What is a Decentralized Autonomous Organization (DAO)?
A company or organization is actually always run by a central group of people. They decide what the future of the company should look like, who should complete certain tasks and what new products or services should be developed. The advent of cryptocurrencies, which operate decentrally, has inspired developers to decentralize the governance of companies and organizations as well.
With the Decentralized Autonomous Organization, abbreviated DAO, a company no longer has central board members. In this article, we'll explain what a DAO is, how it works, and which well-known DAOs there are.
What is a DAO (Decentralized Autonomous Organization)?
DAO means a Decentralized Autonomous Organization and is a company or organization that operates completely independently. There are no central board members or staff. After the advent of Bitcoin (BTC), the DAO was invented.
A DAO is actually an application that runs on the blockchain. Some blockchains offer support for smart contracts. These are digital contracts that can be used to develop decentralized applications (dApps).
Like cryptocurrencies and dApps, the DAO operates on a decentralized network. This means that both crypto, dApps and a DAO are maintained by a decentralized network consisting of computers. They ensure that everything works in an automated way, without the need for humans to operate it.
There are many cryptocurrencies that use a DAO. In fact, a DAO can be integrated within almost any crypto project. Because decentralization is one of the key features of blockchain technology, many people consider a DAO as important.
How does a DAO work?
A DAO can only run on the blockchain, and this blockchain must support smart contracts. This is the only way to build a decentralized application for the DAO.
Each DAO has its own cryptocurrency in the form of a token. With this token, people can vote on decisions that need to be made. People can also make a proposal to the community with this token. This might be better understood with the example below.
Example of a DAO
Suppose someone has an idea to add staking to the platform of the DAO. This person then pays 100 tokens to make a proposal, whereafter token holders can vote 'Yes' or 'No'. The moment at least 51% agree with this proposal, the community will find a programmer to do the job. Programmers can sign up, after which they can vote for the programmer to add the staking feature.
A reward of 10000 tokens will be set up for the programmer. These tokens are kept in the smart contract. After the programmer adds the feature to the platform, the community can vote whether the work was delivered well. If at least 51% of the community thinks the programmer did a good job, the smart contract will automatically send the 10000 tokens to the programmer's wallet address.
What are the main advantages and disadvantages of the DAO?
A DAO has several advantages, although there are also some disadvantages to Decentralized Autonomous Organizations.
Advantages
Anyone can propose an idea or have a say in what happens within a DAO, making a DAO very democratic.
The DAO is completely transparent and anyone can see what transactions are made. This means that corruption or misspending of money is not possible because it would be noticed immediately.
Everything is done automatically, which means that processes can be done faster, cheaper and more efficiently.
Disadvantages
Once a DAO is running on the blockchain, it is almost impossible to modify the code. This would require everyone to agree. This can delay the development of a DAO.
A DAO cannot be subject to regulation because governments have not yet drafted it for a DAO. As a result, a DAO cannot be considered a legitimate business or organization.
Well-known DAOs
There are a number of different DAOs. It is possible to buy the cryptocurrency from a DAO if you have a lot of confidence in its operation. In many cases, a DAO's cryptocurrency can also be used as voting rights, or to make proposals.
The more tokens you have, the more your vote counts. Suppose a DAO has issued 1000 tokens. This would mean that each token represents 0.1% of voting power. If you have 100 tokens, your vote counts for 10% in the final decision.
Uniswap (UNI) - The decentralized exchange Uniswap is controlled by UNI token holders.
Here you can buy the UNI token from Uniswap.
Compound (COMP) - Compound allows users to lend crypto to make money.
Here you can buy the COMP token from Compound.
Aave (AAVE) - Aave's platform allows users to borrow and lend crypto coins. Governance is completely decentralized.
Here you can buy the AAVE token from Aave.
MakerDAO (MKR) - Maker is a platform on Ethereum that allows users to manage and buy DAI stablecoin. MakerDAO is the DAO for this platform.
Here you can buy the MKR token from MakerDAO.
Tezos (XTZ) - It was Tezos that first developed a process in 2018 that allowed users to determine the future of the platform. As such, this was the first DAO.
Here you can buy the XTZ token from Tezos.
Conclusion
DAO stands for Decentralized Autonomous Organization, which represents an organization or business that runs fully automatically on the blockchain. In fact, it is a dApp that uses a smart contract for its operation. So everything happens completely automatically.
A DAO is not governed by a central board. Also, there are no staff members in a DAO. Instead, anyone can join the board of the DAO or work for it.
When you hold the tokens of the DAO, you can have a say in the future of the platform or make a proposal to the community. In this way everyone has a say, and a DAO can be compared to a democracy.
The work is also done by the community behind the DAO. An example: suppose there is a need for a new software implementation, programmers will be able to do this in exchange for crypto coins. The community decides in advance whether the programmer has done his job well by voting with their tokens.
You can also buy cryptocurrencies from DAOs yourself on Coinmerce's crypto exchange, like Aave (AAVE), Uniswap (UNI), MakerDAO (MKR), Compound (COMP) and Tezos (XTZ).