What Is a Decentralized Autonomous Organization (DAO)?

The rate of interest in decentralized finance (DeFi) has become massively explosive in just a few years after the iteration of the DeFi concept and it is relatively close to reaching a mainstream appeal. Being a DeFi inclined development, a decentralized autonomous organization (DAO) seems to have grown famous and continues to gain recognition at a breakneck pace.

One of the core facts about DeFi is its ability to facilitate a governance process in the financial space without the need for a central body. The concept proved appealing to the economy as many nations began to dive into the DeFi space. Due to the wide acceptance of this ecosystem, certain projects began to evolve with the main focus to facilitate the system of decentralized governance and also boost it to reach mainstream adoption. DAO is one such project created to enhance the concept of decentralized governance. Still curious about what DAO actually means? Let’s take a look at the definition of DAO below.

DAO Definition

A decentralized autonomous organization (DAO) is a non-centrally governed virtual entity that is collectively owned and managed by the members based on specific rules enforced on a blockchain. They are an internet community that has its decisions made with the consent of every member. DAO eliminates the need for any central leadership like the government or central bank. They possess built-in treasuries that cannot be accessed unless collectively approved by the members of the organization. Hence, democratizing its decision-making process, the group is made to vote on a proposal before decisions can be made over a specified period.

How DAOs Work

As said earlier, DAOs are internet organizations that operate fully under the concept of decentralization. Hence, they function as decentralized and community-led entities operated without a central authority.

DAOs operate with a specific set of rules that are laid by smart contracts. Thus, it is correct to say that DAOs function with the use of smart contracts. The rules enforced by these smart contracts become stipulated and mandatory. They cannot be altered except when they are voted upon by the DAO’s core community members. Smart contracts basically facilitate the functionalities of decentralized automated organizations by providing them with a set of rules to work upon when making decisions.

Decentralized automated organizations, as the name implies, have proven to be extremely autonomous and transparent. This is because their codes are visible to anyone since they are built on open-source networks. They also possess built-in treasuries that are open to public audits.

The acquisition of DAO’s native tokens by users of the ecosystem plays a vital role in spiking the growth of the project. As said earlier, the creation of DAOs can not be completed without creating smart contracts that contain the core details of the project. However, acquiring funds to back up the project is also as expedient as smart contracts creations. This enables DAOs to raise funds to finance the project. Acquiring funds plays a vital role in financing and establishing the early stage of DAO projects and also helps to sustain and grow these projects in the long run.

Moreso, the act of acquiring funds from token holders enables a DAO to determine its governance. As such, users who acquire the DAO native tokens are entitled to voting rights on the project. Nonetheless, tokens held by users are used to quantify the extent to which they can vote over proposals. This implies that the more a user acquires the native token of the DAO, the more they become privileged to vote.

What Makes DAOs Different?

DAOs operate in full efficiency with a democratic model of governance. They can be utilized for a variety of financial activities without the need for third-party intermediaries or any central body. Some of these financial activities include borrowing, charity, investment, fundraising, acquiring NFTs, and many others.

DAOs provide an avenue for developers from different parts of the world to cooperate and organize without any form of familiarity. They come together over the internet and establish their own rules while democratizing their decision-making process.

The stipulated rules of a decentralized autonomous organization (DAO) and all of its financial transactions are recorded on an open-source blockchain. This is because DAOs are fully transparent and public, hence any adjustment made on the rules becomes noticeable to everyone, posing its investors and users to lesser risks.

Top Examples of DAOs

A notable and top-rated example of DAO is Dash (DASH), a payments-focused digital asset that deploys a governance model that expressly allows stakeholders to vote on its treasury management.

Other examples of DAO commonly used include SushiSwap (SUSHI), Uniswap (UNI), Aave (AAVE), Curve DAO (CRV), Compound (COMP), Maker (MKR), Synthetix (SYN), and many others.

DAO’s Benefits

DAOs offer numerous benefits to users considering their exclusive functionalities and mode of operation. Some of the benefits enjoyable with DAOs include:

• Possessing an automated, decentralized, and fully transparent nature which allows users to gain full ownership of maintaining the system;
• Democratized system of governance, which ensures that the interest of all stakeholders is considered when making adjustments to the protocol. This way, all token holders can contribute to the development of the DAO.
• A reward mechanism that allows the DAO token holders to earn an actual portion of the transaction volumes on the exchange.

DAO’s Disadvantages

One of the major downsides of DAOs is that they are facing legal and regulatory criticism as they lack regulatory clarity due to the structure DAOs possess. As a result, investors might face risks of the uncertain outcome of their investment.

Moreso, DAOs are prone to cyber-attacks since the set of rules governing the protocol is established via smart contracts. In cases where these smart contracts become hacked or malfunction, the security becomes altered and might lead to massive loss of funds.

Conclusion

DAOs with the model they adopt basically facilitate and enhance the system of decentralized finance. As a result, they are making the DeFi space more appealing to the public as a way to drive DeFi to reach mainstream adoption.

As DAOs continue to advance and most of the loopholes become fixed, it is certain that an increasing number of enthusiasts will begin to dive into the ecosystem with institutions also venturing into DAOs.