What DAOs are and how they can change the future of business.
July 19, 2022
Can you envision a way to collaborate with others globally without knowing each other, setting your own rules, and making decisions on your own? DAOs are, in fact, making this happen.
A decentralized autonomous organization, commonly known as a DAO, is a community-led organization with no central leadership or authority.
Sounds like a mouthful, yea? But it is quite simple. It is just an entity that is run by a group of individuals who are bound together by a set of rules that are enforced on a blockchain. These rules are made possible by smart contracts, which are agreements that have been embedded in a blockchain to take effect when specific circumstances have been satisfied. These smart contracts are the fundamental laws that DAOs rely on to carry out the selected course of action.
In general, community members draft suggestions for how the protocol should operate in the future before coming together to vote on them. The rules incorporated into the smart contract will then accept and apply suggestions that receive a specific amount of support. Because of the transparency that the blockchain provides, the public can examine the ideas, votes, and source code.
There has been a surge in fresh interest in DAOs as a result of the growth of decentralized finance (DeFi) in 2020. Now that you have a better understanding of what DAOs are, it is essential to learn more about their attributes and how they work in order to appreciate the bigger picture of what is reshaping traditional forms of organization.
How do DAOs work?
The DAO’s rules are set by a core group of community members through the use of smart contracts. These smart contracts spell out the basic rules of operation for the DAO. Because the protocol is very visible, verifiable, and publicly auditable, every potential member should understand how it works at every stage.
After these regulations are formally recorded on the blockchain with the help of smart contracts, the DAO must determine how to raise money and enable decentralized governance. This is often accomplished through the issuance of governance tokens, whereby the protocol releases tokens through means such as airdrops to early supporters and frequent users or contributors, or through a token sale to raise money and fund the DAO treasury.
Holders of tokens receive specific voting rights in exchange for their currency, typically in proportion to their holdings.
The objective of an airdrop distribution or a token sale is to get the tokens into as many hands in the community as possible, in a fair manner, to ensure a good distribution and make sure that some people do not hold too much voting power initially.
Once the token sale and airdrop distribution are completed, the DAO is ready for launch. At this point, the only way to alter the code or rules in the smart contract is to obtain an agreement among the voting members after it has been deployed into production. In other words, the DAO’s rules cannot be changed by a specific authority; instead, the community of token holders must make that decision by voting.
Some examples of organizations that use DAOs are Bankless, Uniswap, the famous Bored Ape Yacht Club NFT project, the decentralized finance project AAVE, and Gitcoin—an organization that facilitates public goods funding for Web3 projects.
Other examples include:
- Charity institutions where donations are endorsed by members
- Venture capital firms that are owned by groups
- Networks of independent contractors that pool their income to pay for software subscriptions.
Benefits of DAOs
DAOs provide a safe and fair way to collaborate with strangers on the internet.
A safe place to commit funds to a specific cause.
How traditional companies are different from DAOS
While DAOs bring new options to the table, they haven’t fully replaced conventional organizations. Currently, traditional organizations adopt a hierarchical structure to keep things running smoothly. Despite the ongoing move toward more agile business structures and projects, they haven’t been able to change this structure. Let’s take a look at how the two systems differ.
In traditional organizations, the role of every member or worker is clearly defined, which is typically an effective way to distribute responsibility to a sizable team. However, this strategy also leads to the movement of ideas from a small group of people to the majority.
DAOs are a decentralized alternative to these standard management frameworks. It enables blockchain and Web3 projects to stay decentralized and conduct community governance without the need for a board of directors. The community retains all decision-making authority. Today, we are familiar with companies’ being backed by legal status. A DAO may perfectly function without it as it can be structured as a general partnership.
Let’s also have a look at how similar DAOs are to traditional companies.
- Just like every traditional company, DAOs require a founding member or team. A DAO’s founding members, on the other hand, may be a small group of people who seek to generate value through a new protocol or service.
- Both of them require the submission of documentation, although DAOs do not require participants to fill out any paperwork.
Now here are some key things to note about DAOs:
- DAOs are more democratically organized than standard corporations.
- They have no CEOs or executives.
- The rules inherent in the smart contract code are followed by all members of a DAO.
- DAO operations are entirely transparent and worldwide.
- Any changes to a DAO must be approved by all members..
- DAOs give us the chance to reconsider current company structures and gain a sense of where businesses are headed in the coming decades.
Some DAOs to check out
DAOhaus is a no-code platform for building and managing decentralized autonomous organizations (DAOs). The community owns and operates it. You can check them out if you’re interested in founding your own DAO or exploring the dynamic environment.
MakerDAO: If you want to contribute to the protocol that launched the world’s first unbiased stable coin, DAI, you can participate in governance by voting on Maker protocol updates.
Opolis: This member-owned digital employment cooperative caters to independent workers with benefits and shared services. You might want to look them up if you’re passionate about the future of work and want to influence how it develops.
Businesses and brands need to keep up with the latest trends since they may affect how consumers connect with them and how they engage with them. DAOs are not yet commonplace, but they do appear to be gaining popularity among many inventors.
For more insight into how a DAO works, you can watch our Introduction to DAOs.