A lot of buzz surrounds blockchain technology, cryptocurrencies, and NFTs, making it difficult to discern their true purpose. A cryptocurrency or NFT's value as a speculative asset makes it difficult to understand its true worth.
It's more straightforward to understand the benefits of DAOs, or decentralized autonomous organizations, even though the concept is still extremely new and has only been tried in a small number of different types of organizations so far.
What is DAO?
A decentralized autonomous organization (DAO) is a smart contract whose conditions are agreed upon by a group of people with similar goals. Those people choose a common aim (the mission of the organization) and gather money(native tokens) to achieve it.
Why would a DAO be different from any other type of business contract, you could ask? On the one hand, people who join a decentralized autonomous organization (DAO) make decisions together. Any modifications that are presented in the community must be approved by The people who have invested in the DAO, which is a form of investor-directed venture capital fund.
New decentralized business models for both commercial and non-profit organizations were the goal of the DAO. No traditional management structure or board of directors existed because it was created on the Ethereum blockchain. The DAO's code is open-source and available for anybody to download and use.
The DAO’s Hack
The DAO launched on April 30, 2016 to fund the organization through a website and a 28-day crowdfunding campaign. More than 11,000 investors contributed to the fund's Ether value of more than $150 million on May 21, 2016.
One-third of the DAO's token(about $3.6 million) were transferred to a subsidiary account in June 2016 when a weakness in the code was exploited by users. Hard-forking the Ethereum blockchain to return nearly all cash to the original contract was controversially decided by the Ethereum community. The unforked version of the Ethereum blockchain was renamed Ethereum Classic, while the forked version was renamed Ethereum.
Delisted from major cryptocurrency exchanges including Poloniex and Kraken in September 2016, the DAO token's value had effectively been wiped off.
SEC released a study on The DAO and Initial Coin Offerings in July 2017, evaluating "whether The DAO and affiliated businesses and persons violated federal securities laws with unregistered offers or sales of DAO Tokens in exchange for 'Ether,' a virtual currency" . The Securities and Exchange Commission (SEC) has determined that Ethereum blockchain-based DAO tokens traded as securities may have violated U.S. securities laws.
How does a DAO work?
There are two ways in which smart contracts can be used:
1. Smart contracts serve as the foundation for rules and objectives
A smart contract is the foundation of a DAO, and no single authority has control over it. The only way to change the "regulations" of a smart contract (DAO) is through a community vote. A vote is required to change the terms of a smart contract, because the contract is defined in code and cannot be changed without a vote.
In the same way, funds collected by the DAO cannot be used unless approved by its members. A decentralized project is one that follows this model. Due to the contract lives on the blockchain, the contract is accessible to anyone who has access to the blockchain.
2. The DAO uses native tokens to raise funds
Once a smart contract is hardcoded and posted on the blockchain, the DAO can begin collecting funds towards the project's objectives. Native tokens, a sort of currency linked to the DAO's smart contract, are used to accomplish this. Voting, feedback, and the ability to set goals for future ideas will all be made available to users who become involved early in the project.
Because of the way smart contracts are designed, each DAO project's internal workings will be distinct. As a result, examples are the greatest approach to learn more.
Examples of DAO
First, let's take a look at some real-world instances of DAO projects.
In some DAOs, holders of governance tokens can trade them on decentralized exchanges(DEXs) without permission. Tokens are issued via other protocols, such as Proof-of-Work (PoW) consensus mechanisms, when users provide market liquidity or contribute to network security in some other way. No matter how governance tokens join the market, they tend to grant voting rights to its owners. Decentralized protocols or even ownership of the tokens themselves can be governed by token holders in many circumstances.
Using a DAO framework known as MakerDAO, the Maker platform uses executive votes to drive the evolution of the protocol. Executive votes can influence protocol fees, for example, or even lead to a shutdown in the event of an emergency. Investing in voting power is accessible to everyone thanks to the MKR token's wide availability on decentralized exchanges. Voting power is weighted, so people with the highest MKR tend to have a greater say in the outcome.
It serves as a tool for other DAOs, but it also serves as a DAO itself. As a result, the voting procedure is open to all ANT token holders. Aave, Curve, and Pillar are just a few of the famous projects that have made use of the Aragon framework. Decentralized asset managers like the dHedge DeFi hedge fund and the BarnBridge derivatives protocol, as well as many more collaborative asset management projects, use the Aragon platform.
However, share-based DAOs remain more accessible than governance-token DAOs, which are more difficult to access. People who want to be part of the DAO must submit a proposal and deposit tokens such as ETH or DAI. Token-based DAOs, on the other hand, issue a single token that represents both voting power and ownership of the capital reserve. The tokens issued by share-based DAOs can be exchanged for the underlying capital at any moment. There is no capital reserve for MKR holders to trade against in governance token systems like MakerDAO, which allow MKR to be traded on decentralized exchanges.
Many of the most widely used decentralized autonomous organizations (DAOs) are based on Ethereum and use the MolochDAO protocol. Those who wish to join the DAO must do so by submitting a proposal that demonstrates they have the competence and resources necessary to participate in decision-making. On the MolochDAO platform, the group must also trust these persons to make decisions about Ethereum project grantees.
A fork of Moloch, MetaCartel, is one of the most popular initiatives within MolochDAO. Ethereum development is not MetaCartel's emphasis; instead, the company allocates cash to the Ethereum application layer. MetaCartel has made major investments in startups including Rarible, xDai, and Opium since its foundation.
The Future of the DAO concept
Web3 is still in its infancy where we're still in. Adaptations of DAOs have not yet reached a broad audience, which is understandable. However, I believe that this is due to a more tougher admittance requirement. Smart contracts written in code are not something that everyone is familiar with. Have the ability to keep them running at scale, at least.
Some projects are possible to amass a large following, as we have shown in this article, but people aren't just interested in a project because it's charitable. We like the concept of democratic government. It is now possible for the typical Web3 user to have their voice heard thanks to distributed autonomous organizations (DAO).
I believe that many open-source projects will undergo significant structural changes in the near future. Everyone who wants to participate in a DAO can do so for the time being by investing in the native token.