What is a Decentralized Autonomous Organization (DAO)? – DAO series Part I
Can you imagine a way of organizing with other people around the world, without knowing each other and establishing your own rules, and making your own decisions autonomously all encoded on a Blockchain?
One of the main features of cryptocurrencies is that they are decentralized. This means they are not controlled by a single institution like a government or central bank, but instead are divided among a variety of computers, networks, and nodes. Inspired by the decentralization of cryptocurrencies, a group of developers came up with the idea for a decentralized autonomous organization, or DAO, in 2016
I. Some definitions of DAO
- DAO (Decentralized Autonomous Organization) as an organization represented by rules encoded as a transparent computer program, controlled by the organization members, and not influenced by a central government. As the rules are embedded into the code, no managers are needed, thus removing any bureaucracy or hierarchy hurdles (Wikipedia)
- A decentralized autonomous organization (DAO) is an emerging form of legal structure. In this structure there is no central governing body, every member within a DAO typically shares a common goal and attempt to act in the best interest of the entity. Popularized through cryptocurrency enthusiasts and blockchain technology, DAOs are used to make decisions in a bottoms-up management approach.
Basic comparison table between decentralized and centralized governance.
II. How the DAO works?
DAOs are mainly based on smart contracts. These logically encrypted agreements make decisions based on the underlying activity on the blockchain. For example, based on the outcome of a decision, certain code may be implemented to increase the circulating supply, burn of a select amount of reserve tokens, or issue select rewards to existing tokenholders.
The voting process for DAOs is posted on a blockchain. Users must often select between mutually-exclusive options. Voting power is often distributed across users based on the number of tokens they hold. For example, one user that owns 100 tokens of the DAO will have twice the weight of voting power over a user that owns 50 tokens.
The theory behind this practice is users who are more monetarily invested in the DAO are incentivized to act in good faith. Imagine a user who owns 25% overall voting power. This user can participate in bad acts; however, by doing so, the user will jeopardize the value of their 25% holding.
III. Benefits and limitation of DAOs
There are several reasons why an entity or collective group of individuals may want to pursue a DAO structure. Some of the benefits of this form of management include:
- Decentralization Decisions impacting the organization are made by a collection of individuals as opposed to a central authority that is often vastly outnumbered by their peers. Instead of relying on the acions of one individual (CEO) or a small collection of individuals (Board of Directors), a DAO can decentralize authority across a vastly larger range of users.
- Participation. Individuals within an entity may feel more empowered and connected to the entity when they have a direct say and voting power on all matters. These individuals may not have strong voting power, but a DAO encourages token holders to cast votes, burn tokens, or use their tokens in ways they think is best for the entity.
- Publicity. Within a DAO, votes are cast via blockchain and made publicly viewable. This requires users to act in ways they feel is best, as their vote and their decisions will be made publicly viewable. This incentivizes actions that will benefit voters’ reputations and discourage acts against the community.
- Community. The concept of a DAO encourages people from all over the world to seamlessly come together to build a single vision. With just an internet connection, tokenholders can interact with other owners wherever they may live.
- Speed: If a public company is guided by a CEO, a single vote may be needed to decide a specific action or course for the company to take. With a DAO, every user is given an opportunity to vote. This requires a much longer voting period, especially considering time zones and prioritizes outside of the DAO.
- Education: Similar to the issue of speed, a DAO has the responsibility of educating a lot more people in regards to pending entity activity. A single CEO is much easier to keep comprised of company developments, while tokenholders of a DAO may have ranging educational backgrounds, understanding of initiatives, incentives, or accessibility to resources. A common challenge of DAOs is that while they bring a diverse set of people together, that diverse set of people must learn how to grow, strategize, and communicate as a single unit.
- Inefficiency: Partially summarizing the first two bullets, DAOs run a major risk of being inefficient. Because of the time needed to administrative educate voters, communicate initiatives, explain strategies, and onboard new members, it is easy for a DAO to spend much more time discussing change than implementing it.
- Security: An issue facing all digital platforms for blockchain resources is security. A DAO requires significant technical expertise to implement; without it, there may be invalidity to how votes are cast or decisions made. Trust can be broken and users leave the DAO if they cannot rely on the structure of that DAO. Even through the use of cold wallets or multi-signature wallets, DAOs can be mined, treasuries stolen, and manipulated.
C. Comparison table of pros and cons
With the basic factors presented above, we can see that a decentralized autonomous organization (DAO) has advanced advantages or compared to the traditional centralized governance model. Although it will also have disadvantages or limitations that are difficult to overcome or find a solution in a short time. But the new world of blockchain and cryptocurrency is in its infancy, so the complete construction of the DAO will also take time.
Hopefully, through what is presented, readers can get a basic picture of what a DAO is. However, we need to keep in mind that each system or network has a different size, number of participants as well as the complexity of different jobs. For example, a DAO in a blockchain platform, a diverse ecosystem will certainly be different from a DAO in a Dapp. So in future, DAO models must also match those factors. In the following articles, we will try to select and introduce to our readers good DAO models at each level of each system or network.