Decentralized autonomous organization (DAO) is one of the best-known concepts that blockchain technology has introduced to date. “Decentralized” refers to no need for any central government interventions, and “autonomous” refers to the amplification of smart contracts and encoded transactions on the blockchain. The creation of DAO was first made public by some members of the ethereum blockchain community in early May of 2016. The DAO creation was an outstanding success which produced 150 million dollars worth ether at that time. Furthermore, this value managed to reach a worth of 250 million dollars which is recognized as the biggest crowdfunding in history.
Let us understand the meaning of the term and important points related to it.
What is the meaning of DAO?
As you already know that DAO stands for decentralized autonomous organization, but what does that mean exactly? Well, it is a blockchain-based technology that lets users organize and oversee themselves. Users have to play along with the set of self-executed public blockchain rules. The system is free from the governance of any central party. Additionally, users can receive funds from the DAO by projecting their pitches to the community. Now that you have learned the base concept of DAO creation, we can move ahead with its roles in the blockchain.
Why are DAOs needed?
When a person wants to build up an organization with the other party, the involvement of money and funding in this process demands a lot of trust in the parties you are working with. But it is not a wise move to trust anyone you just interacted with on the internet for your business. But by using DAO, one doesn’t need to stress out in finding trustable people as the DAO system will provide you with a hundred per cent credibility and transparency on DAO code. This advancement draws in so many opportunities for worldwide collaboration.
So, this is why DAO holds its importance in the world of trade. Now, let’s look into how it works.
How do DAOs work?
The smart contract is the foundation of DAO. DAO group regulations and organization rules are ingrained in the smart contract. No changes can be made to the rules once the contract is published on Ethereum. However, a voting system can be used to approve any changes. If any member does something that is not under the logic and rules of the created code, the action will cease to function. Without the group’s permission, nobody can spend the money as funding is also specified by the smart contract. The DAO group decides rulings altogether without the central authority, and donations are granted automatically when votes are passed. Smart contracts are untameable after they get sent on Ethereum. Nobody can just modify its rules without getting caught by other members as everything in this system is public.
How to use DAO?
Here are some examples of how one can use a DAO:
- In charitable organizations: By using DAO, you can approve membership and contributions from people around the world, and the respective organization can decide on how they can spend these donations.
- In freelancer business: Another excellent example of DAO use is creating a network of contractors who are willing to combine their funds for office areas and software subscriptions.
- Pool investment: One can establish a venture fund that merges investment capital and counts on enterprises to support it. Later on, refunded money can be distributed again among each and every DAO member.
DAOs are highly functional in numerous funding areas, users can legally use DAOs according to the required scenario. All you need is a DAO membership.
How to get DAO membership
There are various categories to get DAO membership. Membership can conclude the working procedure of voting and other crucial roles of the Decentralized autonomous organization.
- Token-based membership
Primarily on a decentralized trade, these tokens can be exchanged for permissionless trade. Depending on the type of token, members can acquire full permission for all activities. At the same time, others need to offer contributions in liquidity or any other proof for credibility. Either way, simply having a token offers you access to voting. This is commonly employed to regulate vast decentralized strategies and tokens themselves.
- Share-based membership
Share-based membership is more restrictive yet quite open. All interested members are allowed to enrol into DAO, usually by providing valuable contributions in the form of a task or tokens. Having shares gives members unrestrained ownership and voting rights. Group members are free to exit anytime with their earned share of the profit.
Although DOA has marked its importance in the Blockchain space, still there are a number of fallacies around the term.
Misconceptions around DAO
- Above everything else, let us first talk about the “decentralization” part of a DAO. It is muddled whether decentralization just should be set up at the level of the primary blockchain-based organization or whether it additionally should be carried out at the administration level (for example, the DAO ought not to be constrained by any centralized group).
- Second, the fact of whether a DAO should be wholly autonomous and automated, meaning the DAO ought to work with no human mediation at all, or whether the idea of “self-rule” ought to be seen from a more delicate perspective, is a matter of confusion. For example, while the DAO, as an association, may require the support of its users, its administration should not be subject to the tendencies of a bit group of users.
- There are a few discussions concerning when the user group connecting with a smart contract can be viewed as a real “organization” (freely of any legal acknowledgment). For example, it is puzzling whether the simple demonstration of executing with a smart contract qualifies as an authoritative action or whether a more grounded level of involvement is vital, such as having an administration model or collective communications among members.
The term “decentralized autonomous organization” is now well solidified in the blockchain platform. DAOs have become critical as they assist in systematizing the principles of a business, providing robust decision-making equipment, and abolishing the need for papers and external authorization.