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What is a Decentralized Autonomous Organization: A Complete Overview

Updated on :  

08 min read.

One of the most significant features of digital currencies is their decentralised status. This implies that a single institution like a central bank or government does not control them. Instead, they are divided among several networks, nodes and computers. 

Virtual currencies, in many cases, use this decentralised status to achieve security and privacy, which is typically not present for standard currencies and their transactions.

Taking inspiration from the decentralisation of cryptos, a team of developers devised the idea for a DAO or decentralised autonomous organisation in 2016. And as per several optimists, these organisations can revolutionise the digital space.

With all this in context, here are some vital details related to a DAO. Dive in to find out.

What is a DAO?

A DAO or decentralised autonomous organisation refers to an entity with no central leadership. These internet-native organisations are collectively managed and owned by their members. DAOs contain built-in treasuries, which can only be accessed with the approval of these members. 

The decisions are made from the bottom-up and through proposals that the group votes on during a certain period. These decisions are governed by a community organised around a particular set of rules enforced on a blockchain.

Functioning of a DAO

A core team of community members establish rules of the DAO via the use of smart contracts. 

Smart contracts lay out a foundational framework by which the decentralised autonomous organisation needs to operate. They are highly verifiable, visible, and publicly auditable. Hence, any potential member can fully understand how the protocol must function at each step.

After these rules get formally written to the blockchain, the process moves to the next step – funding. In this step, the decentralised autonomous organisation must figure out how to bestow governance and receive funding.

Typically, this takes place via token issuance, by which the protocol raises funds by selling tokens and filling the DAO treasury.

Token holders receive voting rights in return for their fiat. Usually, these rights are proportional to their holdings. After the completion of funding, the decentralised autonomous organisation becomes ready for deployment.

At this stage, once the code goes into production, it is impossible to change it via any other means apart from a consensus reached through member voting. Thus, no special authority can modify the DAO’s rules, and only the community of token holders can make a decision.

Types of DAOs

  • Philanthropy DAOs – Big Green DAO, PleasrDAO
  • Grant DAOs – Aave Grants DAO, MetaCartel
  • Investment & Venture DAOs – Krause House, BessemerDAO
  • Protocol DAOs – Uniswap, MakerDAO, yearn.finance
  • Collector DAOs – FlamingoDAO, ConstitutionDAO
  • Media DAOs – BanklessDAO, Decrypt
  • Sub DAOs – Balancer Protocol
  • Social DAOs or Creator DAOs – Friends With Benefits, Developer DAO

DAO vs traditional organisation


Traditional organisation

DAO

Usually hierarchical

Usually completely democratised and flat

Based on structure, voting may be provided, or changes can be demanded from a sole party

For the implementation of any change, voting is necessary by members

If voting is allowed, the votes are tallied internally. Also, the outcome of voting should be manually handled

Votes are tallied, and implementation of the outcome takes place automatically without any trusted intermediary

Requires centrally controlled automation or human handling. Also, it is prone to manipulation

The offered services are automatically handled in a decentralised manner

Typically, activity is private and restricted to the public

All activities are fully public and transparent

A glance through some leading DAOs

Uniswap

Uniswap is the most popular decentralised cryptocurrency exchange globally and is perhaps the biggest DAO now. It launched its governance token in September 2020. 

Primarily, Uniswap functions as one of the top active DAOs today, providing several tradable cryptocurrency tokens. As a reference, centralised exchanges offer only a few hundred coins.

BitDAO

BitDAO is one of the biggest DAOs determined to create an ecosystem with a decentralised tokenised economy. This organisation invests funds to support other partners and projects in the DeFi world and help them grow.

The native token of BitDAO is BIT. It serves as the project’s governance token. Holders of BIT can present a proposal and cast votes on all decisions related to the project. This implies that every decision is made with a proper voting process and community proposal approval.

Dash

Dash is a decentralised digital payment option that provides faster transactions compared to other cryptos like Bitcoin. Dash is an example that shows how a decentralised autonomous organisation project can become the driving force behind DeFi’s success.

The utility token of the DAO is DASH. Dash is gradually rising to the top of the DAO hierarchy as demand for anonymous payments grows.

Advantages of a DAO

  • Community involvement

Decentralised autonomous organisations allow communities across the globe to connect and work together on productive goals. Any individual having only governance tokens of a DAO and an internet connection can enter into the web3 space. 

Participation in these organisations delivers the unique value advantage of contributing to new projects. This includes developing new domains like the ENS (Ethereum Name Service) or new play-to-earn cryptos.

In addition, DAOs do not restrict decision-making to the boardroom. The organisation can incorporate innovative developments with inputs from multiple DAO members.

  • Active Stake in the Game

Primarily, mechanisms underlying DAOs focus on providing the members with the facility to exert their stake in the organisation.

Firstly, DAO governance tokens highlight the requirement of burning or spending tokens to receive voting rights. That makes members more likely to be thoughtful and considerate regarding every vote. In other words, governance tokens on decentralised autonomous organisations integrate the ability of every user to influence the DAO project’s future.

Moreover, all votes on the DAO blockchain are entirely public, ensuring that every user is accountable for the votes.

  • Decentralisation

Decentralisation is an essential trait and one of the biggest advantages of a DAO. Decentralised autonomous organisations aim to achieve maximum decentralisation per their basic design principles. 

In the case of other endeavours, the concept of total decentralisation generally loses value. But, for DAOs, the equation changes as these organisations depend on collective participation rather than relying on a single individual.

Disadvantages of DAO

  • Disagreements

The organisation can split into two if the community disagrees strongly. 

  • Governance looks similar to traditional organisations in some cases

In some of these organisations, the ones with the maximum number of tokens call the shots.

  • Flat structure 

DAOs do not have a chain of command or clear authority figure, making it slower to operate them as it takes longer to make decisions.

Closing thoughts

In 2021, new DAO models and experiments exploded in terms of popularity. Meanwhile, the number of organisations and initiatives developing the tooling necessary for these organisations to realise their full potential is highly diverse. 

If Web3 becomes a user-owned internet, DAOs will undoubtedly be the organisational primitive via which distribution of that ownership will take place. It seems it would not take long for DAOs to revolutionise the present social media space.