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Decentralized Autonomous Organizations Explained

A decentralized autonomous organization or DAO, is a community-led entity that doesn’t possess any central authority. DAO is a fully independent and transparent organization that works with the help of smart contracts. Smart contracts establish the ground rules, carry out decisions, proposals, and voting, and even allow code execution.

A DAO is governed by its members, who make critical decisions such as treasury allocations, significant upgrades, and technical upgrades for the project’s future. The community members draft proposals about future operations and come together to vote on each proposal. Only the accepted proposals which achieve some predefined level of consensus are enforced by the rules instantiated within the smart contract.

DAO takes a significant hit on the traditional hierarchical structures as it is more community-centric and allows easy collaboration with the community. DAO enables each member to oversee the protocol at some level. A member receives incentives for voting if the proposal they voted for is approved in the protocol. In short, a robust DAO will gain visibility from several people, increasing the token value for each token holder.

Examples of DAO

Although the ecosystem has numerous DAOs up and running for different purposes, let’s first consider some basic examples to visualize the foundational values of DAO.

In such a case, you can create a network where freelancers can join and publish gigs for a monetary value.

Another case could be to create a DAO for ventures and grants. The decentralized autonomous organization will help you create a venture fund that pools investment capital and votes on ventures to back. DAO could later redistribute repaid money amongst the members. Let’s consider some real-life examples of DAOs.
Real-life examples of DAOs
MakerDAO is a famous DAO that allows MKR token holders voting power to vote for the Maker protocol’s future. A user can easily buy MKR tokens on decentralized exchanges.

Another example is MolochDAO which focuses on funding Ethereum projects. Contrary to MakerDAO, it requires a proposal for membership to assess whether you have the experience and capital to make informed judgments about potential grantees.

Why do we need DAOs?

DAOs remove new-age organizations that boast several advantages over traditional organizations. Since they live on the Internet, DAOs do not require trust between two parties. Contrary to traditional organizations, which require a lot of trust in the people behind them, DAOs run on code, so only it needs to be trusted.

Also, the code is publicly available (open source) and goes Through into extensive testing before the launch. It makes the DAO functioning transparent and verifiable as every action has to be approved by the community. Although DAOs do not have any hierarchical structure, they can still accomplish tasks and grow while being controlled by stakeholders.

Since DAOs do not have a hierarchy, they enable the creative side of stakeholders to come up with innovative ideas. The community can vote on the concept, which a smart contract will implement with the pre-written rules.

DAO (Decentralized Autonomous Organization)
Traditional Organization
It works on a flat and fully democratized model.
It works on a hierarchical model.
It requires members to vote for any changes in the protocol.
The decisions can be governed by a sole party or collectively offer voting rights to members.
It ensures all activity is transparent and fully public.
It enables only members to see the activities and is limited to the public.
It doesn’t require any trusted intermediary for tallying votes tallied or implementing outcomes.
It requires a trusted intermediary who will tally the votes internally and handle the outcome of the votes.
The smart contract handles the services in a decentralized manner.
Since it requires human handling, it is prime to manipulation by people in power.

How do DAOs work?

The entire skeleton of a DAO is dependent on a smart contract. The core team members lay down the rules of DAO in the contract, which also holds the group’s treasury. Smart contracts act as the foundational framework for DAO to operate functionally. Since the contracts are visible to the general public, any member can understand how the protocol functions.

After the rules are written onto the blockchain, no one can change them except for a vote. Hence, no special authority can change the rules of the DAO, and only the community can decide that. The next step comes for funding, as a DAO needs to figure out how to receive funding and how to bestow governance.

A DAO performs this operation by issuing tokens to raise funds and fill the DAO treasury. The tokens allow voting rights to members according to their blockchain holdings. Now, the DAO is entirely ready for deployment.
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Frequently Asked Questions (FAQs)

Q1. What is a DAO and how do they work?

Ans. A decentralized autonomous organization or DAO is a community-led entity that doesn’t possess any central authority. DAO is a fully autonomous and transparent organization that works with the help of smart contracts. They lay the foundational rules, execute the decisions, proposals, and voting, and even allow code execution.

Q2. What is the purpose of a DAO?

Ans. A Decentralized Autonomous Organization works on a fully democratized model, where a smart contract handles the services in a decentralized manner. It ensures all activity is transparent and fully public and doesn’t require any trusted intermediary.

Q3. What is an example of a DAO?

Ans. An example of DAO is BanklessDAO which aims to spread the Web3 word and educate the masses through content. BanklessDAO is a media-centric DAO that wishes to onboard 1 billion people to crypto.

Q4. How does a DAO make money?

Ans. DAOs raise funding by issuing tokens and then share the capital with their participants. The members can buy the tokens that will help to bestow governance. A successful DAO will give significant profits to the early members and the voting rights, making it much more valuable than any other token.

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