Blockchain and cryptocurrencies have become the most discussed topics in the domain of technology recently. The innovative use cases of blockchain technology continue to revolutionize many sectors while also setting the stage for new solutions such as NFTs and DeFi. At the same time, one of the most prominent aspects which emerged from blockchain apart from cryptocurrencies would refer to decentralized autonomous organization.
The concept of decentralized autonomous organizations presents a completely new and revised perspective on legitimacy of governance. How do you decide the optimal form of governance? Does social democracy favor the majority, or liberal democracy favors the minority? Can you trust democracy for freedom from hidden hierarchical structures? The following discussion would help you understand the concept of DAO in detail and identify its value and relevance in present times.
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Table of Contents
Background for DAOs
In order to understand the DAO blockchain clearly, you need to take a look at a practical scenario. Think of a situation in which a ship crashed on an unknown and desolate island with hundreds of survivors. Now, the survivors must work in coordination and cooperation with each other to survive on the island until help arrives.
Therefore, the survivors must follow a specific set of rules for maintaining coordinated behavior to survive on the island. However, the survivors would definitely need rulers and people to enforce the rules, thereby leading to the principal-agent dilemma. Interestingly, the principal-agent dilemma provides an ideal explanation for different DAO examples and how they work.
The people making decisions on behalf of other people are referred to as agents, and the others are referred to as the principal. Since decision-makers or agents distribute the risk associated with their actions among others, the risk for the principal increases profoundly. In addition, the agents also generally prioritize their personal interests over that of the principals.
The situation is worsened further as the principal encounters limitations in tracking and controlling the actions of an agent. You can look up to legal agreements and the judicial system for resolving such moral concerns in traditional organizations. However, a decentralized autonomous organization could help in reducing such risks by huge margins alongside alleviating the costs of managing the risks of moral hazards.
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Definition of DAOs
Now that you know about the basic reason for introducing the concept of DAO, you might be eager to find the definition of DAO. Decentralized autonomous organizations basically refer to groups centered on a specific mission that work in coordination according to a shared set of rules encoded on a blockchain.
One of the primary benefits associated with a DAO blockchain refers to improved transparency in comparison to traditional companies. Since anyone could easily view all the actions and funding for DAOs, the transparency level is higher. At the same time, DAOs also present a favorable reduction in risks of censorship and corruption.
In the case of traditional publicly traded companies, you can access the financial statements of the company audited by independent parties. However, the audited financial statements offer only a glimpse of the organization’s financial health at a specific point in time. On the other hand, decentralized autonomous organization examples showcase clearly how their balance sheet has been documented clearly on a public blockchain. As a result, the shareholders could easily find a transparent account of the organization’s financial health at any time. Furthermore, the documentation of an organization’s balance sheet on a public blockchain with DAOs takes every single transaction into account.
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Governance in DAOs
The discussions about DAO in crypto often round-up on the theme of governance. Decentralized autonomous organizations leverage the functionalities of blockchain for offering self-enforcing protocols or rules. The smart contracts of the blockchain take care of storing the rules, and the native tokens of the network help in securing the network and voting on the rules. If you want to understand how DAO blockchain ensures governance, then you should review the steps for creating DAOs.
- The first step in creating DAOs starts with the developers understanding the governance problem. Developers should review the governance problem they want to codify for creating a productive smart contract that would establish the foundation for the DAO in question.
- In the second step, the developers have to present the definition of tokenomics in the governance model. Developers have to define the precedents for monetization in DAOs for ensuring the right balance between the rewards and penalties for malicious behavior.
- The final step involves the launch of the DAO blockchain, generally with the same token stakes for developers as the remaining stakeholders. As a result, DAOs can prevent any concerns of imbalance in power. On the other hand, developers generally release their stakes in the network over the course of time.
The basic precedents for developing a decentralized autonomous organization clearly establish the foundations for autonomy and transparency. The number of tokens a user holds in DAOs represents their weight for voting rights. As a result, the shareholders with more tokens are likely to have more privileges for introducing new governance proposals.
Therefore, one can clearly notice how the equal distribution of power reduces the possibility of DAOs being flooded with new proposals. DAOs can ensure stability by passing governance proposals only with the affirmation of majority of stakeholders. It is also important to note that the governance in DAO depends on the shareholders in the organization. In addition, all DAOs have unique rules regarding governance, such as the voting process and defining the majority for the same.
