What is a Decentralized Autonomous Organization?
A decentralized autonomous organization (DAO) is a form of legal structure that does not have a central governing body and whose members share the common goal of acting in the best interests of the entity or organization. The most popular and prevalent are with crypto and blockchain enthusiasts, and are used to make decisions when managing an organization. In short, DAO is a form of organization that does not have a central governing body, but decisions are made on the basis of decentralized mechanisms, often through blockchain technology. DAO members often share a common goal and work together through smart contracts or other decentralized tools to achieve these goals.
Source: cointelegraph
What is the purpose of decentralized autonomous organizations (DAOs)?
One of the main characteristics of cryptocurrencies is that they are decentralized. This means that they are not controlled by one institution such as the government or the central bank, but are instead divided among various computers, networks and nodes. In many cases, cryptocurrencies use this decentralized status to achieve levels of privacy and security that are usually inaccessible to standard currencies and their transactions. Inspired by the decentralization of cryptocurrencies, a group of developers came up with the idea of a decentralized autonomous organization, or DAO, in 2016. years. The concept of the DAO is to promote the supervision and management of an entity similar to that of a corporation. However, the key to the DAO is the lack of a central authority; where a collective group of leaders and participants acts as an administrative body.
Source: cointelegraph
How does DAO work?
DAOs rely heavily on smart contracts. Based on the outcome of the decision, a particular code can be executed to increase supply in circulation, burn selected reserve tokens, issue selected rewards to existing token holders, or finalize some other decision. The voting process for DAOs is published on the blockchain. Users often have to choose between mutually exclusive options. Voting power is often distributed among users based on the number of tokens they own. For example, one user who owns 100 DAO tokens will have twice the weight of voting power compared to a user who owns 50 tokens. The theory behind this practice is that users who are more financially invested in DAO are encouraged to act in good faith. Imagine a user who owns a total of 25% of the voting power. That user can participate in bad actions; however, by doing so, the user will compromise the value of its stake of 25%. DAOs often have vaults that contain tokens that can be issued in exchange for fiat currency. DAO members can vote on how to use these funds; for example, some DAOs with the aim of acquiring rare NFTs may vote on whether to give up treasury funds in exchange for that NfT or some other asset.
Source: cointelegraph
Advantages of DAOs
There are several reasons why an entity or collective group of individuals might want to implement the DAO structure. Some of the benefits of this form of management include:
Decentralization: Decisions that affect an organization are made by individuals instead of by the central government. Instead of relying on decisions of a single individual (CEO) or a small group of individuals (Board of Directors), a DAO can decentralize authority across a significantly larger range of users.
Participation: individuals within an entity may feel more powerful and connected to the entity when they have direct opinion and voting power in all matters. These individuals may not have strong voting power, but the DAO encourages token holders to vote, burn tokens, or use their tokens in ways they deem best for the entity.
The public: within the DAO, voting is made via blockchain and everything is publicly visible. This requires users to act in a way they deem best, as their voice and their decisions will be publicly visible.
Source: cointelegraph
Disadvantages of DAOs
However, not everything is perfect when it comes to DAOs. There are serious consequences of improper installation or maintenance of daos, and these are just some of the limitations of the structure:
Speed: If a public company is run by an CEO, it may only take one vote to decide which direction the enterprise will take. With the DAO, every user is given the opportunity to vote. This requires a much longer voting period, especially taking into account time zones and priorities outside the DAO.
Education: similar to speed issues, DAO has a responsibility to educate many more people regarding ongoing entity activities. One CEO is much more knowledgeable about enterprise development, while DAO token holders may have different educational backgrounds, understanding initiatives, incentives, or resource availability. A common challenge of DAOs is that, although they bring together a diverse set of people, this diverse set of people must learn how to grow, strategize and communicate as a whole, and it can happen that not everyone understands how to achieve it all in the most effective way.
Inefficiency: partially summarizing the first two positions, DAOs carry a high risk of inefficiency. Because of the time it takes to educate voters, communicate initiatives, explain strategies, and introduce new members, dao will easily spend a lot more time discussing changes than it implements. Daos can get stuck in trivial, administrative tasks due to the need to coordinate many more individuals.
Source: cointelegraph
How does DAO make money?
Dao initially raises capital by selling its token. This basic token represents voting power and ownership share among members. If the DAO achieves success, the value of the base token will increase. DAO can then issue future tokens at a higher value to raise more capital. The DAO may also invest in assets if members choose to approve such measures. For example, a DAO can buy companies, NFTs, or other tokens. If these assets increase in value, the value of the DAO, that is, its treasuries, also increases.
Source: cointelegraph
Conclusion
Decentralized autonomous organizations (DAOs) are an innovative form of organization that relies on blockchain technology and smart contracts to transform the way decisions are made and managed by entities. Although they bring a number of advantages such as decentralization, greater member participation, transparency and global connectivity, DAOs are not without disadvantages. Problems such as the speed of decision-making, the need to educate members, potential inefficiencies and safety issues are often present. Despite these challenges, DAOs remain an intriguing concept with great potential to transform different industries and create new economic models. Continuous learning and adaptation is key to reap the benefits of the DAO model and minimize risks, which will be key factors for their long-term success. We hope that you enjoyed reading today’s blog, and that you have learned something new, if you have any questions or suggestions you can contact us on our social networks (Twitter, Instagram).
