WHAT IS DAO? AND HOW DOES IT WORK?
Still, in continuation of what positives Blockchain technology holds for our present generation, another application of the technology is in the area of governance and organization.
This article introduces the meaning of a Decentralized Autonomous Organization, the requirements to create a DAO, the Use case of DAO, the basic characteristics, and the limitations facing DAO.
What is DAO?
DAO is an acronym that stands for Decentralized Autonomous Organization. Blockchain technology through the use of smart contracts enables the creation of organizations that enjoys autonomy from any central body or authority but relies on lines of computer codes for regulation. The implications is that a DAO can function autonomously, without the need for any central regulating body. The regulations and transaction records of a DAO are stored openly on the blockchain. Rules are generally decided on by stakeholders’ votes.
Popular examples of successful DAOs includes; Aava(a DeFi lending platform), Uniswap( One of the largest decentralized exchange), and MakerDAO( an organization that manages the crypto-collateralized DAI). And there are so many other great projects out there!
Requirements To Create A DAO
Every DAO project considers the following;
- Voting Mechanism- anyone can create a decentralized autonomous organization. All you need is to decide on a mechanism for handling votes and proposals. There are several open-source solutions available, including Argon and Snapshot.
- For a DAO project to get started, it needs a community of participants to come together and decide on a particular purpose that the DAO will serve, the purpose is what drives a DAO.
- For a DAO to prosper, it needs a governance token. A governance token determines each user’s stake in a DAO. It gives holders the right to vote on issues that govern the development and operations of the organization.
Use Case Of DAO
DAO is a useful way to organize a community of people with the same interest. DAO Project may be deployed for different use cases, such as token governance, decentralized venture funds, social media platforms, crowdfunding, Dapps, NFTs community, investment platform, project funding, etc. And it is ideal for a community of people that wants to remain anonymous. The Blockchain allows people to organize themselves efficiently with just computer codes. There is no central authority or any superior, rather community members vote on issues depending on their voting power( number of governance tokens).
Characteristics of a DAO
Decentralized Autonomously organizations running on a Blockchain may enjoy the following features;
- Transparent ~ The rules regulating a DAO are completely open and transparent to all. These rules are written in a Blockchain( open-source) that governs the organization. Every member of the organization sees what goes on.
- Autonomous~ DAO is autonomous because it can function on its own. Members of a DAO are not bound by any formal contract. They are rather bound together by a common goal and network incentives tied to the consensus regulations.
- Decentralized~ Once a DAO is deployed, it cannot be governed by a single entity but is governed by all participants. No one entity has the authority to make and enforce decisions.
- Smart Contract ~ At the core of DAO are Smart Contracts. Smart Contracts enables a DAO to self executes rules independent of any central authority.
- Agreement ~ generally, decisions are made via a proposal. When the majority of the community members votes on a proposal or fulfill the agreed rules set by the consensus rule, it is then implemented.
- Trustless~ DAOs it possible for collaboration between individuals and organizations to come together without having to know or trust each other.
Limitations of a DAO
The Immutability and Trustlessness nature of DAO still pose some security setbacks. Decentralized autonomous organizations built on a Blockchain are faced with a combination of social and technical issues. Technically, the security of a DAO network is constantly challenged by coordinated attacks and hacks.
Critics are still against the decentralization of a DAO. They argue that Achieving decentralization when the governance rule gives some participants more voting power than others is questionable. Some group of investors can accumulate major shares of DAO tokens. As a result, they would gain higher voting power in the organization.
Also, there is a lot of uncertainty surrounding the legality of DAO. DAO could turn out to be a regulatory problem, due to the lack of any definite regulations for taxation and management. And this uncertainty could be a significant barrier to the mainstream adoption of DAOs.