The abbreviation “DAO” stands for decentralized autonomous organization. DAOs have been an idea for a reasonable amount of time, but blockchain technology, including Ethereum, has made them more of a possibility than ever before. Do not confuse DAOs with The DAO. The DAO was one of the first attempts at creating a DAO, and it was far from successful. This failure, however, does not mean that no DAOs will work.
Defining DAOs
DAOs are essentially self-governing organizations that follow incorruptible business rules. Those rules are usually open-source and auditable, with distribution. The main idea is that a DAO is able to function without having any sort of hierarchical management or centralization.
How DAOs Function
To be a fully functional DAO, an organization needs to have clear rules that it operates by following. Those rules should be in the form of a smart contract so they can exist autonomously. After creating rules, someone looking to form a DAO would work toward funding. This is crucial since DAOs must have internal property of some sort to function. This property can then be used to reward participants and for spending by the organization. Additionally, the ability to invest in DAOs gives participants voting rights so they can influence its future.
Following the funding, the DAO can be deployed, at which point it is independent from its developers for anonymity. DAOs must remain open-source so anyone can see their code. Their transparency, incorruptibility, and immutability are all enhanced by the fact that the blockchain records all financial transactions.
To make decisions regarding spending funds and other actions, the DAO’s members must reach a consensus. Anyone with a stake can make proposals, which stakeholders then vote on. When a majority agrees, the DAO can follow the proposal.
Benefits of DAOs
The idea of DAOs is attractive to those in the blockchain community for several reasons. The main advantage is the way that DAOs try to resolve many issues with modern-day organizations. Every investor is able to contribute to the organization and help shape its future. Without a hierarchical structure, anyone is able to propose an idea, regardless of their role or investment. The pre-written rules also eliminate potential fighting over proposals, voting, and other decisions. DAOs are also fully transparent since both their rules and transactions are all recorded in the blockchain.
Criticisms of DAOs
Despite their benefits, many still have criticisms of DAOs. This is still a fairly new technology, meaning it is revolutionary. Some feel that letting the masses make crucial financial decisions will likely lead to poor returns since people will not have the necessary experience or knowledge.
Others are concerned about security, particularly following the hack to the DAO that caused it to fail. This hack also highlighted the issue of “unstoppable code,” as the attacker could not be stopped. To prevent a similar problem in the future, DAOs can have zero tolerance for bugs in codes. This is a high standard to meet.
The Future
Expect more DAOs to appear in the future but for them to face challenges along the way.