Delving into DAOs. What is a DAO and How do they work?

DAO stands for Decentralized Autonomous Organization.

Decentralized means that there is no central governing authority and autonomous means governing and controlling its affairs! So yes, you got that right. A Decentralized Autonomous Organization (DAO) is a completely democratized legal structure that is owned and managed by the community. The members of the community are holders of the DAO token. The voting amongst the members is used for taking action regarding the organizational and business decisions of the project. These decisions are then implemented using smart contracts which also makes a DAO transparent and openly accessible organization.

How do DAOs operate?

A DAO’s structural foundation lies in the smart contract. These contracts control the group’s finances and establish the organization’s policies. Once the contract goes live, a voting mechanism is used to alter the terms. Furthermore, since the smart contract itself establishes the treasury, no one is permitted to use the funds without the consent of the group. Collectively, the group decides, and when a vote is approved, funds are immediately issued. Smart contracts make way for transparency, verification, and public audibility in a DAO.

DAOs are the harbinger of participation and democracy in organizations. That is to say, DAO decisions are made only if most members agree with them. Users are often required to acquire a DAO’s governance tokens to get voting privileges or membership. Additionally, the voting power is frequently divided among the members according to the number of tokens each member possesses. There are several ways to gain this now that everything is based on smart contracts.

Votes are delegated by token holders to users who nominate themselves, agree to uphold the system, and commit to maintaining knowledge. Automatic transaction governance: the transactions are carried out automatically if a majority of members approve them. Multisig user governance: the 5 to 20 active trustworthy and doxxed members of the community, after following a vote, carry out the community’s decision.

Access to these DAOs is granted in below ways:

Token: The governance tokens can typically be traded on a decentralized exchange without a permit.

Share: Share-based DAOs are still relatively open but have additional permissions. Anyone interested in joining the DAO may do so by submitting a proposal and typically providing some kind of tribute, like coins or services. Shares stand for ownership and direct voting. A member’s proportionate share of the treasury is theirs to keep at all times.

Reputation: DAO members must gain a reputation by involvement; it cannot be purchased, transferred, or delegated. Prospective members may freely submit proposals to join the DAO and request to receive reputation and tokens as payment in exchange for their contributions because on-chain voting is permissionless.

Types of DAOs.

Let us have a look at some ways DAOs are currently being used:

1. Protocol DAOs: one of the main applications of DAOs today is the control of decentralized protocols.
2. Collector DAOs: A collector DAO’s goal is to accumulate non-fungible tokens (NFTs). Members of a DAO will combine their funds and purchase the NFTs that they have selected.
3. Social DAOs: The majority of DAOs have some social components, however social DAOs are specifically designed to bring together people who share common interests.
4. Investment DAOs: Investment DAO / venture DAO participants, combine their resources and use governance tokens to vote on how and where to invest them.
5. Philanthropy DAOs: They serve as a community-run charity, raising money and determining collaboratively which organizations to support.

Why are DAOs beneficial?

There are quite a few benefits associated with the decentralized form of organization management:

1. Decentralization: Instead of a centralized authority, a group of people influences the decisions that have an impact on the organization. A DAO decentralizes power among a far wider group of users rather than awaiting decisions from the CEO or Board of Directors
2. Encourage Participation: With a direct say and voting authority on all issues, members feel more involved and associated with the entity. Even though these people may not have much influence, a DAO encourages token holders to vote, burn, or utilize their tokens in ways they believe are best for the company.
3. Publicly Viewable: Votes within a DAO are cast via blockchain and made available to the public. How their vote and their judgments will be made public, encourages them to behave as they consider is best.
4. Community building: The idea of a DAO inspires people from all around the world to work together invisibly to realize a shared vision. Owners of tokens can communicate with one another no matter where they live.

However, there are also certain limitations to DAOs!

A poorly framed DAO can have serious repercussions with some of the following drawbacks.

1. Slow action time: Every user has a chance to cast a vote in a DAO. This calls for a significantly longer voting period especially because members of DAO are based in globally diverse locations.
2. Difficult to onboarding new members: A DAO is tasked with informing people of pending entity activity across a larger audience. Members of a DAO may have different levels of understanding of initiatives, incentives, or resource accessibility. The varied group of individuals must learn how to develop, plan, and communicate as a unified unit.
3. Inefficient operations: A DAO could become slowed down by pointless administrative duties. Due to the time required for administration, voter education, initiative communication, strategy explanation, and onboarding of new members
4. Technical Challenges: Implementing a DAO needs extensive technological know-how; otherwise, decisions or votes may not be meaningfully cast. If users can’t trust the entity’s structure, the trust may be lost and users may exit.

In Conclusion:

The strength of community, which is essential to the blockchain revolution, is highlighted by DAOs. They introduce a method of communication and coordination for online communities that didn’t exist before Bitcoin. DAOs promise to usher in new global and digital collaboration and organizational systems eras. DAOs might be the native entity for value creation in cyberspace as considerable amounts of digital value are created through non-fungible tokens or the metaverse. Many blockchain protocols are the result of international, cross-border collaborations. By encoding governance principles, DAOs are intended to enable trustless and decentralized partnerships. DAOs will play a significant role in the development of Web3.