March 19, 2021
What is DAO?
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What is DAO?; A Guide For Beginners

Imaging an organization, which doesn’t have a board of directors and all shareholders could vote for all activities and making decisions. This organization operates automatically and it’s fully decentralized. Working automatically means that all the rules and regulations are pre-defined and the system works based on these rules. Decentralization feature also means that the power is not on the hands of one or more people. In fact, all activities and decision are transparently available for everyone. It means that in order to make any changes or take a new decision, all shareholder should vote for it. Such this organization is called Decentralized Autonomous Organization (DAO).

 

DAO definition

Perhaps it seems impossible at first, but, blockchain technology made it possible easily. The decentralization feature of cryptocurrencies has prevented transactions from being controlled by any single organization or entity. In fact, computers, which are running around the world, verify transactions and control the network. As a result, the developers come about an idea to create a Decentralized Autonomous Organization.

Bitcoin was the first DAO introduced to the world. In fact, Bitcoin managed to eliminate the middle-men in financial transactions. It provided a pre-programmed set of rules, which is coordinated through a distributed consensus protocol as well as functions autonomously. After a while, Ethereum provided smart contracts based on blockchain technology. Ethereum publicized the DAO and created a platform, which everyone could perform a DAO by using it.

How DAOs work?

In order to build a fully operational DAO, it requires to set particular rules at first. The rules, build in the form of a smart contract. In fact, smart contract is mainly a computer program, which autonomously exists on the Internet.

Once the rules are defined and established, the DAO go in for a funding phase. This part is one of the most important parts. There are two reasons for that. The first is that DAO has to have an internal property. The internal property is basically a token, which can spend by organization as well as used to reward specific activities within it. The second is people, who invest in a DAO and have voting rights. Meanwhile, they are able to influence the way DAO operates.

Once the funding phase is done, the DAO will become completely independent and fully autonomous from its creators as well as others. DAOs are open source. It means, that anyone can observe the codes. Additionally, all financial transactions and rules will be recorded on the blockchain. Consequently, it makes DAO fully immutable, transparent and incorruptible.

Implementation of a Decentralized Autonomous Organization

When a DAO is ready to operate, all the decisions on how and where to spend the funds will make by reaching a consensus. All the participants, who bought a stake in a DAO can anticipate with proposals regarding its future. In order to prevent spams in the network, the participants should deposit some amounts of money before their participation.

Eventually, the stakeholders would be able to vote on the proposal. However, the majority should be agreed on doing something in order to perform a certain action. The percentage required to reach that majority is totally depending on a DAO, which is pre-defined in its codes.

It’s notable that a DAO doesn’t have the ability to build a product, writing a code or developing a piece of hardware. Therefore, it requires to hire a contractor in order to perform the tasks. The contract will make through the same voting system. In addition, the smart contract will ensure a quick payment via swift network, once the task is completed.

How to become DAO shareholder and why?

Investing in DAO is quite simple.  Especially if you own Bitcoin or Ether, or know how to buy them. In addition, you need to have a wallet as well. After that, you just need simply buy the tokens of a specific DAO. In fact, buying the tokens is equivalent to buying share of a company.

When you invest in a DAO and the funding phase is done, you would be able to make proposals. In addition, you can vote on other proposals and make a profit. The amount of your voting power is a correlate with the amount of tokens you purchased.

It’s notable, to do enough research and study about the project before put your step in. The most important feature of DAOs is that they are transparent and open source. Therefore, you would have the chance to review the codes in order to make sure that there is no mistake or any bug in it.

What is Dapp?

Dapp stands for Decentralized Applications. These apps are basically unstoppable apps. In fact, they work on Ethereum blockchain and powered by smart contracts. The main difference between the ordinary apps and Dapps is that Dapps are fully autonomous. It means that they do not need any third-party to be operated. In addition, they are totally immune to censorship. In other words, they establish a direct connection between a service and user. Basically, DAOs are the very ambitious version of the decentralized apps.

The story of the DAO

‘The DAO’ is basically a name of a specific DAO. This project was created by a team, which were developing a German startup named slock.it. The slock.it specialized in ‘smart locks’, which could make people be able to share their property in a decentralized version of Airbnb. The DAO established in May 2016 and started to raise fund by selling tokens. This project became one of the most successful projects, which used crowdfunding method in the history of DAO. In fact, they could raise more than $150 million.

However, the DAO code wasn’t perfect enough. It was an open-source protocol, which everyone could observe the codes. Therefore, someone found a bug in the codes. It was in June 17th that a hacker or group of hackers could transfer money from the DAO to a ‘child DAO’. In fact, the ‘child DAO’ copied the DAO’s structure. In this attack, hacker could successfully steal over $50 million worth of Ether.

Consequently, the hack undermined Ethereum hosting platform reputation as well as the core concept of DAO. Finally, the Ethereum network split into two networks due to the hack. This hack played a significant role in the future of the DAO. In fact, the developers became aware of the weaknesses and tried to fix the bugs and issues in the future.

Advantages of DAOs

There is no doubt that the core concept of DAO is really exciting. In fact, it can revolutionize the system that how modern-day organizations run. A DAO can give the opportunity to the investors to shape the organization as long as the DAO shaped perfectly. In fact, there is no hierarchical structure. Therefore, everyone can put their innovative idea and the entire organization will consider the idea. All the rules are pre-defined and all the investors are aware of before joining the organization. In addition, the voting system will eliminate any argument or whatsoever.

Furthermore, in order to put a proposal and participate in voting, each investor has to spend some amount of money. As a result, it pushes the investors to evaluate their decision first and don’t waste time on ineffective solutions.

All the transactions in DAO will be recorded on the blockchain. So, it would be available for everyone to check the records in order to decide how to spend the funds or even what happened to the raised funds.

Disadvantages and critique

DAOs are still pretty young and consider as a revolutionary technology. So, it’s obvious that such these projects will attract a lot of criticism. For example, MIT Technology Review believes that trusting the masses could not be an enough good idea. In addition, there is no chance for any returns. In fact, they believe that the world has to change much for DAO- related projects in order to become successful.

The other problem apart trust issue to the masses is the security issue. This problem highlighted especially after the DAO hack. In fact, it’s connected to the ‘unstoppable code’ principle. Unfortunately, in that attack the investors and observers were watching the funds are transferring out of the DAO, but, they could not do anything as the hackers were following the rules.

Finally, DAOs require to have a legal framework. In fact, it’s necessary for startup businesses, which operate outside of the blockchain network and communicate with the physical world of financial instruments as well as intellectual property. The lack of clear regulations around the cryptocurrency world is one the main issues of this sector. However, it would become much better over the time.

Examples of DAO

Any autonomous organization, which has a decentralized budgeting system and governance can be a DAO. As a result, it makes most of the decentralized cryptocurrency networks a DAO. Here we are going to give a short list of successful and well-known DAOs.

Dash

A peer-to-peer and open source cryptocurrency. Dash offers private transactions as well as instant payments.

Digix Global

A digital asset pegged to gold. Each Digix Gold token represents 1 gram of LMBA standard gold.

BitShares

BitShares is a cryptocurrency exchange. It offers a fast and fluid trading platform. It provides both the stability of dollar and the freedom of cryptocurrency.

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