they frequently work toward a common objective, give each member an equal voice in decision-making, and may have access to financial resources that most clubs would never know what to do with.  

And yet, they're springing up everywhere on the decentralized internet to finance bigger businesses, generate funds for blockchain-based initiatives, or mistakenly pay millions of dollars for the first edition of a book in the mistaken belief that doing so will also provide them the rights to that book. These organizations have a ton of resources. Here are the key points regarding DAOs in Crypto.

Let's start with the pronunciation of DAO.

"Dow."  

What exactly is a DAO in the Crypto world?

As the name implies, a decentralized autonomous organization is a group of people that gather together without having any choices made by a single central figure or organization. Instead, they are constructed using smart contracts on a blockchain (digital one-of-one agreements). Members of DAOs frequently pay their way in by buying a governance token designed just for the DAO, which gives them the right to vote on decisions affecting how the money fund is used and handled. People worldwide may be a part of these groups and frequently interact on Discord channels.

According to Jason Yanowitz, co-founder of the cryptocurrency trade newspaper Blockworks, a DAO features a "totally flat hierarchy." It is a means to manage individuals uniquely around a common balance sheet.  

DAO in Crypto: MAIN TAKEAWAYS

• Token holders engage in the management and decision-making of an entity in a decentralized autonomous organization.  
• A DAO lacks central authority; instead, power is shared among token holders who cast votes as a group.  
• Since the DAO posts all votes and activities on a blockchain, everyone can see what people do.  
• Developers founded The DAO, one of the first DAOs, to automate decision-making and streamline cryptocurrency transactions.  
• A DAO must prioritize security since exploits can cause it to lose millions of dollars in treasury savings.  

What is the purpose of a DAO?

Whether it serves a single function or is a component of a bigger enterprise, each DAO has a unique mission and can be connected to various businesses.  

Some of them are motivated by individual interests, like the Constitution DAO, which was formed last year to purchase one of the original copies of the United States Constitution from Sotheby's. The group lost the auction after learning it was not the top bidder, but members were able to get their initial deposit back.  

Others have more ambitious plans, such as establishing or managing a business together.  

In a nutshell, a DAO is designed to enhance the conventional management structure many businesses use. A DAO aims to give each member a voice, a vote, and the chance to suggest projects rather than relying on a single person or small group to decide the business's path. In addition, a DAO aims to have strong governance that is controlled by blockchain code.  

How does a DAO make money?

A DAO first raises money by exchanging fiat currency for its native token. This native token represents the distribution of ownership and voting power among members. The native token's value will rise if a DAO is successful.  

The DAO can then issue tokens in the future with a higher value to raise additional funds. A DAO may also invest in assets if the members elect to support such actions. A DAO can, for instance, purchase businesses, NFTs, or other tokens. The value of the DAO rises if those assets experience an increase in value.  

When were DAOs initially developed?

A business called Slock developed the first DAO, referred to as The DAO.  

It, a German-based developer built on the Ethereum blockchain, is attempting to link real-world transactions to the blockchain, allowing users to rent, sell, or share property directly with one another.  

According to an interview with the firm's creator Christoph Jentzsch from 2018, Slock.it needed to find a mechanism to generate money in the early months of 2016. So, the company established a DAO in April, comparable to Kickstarter or GoFundMe. The DAO allowed all investors and members to vote in the business's choices when allocating the raised funds. This is what made it unique.  

According to The Economist, it eventually developed into a decentralized version of a venture capital fund and owned almost 14% of the total value of the Ethereum cryptocurrency at the time. With over 11,000 users contributing over $150 million in the ether between May and June, this became the greatest crowdfunding in history as of 2016.  

However, The DAO was compromised by June of that year, losing around $50 million (about 3.6 million ETH at the time). The DAO was not destroyed following the breach, although it never recovered its prior position.  

So, did the initial DAO give rise to all subsequent DAOs?  

No, the term DAO is now more of a descriptive acronym than a name because it has been embraced by various businesses, blockchains, and cryptocurrency fans.  

How DAOs work

Smart contracts play a big part in DAOs. Decision-making is mandated by these logically coded agreements based on underlying blockchain activity. For instance, depending on the result of a decision, a specific code may be written to raise the number of tokens in circulation, burn a predetermined number of reserve tokens, or give predetermined rewards to token holders already in existence.  

On a blockchain, the voting procedure for DAOs is published. Choosing between mutually exclusive alternatives is common for users. Users' voting power is frequently split among them according to the number of tokens they possess. For instance, a person who owns 100 DAO tokens will have twice as much voting weight as a user who owns 50 tokens.  

