Business structures typically involve a hierarchy of leaders who make decisions for the company. Recently, a new organizational structure has emerged: Decentralized autonomous organizations or DAOs. DAOs are an emerging method of handling an organization’s finances, which emphasizes democracy and utilizes blockchain technology. This article will offer a beginner’s introduction to the nature of DAOs, how they work, and a few examples of currently operating DAOs.
A DAO is a collective of internet users who contribute currency into a shared bank account, usually a crypto wallet.
While DAOs are organizations, they differ from traditional companies and financial entities. Unlike their traditional counterparts, DAOs don’t follow a general leadership hierarchy and are democratic. All decisions are made collaboratively and implemented by a community that follows the rules enforced via blockchain.
These internet-native, community-led organizations are owned and managed by their members, with no one member above another. There are no boards, committees, or executives. Instead, rules previously agreed upon are hardwired via code and executed automatically by the online network that powers the DAO. Decision-making is done via group voting within specified periods, and the entire process operates online. Fundamentally, DAOs were created to minimize and eliminate human error and unethical handling of funds.
Generally, DAOs fall into two categories; blockchain-based open-source projects and investment collectives. Depending on the nature and objectives of a DAO, it can operate in ways similar to investment firms, LLCs, or VC firms. One example of this is PleasrDAO, which is a collective of crypto investors that purchase high-value NFTs. The type, governance styles, rules, and structure of DAOs can significantly differ, depending on their goals and the individuals comprising them.
DAOs are powered by blockchain technology and smart contracts. These two pieces act as a DAO’s backbone, executing and maintaining the structure and systems of governance. The blockchain serves as a digital and decentralized record, while smart contracts implement (via automation) a set of rules coded into the blockchain. For clarity, smart contracts are agreements built into the blockchain infrastructure. They contain a set of rules to be deployed if/when certain conditions are met.
In DAOs, day-to-day governance is not undertaken by any person but through these smart contracts. Unlike traditional organizations, where decisions are made by a board of directors, upper management personnel, and high-level executives. The smart contacts contain previously agreed-upon rules and processes that are coded into the blockchain and implemented automatically anytime action has to be taken. These rules cannot be altered or bypassed without the DAO’s members’ majority consent.
Once rules have been conceptualized, ideated, and finalized, they are hardcoded through smart contracts. Usually, once this is complete, DAOs initiate a funding phase, inviting investments from anyone who wants to put in money. Investors participate by purchasing the DAO’s particular form of cryptocurrency (whichever the DAO chooses to use). Once funding is complete, the DAO is operational and makes decisions through collective consensus.
Additionally, instead of a select number of individuals deciding the fate of the DAO, every member has a vote in all decision-making. This setup motivates members to be actively engaged and provides higher levels of transparency.
Both an open-source cryptocurrency and a DAO, Dash is considered the first DAO. The organization is run by a section of its users, called masternodes. Masternodes are computers that put in extra work and heavily invest in Dash tokens.
The altcoin Dash stems from Bitcoin protocol, and Dash has a governance system built to address the shortcomings of Bitcoin. The organization splits payouts (rewards) into three segments: 45% to masternodes, 45% to miners, and 10% to its decentralized governance fund.
Owned by a private New York-based company called Steemit Inc., the steem blockchain aims to monetize social media platforms while building an online community. Users can submit work proposals that will benefit the platform, and if the proposal receives enough votes, the user is paid for completing the project.
Uniswap refers to a company and a DAO. It is a decentralized finance protocol that allows for cryptocurrency exchange and is built by a company of the same name.
Uniswap launched a governance token in 2020 called UNI that allows its community to have a say in the platform’s development. This means that those with UNI tokens can submit proposals for new features and/or vote on what proposals move forward.
Developed by the Forecast Foundation and advised by the co-founder of Ethereum, Augur is a decentralized platform that lets users formulate prediction markets on any subject.
Over the past few years, DAOs have begun to emerge. Their unique form of pooling finances and achieving real-world objectives through digital, decentralized currency and transactions has gained momentum. While not the norm yet, DAOs have opened up exciting possibilities and ways to evolve global economies for decades to come.
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