What is a decentralized Autonomous Organization (DAO)?

 

Decentralized Autonomous Organization (DAO)

DAO is an evolving legal entity without any central governing body. The members of DAO share a common goal to perform in the best interest of the entity. Commercialized by crypto enthusiasts and blockchain technology, DAOs are used for decision-making in a bottom-up management approach.

Understanding DAO

Decentralization is one of the main features of digital currencies. So the cryptos are not controlled by a single institution like a government body or a central bank but instead are divided among computers and nodes in the network. Virtual currencies make use of this decentralized status to attain high levels of privacy and security that are naturally unavailable to standard currencies and their transactions.

Inspired by decentralization, a group of blockchain developers came up with the concept for a DAO as a venture capital fund, in April 2016. The objective of the DAO concept is to promote the administration and management of an entity similar to a corporation. Lack of central authority is the key feature of DAO in which the leaders and participants act as the governing body.

How DAO work ?

DAOs depend heavily on smart contracts. These logically enciphered agreements determine decision-making based on the essential activity on a blockchain. For example, specific codes may be executed based on the decision outcomes to increase the circulating supply, burn a select amount of reserve tokens, or issue rewards to the existing token holders.

The voting process for DAOs is posted on a blockchain. Users should frequently select between mutually-exclusive options. Voting power is disseminated across users based on the number of tokens they hodl.

The users who have high monetary investments in the DAOs are incentivized to act. DAOs have treasuries that hold tokens that can be issued in exchange for fiat. DAO members can vote on the usage of those funds. Some DAOs with the purpose of obtaining rare NFTs can vote on the waiver of treasury funds in exchange for crypto assets.

Benefits

Decentralization

A group of individuals opposing a central authority outnumbered by their peers is involved in making decisions that impact the organization. Instead of trusting the decisions/actions of one individual (CEO) or a small collection of individuals (Board of Directors), a DAO can decentralize authority across a wide range of users.

Participation

Individuals within an entity may feel empowered and connected to the entity when they have direct speaking and voting power on all matters. They do not have powerful voting authority, but a DAO supports token holders to cast their votes, burning tokens, or using their tokens in the best ways.

Publicity

Within a DAO, votes are cast via blockchain and made publicly accessible. This necessitates users acting in ways they believe are best, as their votes and decisions will be publicly viewable. Incentivization will benefit the reputations of voters and discourage acts against the community.

Community

The DAO concept encourages people to seamlessly originate together for creating a single vision. The token holders can interact with other owners despite of their locations.

Pros

1. Many individuals can collectively come together to act as a single entity.

2. More individuals are involved in the planning, strategy development, and operations of the entity.

3. As votes on the blockchain are publicly-viewable, token holders are incentivized to act responsibly.

4. DAO Members are authorized to collaborate with people having similar goals inside a single community.

DAO Membership

Token-based membership

Completely permissionless, depending on the token used. Mostly these governance tokens can be traded on a decentralized exchange without requiring permission. Others must be earned through providing liquidity or some other ‘Proof-of-Work (PoW)’. Simply holding the token gives access to voting.

Share-based membership

Share-based DAOs are based on permissions but are still quite open. Any potential members can submit a proposal to join the DAO, by offering values as tokens or work. Shares represent direct voting power and ownership. Members are allowed to exit at any time with their treasury share.

Reputation-based membership

Reputation denotes proof of participation and gives voting power in the DAO. The reputation-based DAOs do not transfer ownership to the contributors. Reputation cannot be bought, transferred, or delegated. DAO members should earn a reputation through their active participation. On-chain voting does not require permission so the members can easily submit proposals to join the DAO. They can send the request to receive reputation/tokens as a reward in exchange for their involvement.

Conclusion

DAOs foresee a collective organization owned and managed by its members with voting rights. Many analysts and industry representatives confirm that the DAO is reaching prominence, after potentially replacing some traditional companies.

Businesses and corporate brands need to stay abreast of current trends that could impact their customer engagement rate and interaction level with the customer. While DAOs are not omnipresent, they are picking up steam with many creators.