The idea behind this technique is that individuals with a greater financial stake in the DAO are encouraged to act honestly. For example, consider a user who possesses 25% of the total voting power. This user is free to engage in wrongdoing but doing so jeopardizes the value of their 25% share.  

Tokens issued in exchange for fiat currency are frequently stored in the treasuries of DAOs. Members of the DAO can vote on how those funds are used. For instance, DAOs who want to buy rare NFTs may choose to trade treasury funds for assets.  

Advantages of DAOs

There are several reasons why an organization or group of people might decide to pursue a DAO structure. The benefits of this type of management include some of the following:  

Decentralization.

Instead of a centralized authority that is frequently massively outnumbered by its peers, decisions that impact the organization are made by a group of people. As a result, a DAO can decentralize power over a far wider spectrum of users than a single person (CEO) or a small group of people (Board of Directors) could.  

Participation.

When individuals inside an entity have a direct say and voting authority on all issues, they may feel more empowered and connected to the entity. Even though these people may not have much influence, a DAO encourages token holders to vote, burn tokens, or utilize their tokens in ways they believe are best for the company.  

Publicity.

Votes within a DAO are cast via blockchain and made available to the public. How their vote and judgments will be made public forces people to behave as they believe is best. This encourages behaviors that will enhance the reputations of voters and deters misconduct against the community.  

Community.

The idea of a DAO inspires people worldwide to work together invisibly to realize a shared vision. Token holders can communicate with other holders from anywhere in the world with just an internet connection.  

Limitations of DAOs

However, only some things about DAOS are ideal. Improperly establishing or maintaining a DAO has serious repercussions. The DAO structure has some of the following drawbacks.  

Speed.

A single vote may be required to decide a certain action or course of action for the company to pursue if a CEO leads a public corporation. Every user has a chance to cast a vote in a DAO. Considering time zones and priorities outside the DAO, this calls for a significantly longer voting period.  

Education.

Similar to the speed issue, a DAO is accountable for raising awareness of pending entity activity among a larger audience. While token holders of a DAO may have varying educational backgrounds, comprehension of efforts, motivations, or accessibility to resources, a single CEO is significantly easier to keep informed of corporate activities. While DAOs unite a broad group of individuals, one of their fundamental challenges is that this diverse group must learn how to develop, strategize, and communicate as a single entity.  

Inefficiency.

DAOs pose a significant danger of being ineffective, to summarize the first two bullet points in part. It is simple for a DAO to spend considerably more time contemplating change than putting it into action because of the time needed to administratively educate voters, communicate initiatives, explain the strategy, and enroll new members. Due to the necessity of managing far more people, a DAO may become mired in pointless administrative activities.  

Security.

Security is a problem that affects all digital platforms for blockchain resources. Implementing a DAO needs extensive technical know-how; otherwise, decisions or votes may not be validly cast. If users can't trust the entity's structure, the trust may be lost, and users may depart. DAOs can be abused, treasury reserves can be taken, and vaults can be emptied even using multi-sig or cold wallets.  

Why do we need DAOs?

DAOs have been superior to traditional organizations in several ways since they were born on the internet. First, the lack of trust required between two parties is a key benefit of DAOs. With DAOs, just the code needs to be trusted, unlike traditional organizations that demand a lot of faith in the individuals running them, particularly on the part of investors.  

Trusting that code is simpler because it is available to the public and can be thoroughly checked before launch. Following the launch, every decision made by a DAO is subject to community approval and is fully public and verifiable.  

An organization of this type lacks a hierarchical structure. However, it may still carry out duties and develop while being managed by stakeholders via its native token. Because there is no hierarchy, any stakeholder can provide an original concept, which the entire group will review and enhance. According to the pre-written regulations in the smart contract, internal issues are frequently quickly resolved through the voting process.  

DAOs enable investors to pool their resources and invest in early-stage enterprises and decentralized projects while splitting risks and potential rewards.  

‍

In conclusion, DAOs have emerged as a revolutionary concept in the world of cryptocurrency and blockchain technology. By enabling decentralized decision-making and community-driven governance, DAOs have opened up new possibilities for decentralized finance and social coordination. With the rise of blockchain-based applications, DAOs have the potential to transform traditional business models and enable new forms of collaboration and investment. However, there are still challenges that need to be addressed, such as ensuring security and preventing malicious attacks. As the technology continues to evolve and mature, it will be fascinating to see how DAOs shape the future of finance, governance, and social coordination. Overall, DAOs represent a significant step forward in the development of decentralized systems and offer a glimpse into a new era of community-driven innovation.

‍