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Working of DAOs
The next critical highlight in a discussion pertaining to DAOs would refer to the working of decentralized autonomous organizations. You can find a clear impression of how DAOs work by reflecting on a simple example. Imagine a situation where you are working for a video game designing company. It is clearly evident that creative talent and technical fluency are the most crucial factors in your field of work. In addition, you might also come across the concerns of “feature creep” due to the complexity of video game development.
The “feature creep” is basically an organizational setback as the project continues adding new features beyond the original concept. Generally, the “feature creep” ends up leading to a mess, unnecessarily delayed development, and disastrous cost burdens. Developers could identify a governance problem in this scenario and look for DAO examples that can resolve the issue.
Your organization could create a DAO on the Ethereum blockchain with specifications for funding rules. The developers could set a specific budget threshold in the smart contract funding pool, thereby streamlining access to funds. Subsequently, all the actions such as sound, voice-overs, programming, 3D modeling, and others are automatically determined with respect to existing rates followed by the organization.
You can now see how the decentralized autonomous organization works in real. Every team member in your organization would receive tokens for voting when they are included in the DAO. Team leaders are more likely to receive more tokens according to their roles and responsibilities. If the team votes surpass the budget threshold, then the vote would fail. Such decentralized autonomous organization examples clearly show how the team can determine the ideal scale of development within a specific budget. The working of DAOs also shows how you can use them for removing CEOs from their posts or paying bonuses.
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Examples of Decentralized Autonomous Organizations
The detailed overview of decentralized autonomous organizations is practically incomplete without examples. One of the most renowned decentralized autonomous organizations is The DAO, which arrived first in April 2016. The origins of The DAO started with the objective of creating a decentralized venture capital fund. Members invested ETH in return for DAO tokens which they could use for voting on the allocation of funds to projects.
The project raised almost $150 million in ETH, and surprisingly, an infamous hack resulted in the theft of $60 million. The hack presented many questions regarding DAO security and led to skepticism among people regarding the potential of DAOs. However, decentralized autonomous organizations present a formidable tool for organizing, thereby indicating their promising potential.
The DAO crypto interplay is clear proof of the potential of decentralized autonomous organizations. As a matter of fact, crypto projects are also somewhat similar to DAOs in certain situations. If crypto projects follow decentralized governance for management which allows token holders to vote on the project’s direction, then they can qualify as DAOs. For example, the MakerDAO token holders could exercise their authority in system governance and voting on parameters.
You could also find another example of the DAO crypto relationship with Curve DAO, which is developing an Automated Market Maker or AMM. The system would help in generating fees and enabling revenue sharing for token holders locking their tokens in the platform. The DAO setup ensures the distribution of voting privileges and revenue shares according to the duration of time for which a token holder has been invested in the project.
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You might also have many doubts about decentralized autonomous organizations after reviewing the fundamentals. The following DAO FAQs could help you find the ideal answers for commonly asked questions about DAOs.
Do DAOs truly offer decentralization?
The aspect of decentralization is a formidable highlight of any decentralized autonomous organization project. However, the allocation of voting rights to all members in a network cannot drive successful outcomes in most cases. On the contrary, a selected few would get better voting privileges for successful outcomes, thereby quashing the basic tenets of decentralization.
What are the distinct models for membership in DAOs?
The developers of DAOs have the authority to develop membership models. The membership privileges can provide a clear idea of the mechanisms underlying voting and other significant parts of the DAO. You could find two distinct models for membership with DAOs such as token-based membership and share-based membership.
What is the basic objective for introducing DAOs?
Decentralized autonomous organizations help in empowering new prospects for worldwide collaboration and coordination among organization members. With completely transparent and verifiable code, DAOs could take away the need for trusting other members in the organization. Basically, decentralized autonomous organizations streamline governance.
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The concept of decentralized autonomous organization or DAO clearly establishes a new precedent for managing modern organizations. With the value of collaboration and transparency among team members, DAOs can foster new avenues of productivity. In addition, you should also take note of the promising implications of DAOs as an underlying aspect in crypto projects.
Furthermore, the adoption of DAOs would also take the concerns of security risks into consideration. All you need to do is just trust the code and get plausible improvements in governance for your organization. Learn more about DAOs and explore their true potential right now.
*Disclaimer: The article should not be taken as, and is not intended to provide any investment advice. Claims made in this article do not constitute investment advice and should not be taken as such. 101 Blockchains shall not be responsible for any loss sustained by any person who relies on this article. Do your own research!