Understanding DAOs: Decentralized Autonomous Organizations
Every organization has its leaders, right? Not necessarily. Blockchain technology, which underlies the cryptocurrency industry, is enabling the formation of decentralized autonomous organizations, or DAOs.
Keep reading to learn more about decentralized autonomous organizations.
What is a DAO?
Decentralized autonomous organizations are independently functioning organizations distinguished by their lack of centralized ownership or leadership.
DAOs use blockchain technology for all aspects of their operations, including processing transactions and making governance decisions. More specifically, DAOs use blockchain-enabled smart contracts that can be crafted for many different purposes and are self-enforcing. Most DAOs also support a native currency, which can be used to help align the interests of a DAO’s members and provide participation incentives.
How do DAOs work?
The governance of a DAO is decentralized. Smart contracts, which leverage the transparency and consensus protocols inherent in blockchain technology, are used to perform certain functions. These can include:
- Controlling access to the organization's treasury: Smart contracts can require consensus approval for any member of the DAO to access the organization’s assets.
- Making operational changes: DAO members use smart contracts to put forth proposals, which are then voted on by all stakeholders of the DAO. Stakeholders are typically owners of the governance currency used by that particular organization.
- Increasing transparency: Smart contracts make all rules and protocols known to every member of the DAO.
Smart contracts were pioneered by the Ethereum platform, and exist in Solidity: Ethereum’s native code.
Decentralized vs. Centralized Organizations
Let’s dig into how DAOs differ from traditional, centralized organizations:
- Hierarchical structure: DAOs’ organizational structures are flat and fully democratic, whereas hierarchies typically exist in traditional organizations. Every stakeholder in a DAO holds equal authority. The lack of hierarchy in DAOs also eliminates the divide that exists between centralized organizations and their customers. In a DAO, individuals who use a service can also interact in its governance.
- Consensus decision making: DAOs make decisions by consensus, requiring majority approval for any change. Consensus is a familiar concept for blockchain tech, as a similar mechanism exists to verify blocks.
- Transparency and security: The use of blockchain technology enables DAOs to make every aspect of an organization more transparent and secure. Centralized organizations are often less transparent, and rely more heavily on systems of trust for security. Decentralization incorporates what are known as trustless systems, which means the system works without the need for or the implementation of trust.
- Automation: Many operational functions for DAOs, such as voting and spending, are automated via smart contracts. Centralized organizations tend to perform more of their operations manually once the decisions are made.
DAO Examples
Here are some examples of DAOs:
- MakerDAO: This Ethereum-supported DAO is the organization that supports the cryptocurrency DAI. MakerDAO’s native token, known as MKR, is used to govern DAI. MKR token holders, in proportion to their MKR holdings, can vote on key protocol decisions and participate in the development of the DAI network. MakerDAO was established in 2014.
- MolochDAO: Another Ethereum-supported DAO, this organization was formed in 2018 to award grants to projects that advance the Ethereum ecosystem. The decisions are made on Moloch through a very simple proposal and voting design. Moloch research guilds use funds to research topics that would serve the Ethereum ecosystem.
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