What is a DAO?
Traditionally, after the shareholders of a company held meetings to decide the direction of their business, the CEO would then have to ensure that these decisions are executed properly by their subordinates. But what if an organization has no CEO? What if there’s no hierarchy? What if instead of answering to a boss, every move the company makes is made by code?
In a previous article, we likened smart contracts with its ancestor, the vending machine: it functions without the need for a middleman and does its job once its conditions are met. However, vending machines still need humans to maintain it: to restock its products, to pay for its electricity, to collect its earnings, and so on. So while it is able to provide service without humans, it still needs humans to do all these tasks and keep it functioning.
Now imagine if even those tasks were automated as well through code. Imagine a vending machine able to restock itself, one that knows when the electric bill is due then pays for it. One that collects the money on its own and fairly distributes the income to its investors. And lastly, imagine it not requiring any sort of maintenance work from humans because its mechanisms are set and solid. Code, unlike the vending machine’s body, is invulnerable to rust, after all.
That is the function of a DAO.
DAO, or a Decentralized Autonomous Organization, is an organization created by a group of people that is built on the blockchain and completely run by smart contracts. DAOs reduce the need for humans to almost zero by automating every move by the organization through code.
Where Humans Come In
Smart contracts are the blood that keeps a DAO working. After the group of people that created the DAO decides upon its smart contracts and officially launches it in the blockchain, it becomes free from human intervention and begins to function by itself. A DAO will provide and perform its coded services and functions automatically, and distribute its income fairly to its members in the form of crypto tokens. It’s a technology that completely forgoes the need for intermediaries and is incredibly accessible as it recognizes no office hours — a DAO functions 24/7, anywhere in the world.
Now, we know that because code is permanent, it cannot improve itself. So what then if members feel like changes have to be made to the organization, say, to reflect the changes of the times?
Just like in any organization, members of a DAO are free to submit or suggest changes to how they operate.
To compound on our vending machine example, let’s say a member or a stakeholder thinks the vending machine should replace one product with another because it’s not generating enough income and another variant has more demand in the market. Because code is permanent and the vending machine is coded to replenish itself with the same product every time it runs out of stock, enacting this change means that they will have to make changes on the code itself. This stakeholder may submit this suggestion to the rest of the stakeholders and the decision will be put to a vote.
Now a DAO is made up of millions of tokens owned by its members or its stakeholders. In a DAO, each token amounts to one vote which means that whoever owns the most token in a DAO gets the most number of votes. If the voting favors the suggested changes, a DAO’s code will then be changed and it will keep working sans human intervention until its stakeholders once again decide to change or improve it.
Boons and Banes
Joining a DAO or becoming a stakeholder in one may be done by purchasing what is called a governance token specific to the DAO which will give you the right to vote for future decisions of the organization. But is it a viable venture for crypto owners?
DAO is a trustless technology. Because it is completely run by code, joining a DAO does not subject you to human error. You don’t have to be the CEO’s favorite to be treated fairly. You don’t need to politic your way to the top. Putting your trust in anyone is not necessary; because smart contracts are absolute and indiscriminate. There is not even a hierarchy to climb as DAOs are flat and democratized. A DAO also offers transparency. They are open source, which means its code is available for everyone to check out before deciding to join one.
Because a DAO’s code can be seen by everyone, it means that other programmers that aren’t members of one can check it out and find bugs and even propose ways to fix it. While this is a good thing, this also means that there are no business secrets in a DAO and it is prone to attacks. Well-meaning programmers who detect bugs that disrupt a DAO’s functions may have access to the code, but so do attackers.
In fact, probably the most famous of all DAOs is the one known for its failure after being attacked.
The DAO
Created by the German company SlockIt in 2016, the first DAO was simply called The DAO. It was created to raise money a la Kickstarter and went on to become the largest crowdfunding in history, raising over $150 Million dollars. However, in June of that year, The DAO was attacked and lost about 3.6M ETH or $50 million dollars.
Other DAOs that came after are not to be confused with The DAO, though, as other companies have since just adopted their technology and DAO has become more of an acronym that describes the technology rather than the organization that invented it.
DAO and the Future of DeFi
DAO’s technology may be new but it has grown so much since The DAO in 2016 that they are “becoming the new institutions”, as Jason Yanowitz, co-founder of Blockworks, has put it. There are many DAOs in the blockchain now that have billions at their disposal and their growth shows no signs of stopping. Because it is transparent and accessible, it is able to create communities all across the globe that collapse the typical buyer-seller, boss-employee dynamic.
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