What is a DAO (Decentralizing Organizational Governance)?

The Disadvantages of a DAO

Decentralized Autonomous Organization, or DAO, is — as the name implies — an autonomous organization with a decentralized management and budgeting system can be called a DAO.

As a blockchain-based organization, the governing rules are coded like a computer program and are available for all to see, while financial transactions are recorded on a blockchain.

Since DAOs are open source, their code can be viewed, verified and audited by anyone.

In many ways, Bitcoin is considered the first true DAO because it has a transparent, programmed set of rules that executes decentrally and has a distributed consensus protocol.

Only after the creation of smart contracts in the Ethereum protocol, however, did DAOs begin to gain traction in the broader blockchain and cryptocurrency space.

How Does DAO Work?

How DAO Works

For a DAO to work, a set of operational rules must be established and encoded as a smart contract in a blockchain such as Ethereum. This smart contract will exist autonomously on the Internet. However, humans still need to be involved to develop and maintain an DAO.

Once the rules of an autonomous decentralized organization are in place, a DAO will typically enter a funding phase—a critical step, as a DAO requires some form of usable and compensable capital.

In addition, a DAO needs investors so that entities can vote on governance proposals.

A DAO will generally be deployed after it has completed its funding period. Once deployed, the organization becomes — to match its name — decentralized and autonomous, as the rules are permanently recorded in a blockchain.

At this stage, a DAO takes advantage of all the hallmarks of blockchain technology — that is, its transparency and immutability.

After implementation, decisions related to DAO are reached by consensus. DAO stakeholders can propose governance changes, new rules, reward adjustments, or other ideas—usually through a deposit.

Interested parties can then vote on these proposals, with the participation requirements and approval percentage varying from DAO to DAO.

Once fully operational and implemented, DAOs allow for the decentralized and borderless exchange of funds between individuals or entities through investment, donation, financing, loan or various other means of conducting financial transactions.

The Advantages of a DAO

The most obvious advantage of a DAO is the fact that it removes centralization from organizations. While the vast majority of organizations in the world are governed and controlled by centralized parties, DAO puts the governance of an organization truly in the hands of those who have an interest in it. Every investor, in theory and in practice, should have the opportunity to help govern a DAO.

Another advantage is that the rules are predefined, transparent, verifiable and distributed. No one can argue that they didn't understand a DAO's rules before joining, as the rules have always been publicly verifiable.

In addition, proposals and decisions must generally be carefully considered before being presented, as they often require a certain amount of expenditure.

Furthermore, the rules and transactions of a DAO are always recorded in a blockchain, ensuring full transparency and accountability for every decision and financial movement. While centralized organizations may maintain non-transparent records, a DAO's records are always available for all to see.

The Disadvantages of a DAO

Decentralized Autonomous Organization, or DAO, is — as the name implies — an autonomous organization with a decentralized management and budgeting system can be called a DAO.

One problem with the decentralized nature of DAOs and voting mechanisms is that a post-release security flaw may not be fixed until a majority of your stakeholders have voted to approve a fix.

This leaves the door open for hackers and rogues to potentially drain a DAO and all of its funds.

DAOs are also unable to develop. In order for a DAO to build on its core base, a developer must be hired — which requires decentralized voting.

Some might say that this has the potential to delay the development of a DAOs, although many might argue that the pros of a decentralized governance model outweigh the cons.

An additional concern shared by those who are not natural proponents of the technology is blockchain and cryptocurrencies involves the belief that the masses are unlikely to make the best governance decisions about an organization—although this depends largely on personal belief.

Finally, one of the main concerns of DAOs involves the lack of a clear regulatory framework.

Most governments around the world do not have clearly defined legal positions on DAOs, which can hamper the rapid development of such organizations.

DAOs in Today's Crypto Space

Decentralized autonomous organizations are prevalent in today's blockchain and cryptocurrency space, although the average retail user may not necessarily realize this.

DAO Maker and More

Specifically, the world of decentralized finance, or DeFi, is full of DAOs.

DAO Maker, a guarantee financing platform decentralized, is perhaps the most famous DAO.

The main decentralized exchanges uniswap, Compound and SushiSwap are also managed in a decentralized manner and have governance tokens — UNI, COMP and SUSHI, in these cases — for the presentation and voting of proposals. Other DeFi platforms such as Yearn, Aave, Curve Finance and Badger DAO are also DAOs.

Outside the DeFi world, older digital currencies are also autonomous decentralized organizations. Dash, for example, is a DAO, because of its decentralized governance model and budget system.

However, with decentralized funding proving to be one of the most prevalent sectors in the entire blockchain space, the importance of DAOs may continue to increase dramatically as the first promises to “decentralize everything” made by so many early projects come to pass.

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