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DAO.png

What is a DAO?

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PDAX

August 31, 2022

5 min read

IntermediateDeFi

TL;DR

A decentralized autonomous organization (DAO) is an emerging blockchain-based organizational structure with no central leadership or hierarchy. This means that the power to make decisions and approve policies is distributed across the organization’s members. The structure takes a bottom-up approach to management and decision-making by allowing the members to vote through governance rules enforced by algorithms and have the results of the votes automatically executed by smart contracts. 

What is a decentralized autonomous organization (DAO)?

A decentralized autonomous organization (DAO) is an alternative to the hierarchical structure found in most corporate organizations. The main feature of DAO is that there is no central authority and power is distributed across all of the members of the organization.

This is the opposite of a traditional organizational structure, wherein a chief executive officer (CEO) sits at the top of the hierarchy and does most of the decision-making and then delegates specific roles and tasks to managers and department heads for different areas of concern. 

But in a DAO which has a decentralized structure with no authority figurehead, the community maintains order and direction simply through a democratic voting process carried out by algorithms. And since a DAO is based on a blockchain, members can also maintain their anonymity completely. 

How does a DAO work?

A traditional corporation or company is funded by a pool of shareholders or investors, and it’s the job of the CEO to create policies and oversee operations to ensure that the shareholders’ expectations are being met, since they are the ones with a financial stake in the company and who seek to yield profits from the company’s operations. 

However, the investors themselves do not have much decision-making power, thus the whole system relies on complete trust between the CEO and the shareholders. 

For example, let’s say that you’ve invested your life savings into buying shares of a company. But just because you own shares doesn’t automatically mean that you get to make decisions with regard to the company’s direction. Broadly speaking, traditional investments rely heavily on market forces to press companies to act in the interest of their investors. 

But with a DAO, the entire community has a direct say with regard to all future decisions. This is made possible through algorithms in smart contracts.

Smart contracts are self-executing programs that are automatically triggered once certain parameters are met. So if a decision needs to be made within a DAO, a smart contract is issued on the blockchain with the proposed course of action. Community members need only to vote on the proposal after which the changes will take effect according to what the majority has decided on. 

Voting within a DAO is facilitated with the use of cryptocurrencies called “governance tokens”, which are “staked” to represent one’s investment share to the project.  An entity’s voting power is dependent on the number of tokens that they own, hence a user who owns 1,000 tokens will have five times the voting power of someone who only owns 200 tokens. Matters such as future updates to the network or treasury fund allocations can be easily voted upon this way. 

The principle behind this is that a person who owns more tokens is more likely to vote on decisions in good faith in order to maintain or increase the value of their assets. They are less likely to vote poorly on a decision if they know it can impact the value of their crypto tokens for the worse.

What are the advantages of a DAO?

  • DAOs don’t require multi-party trust for it to work - In a traditional corporate structure, there is so much trust that needs to be established between various parties which would require drafting extensive policies and legal paperwork. With a DAO, trust can be facilitated by a foolproof algorithm–even between parties who have never met and do not know each other.
  • DAOs are more transparent and democratic - Any decision made on a DAO is publicly accessible throughout the whole network via the network’s public ledger. That means that community members always have access to the information that they need regarding the DAO that they are a part of.
  • DAOs can enact improvements and solve problems faster - Since DAOs are decentralized, community members are thus more incentivized to actively participate in the process of strengthening the entire network. They are encouraged to introduce new ideas, policies and vote on active proposals which builds more momentum for the project and the entire community as a whole. 
  • DAOs make it easier for global and inclusive community-building - DAOs have a way of connecting individuals from all around the world regardless of background or social class, into a single platform where they can fulfill a shared vision. 

With the digital landscape shifting more towards decentralization, DAOs are being seen as the potentially dominant economical structure for the emerging Web 3.0.  Not only do DAOs allow people to have greater control and peace of mind over their digital assets, but it effectively eliminates entry barriers and makes it more convenient for anyone to become an investor and buy into projects and developments.

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DISCLAIMER: The statements in this article do not constitute financial advice. PDAX does not guarantee the technical and financial integrity of the digital asset and its ecosystem. Any and all trading involving the digital asset is subject to the user’s risk and discretion and must be done after adequate and in-depth research and analysis.

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