The future of internet communities. As DAOs begin to grow in significance, here is a brief introduction of DAOs to complete beginners!

What is a DAO?

DAO stands for Decentralised Autonomous Organization.

If you focus on the individual meaning of each word,

• Decentralized or decentralization refers to a process whereby activities of an organization, such as transfer of authority and decision-making, are delegated away from a central authoritative location or distributed into a network.
• Autonomous refers to the freedom or right to govern itself, self-government.
• Organization refers to an organized group of people with a particular purpose, such as a business or government department.

If you put them together, a DAO refers to an organization that is not controlled by any authoritative figure or government. It is governed by its own members, a distributed network, and represented by rules that are encoded in blockchains.

How does a DAO work?

DAOs can be seen as a system or a business model that encourages an entity to be led by itself with the use of the current well-known technology known as blockchains. They are programmed using blockchain technology.

To become a member of any DAO, users need to first find and purchase their unique token. These tokens are usually created by the programmers of the DAOs. These tokens can be in the form of cryptocurrency or NFTs (Non-Fungible Tokens), uniquely put together by the programmers or owners of the DAOs.

Interested users can purchase the tokens with money that can be transferred directly to the DAO via blockchain. These tokens give members access to voting rights on decisions relating to the DAO. In most cases, one token equals one right, so the power to vote is proportional to the number of tokens each member owns.

Each DAO may have its own treasury which can only be used based on the approval of the majority of the token-holders.

How are DAOs different from Traditional Organisations

TRADITIONAL ORGANISATIONS

Traditional organizations are what you can observe in companies these days. They are a kind of organizational structure that employees follow. Their structure revolves around a hierarchy and they are managed by boards, executives, and committees. So all decisions are made by the top management.

Through the hierarchy, the responsibilities of each member are pretty clear cut and this can keep any organization organized. However, the only disadvantage of the hierarchy is that there is very little connection or lack of transparency between the management and members and there might be a possible dispute between the members and management, based on the theory of principal and agent theory.

DAOs

On the other hand, DAO is a decentralized network, or you can call it a “community-based network”. In DAO, there is no central authoritative contact, each member is entitled to have a say in the decision-making process relating to the organization. So this makes the structure of a DAO really transparent, as compared to a traditional organization. Also, instead of using modern contracts for decision-making processes, the DAO uses decentralized smart contracts which makes the whole process more efficient with fewer traces.

Benefits of a DAO

TRANSPARENCY

All of the financial records, decisions, and any decision-making factors that are recorded on the blockchains are transparent to all members (token holders) as they are able to access the record by viewing the open code. All token-holders have access to voting rights on all organisation-related matters and every decision made will be autonomously recorded into a smart contract, encoded onto a blockchain.

DIGITAL DEMOCRACY

Since DAOs operate through smart contracts, blockchains, and tokenizations, there is no need for the intervention of governments or any management to manage decision-making processes. All decision-making rights are given to token-holders which helps to eliminate the need for boards of directors or
management which also prevents organizational friction, making the organization fully democratic.

MULTIPLE USES

Since the DAO is able to function without the need for hierarchical management, it can be operated for a number of purposes and enables various use cases. DAO presents another solution or platform for those who want to present their ideas to the community to potentially gain awareness and receive funding.

Drawbacks

There are still some drawbacks and limitations to a DAO. Since DAOs can be considered multi-purpose and self-governance, the possibility of them operating for an undesirable and illegal purpose is there.

In the case where there is any possible bug or error. The idea of blockchain makes it very hard for programmers to immediately solve the issue and this might put the DAO in a very vulnerable position, making it prone to cyber-attacks by hackers.

DAO examples

MUTANT CATS

Mutant Cats is an NFT DAO that buys and holds blue-chip NFT such as Cool Cats and Crypto Punks.
The main objective of the DAO is to use its treasury, which is the money collected from members that bought their Mutant Cat NFT, to buy more popular NFTs.

To become a member of Mutant Cats, users have to purchase a Mutant Cat NFT. Yes, their tokens are given in the form of NFT. With this NFT, owners are entitled to voting rights in all matters relative to the Mutant Cat DAO, 10 $FISH tokens per day for each Mutant Cat they own and lastly, Mutant Cats NFT
staking and airdrops. Each Mutant Cat owner will get to have a say in which NFT project the DAO should buy into. The earnings are fractionalized and given back to the members in the form of $FISH, a cryptocurrency created by Mutant Cat.

KLIMA DAO

Klima Dao is a project that aims to regulate the carbon market and to reduce the damage to the earth caused by carbon pollution generated by society. Klima tokens are given in the form of their own unique Klima cryptocurrency.

With their treasury, from the sale of Klima tokens, they will purchase BCTs (Base Carbon Tonnes) from the market and hold them. By doing so, demand for BCTs from Klima will eventually help to regulate supply in the market, encouraging companies to be more sustainable.

Klima token members will benefit from the capital gain of the Klima token
and are also entitled to stake Klima tokens.

The importance of DAOs

People believe that DAOs can effectively eliminate the need for human inputs for certain areas in an organization, reducing human error and encouraging democracy within an organization when all decision-making is led by the community in it

Furthermore, DAOs can be a really good business model that keeps all its transactions and records on a ledger encoded onto blockchains. And companies that are able to incorporate the DAO system in their business model can achieve better efficiency and scalability without the need for more human work but still maintain the quality of work operations.

How are DAOs launched?

The DAOs are typically launched upon these three major steps:

SMART CONTRACT CREATION

A group of developers must program and create smart contracts for the DAO. They are basically the brains of the whole DAO and they must have had an objective for creating the DAO.

FUNDING

After the creation of the smart contracts, the developer must figure out a method they want to use to receive funding from the crowd. Some examples of methods can be selling NFTs(Non-Fungible Token) or
Cryptocurrency as tokens. Note that these tokens give voting rights to token holders, making them part of the DAO.

DEPLOYMENT

Once the foundation of the DAO has been set up, the DAO needs to be deployed on the blockchain. Once this step has been taken, there is no reversal, so the creators of the DAO have no influence on the project
anymore.

The future of DAOs

As of now, DAO still remains one of the less understood concepts, especially when compared to NFTs and Defi (Decentralised Finance). There is definitely a lot more to be proven and be innovated in this revolution of DAOs.

DAOs will definitely take some time before reaching full mainstream adoption. However, there are still believers around the world who think that similarly to NFTs and Defi, DAOs will eventually succeed and emerge in the future market where we will see more online communities.

[Editor’s Note: This article does not represent financial advice. Please do your own research before investing.]

Featured Image Credit: Chain Debrief

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