Understanding a DAO

30 Nov 2023 by Harry Newman 4 min read

What is a DAO in crypto? A Decentralised Autonomous Organisation is an innovative organisational structure that operates through smart contracts and community voting to make decisions.

Unlike traditional organisations, DAOs are governed by a group of members all without a central authority, and acting in the best interests of the organisation.

What Is A DAO In Crypto

A Decentralised Autonomous Organisation represents a significant change in the way an organisation is run.

DAOs operate through smart contracts that govern a set of predefined rules.

Users who stake the project's token receive voting rights and influence how the organisation operates by deciding on and creating new governance proposals, this is done through a vote.

A proposal will only pass once the majority of stakeholders approve it, the amount of votes required to reach a majority varies from DAO to DAO.

DAOs are built open-source, they are fully autonomous and transparent, anyone can view the code and audit the DAO as the blockchain records all financial transactions.

The first major DAO was simply named ‘The DAO’ and was launched on the Ethereum blockchain in 2016, it raised $150 million worth of ETH through a token sale, the largest crowdfunding campaign in history at the time, ultimately The DAO was hacked due to vulnerabilities in its code base, and Ethereum eventually hard forked to restore the stolen funds, this resulted in the formation of Ethereum and Ethereum Classic.

Examples of DAO’s

MakerDAO (MKR) along with Maker Protocol is a decentralised organisation and a software platform, based on the Ethereum blockchain that allows users to issue and manage the DAI stablecoin.

The aim of Maker is to operate DAI, a community-managed decentralised cryptocurrency with a stable value pegged to the US dollar.

The MKR token acts as a voting share for the organisation that manages DAI. They do not pay dividends to holders, instead, they give holders voting rights over the development of Maker Protocol. MKR is expected to grow in value following the success of DAI.

Uniswap operates under a DAO structure, decisions are made about the protocol by UNI token holders.

Members of the DAO can vote over the $1B treasury, roadmap and governance of Uniswap, all by holding UNI tokens.

Any UNI holder can submit a proposal, it must gain up to 25,000 yes votes before it is eligible for further discussion.

Other real-world case studies of DAO governance triumphs can be found here.

Pros and Cons of DAOs

While DAOs present a unique organisational structure, they are not without imperfections; they come with both benefits and drawbacks.

Pros

Every transaction and vote is recorded on the blockchain, ensuring transparency and trust amongst all participants.
DAOs allow anyone to participate, regardless of location.
DAOs empower the community by giving every token holder a voice in decision-making.

Cons

Too much reliance on smart contracts and the code not being 100% correct can lead to vulnerabilities, as demonstrated in The DAO hack.
As DAOs expand, it's crucial to implement effective scaling strategies to maintain robust governance, especially as the organisation grows in complexity.
Initial uneven token distribution or general token distribution can lead to centralisation of power, meaning the DAO is under control of a select few users.

Final Thoughts

DAOs are a powerful tool that aims to shake up the existing organisational structure, aiming to make it fully decentralised.

We are still in the early stages of DAOs, the concept has had its fair share of problems and challenges.

There are still significant challenges in vulnerabilities and governance complexities, however, the potential DAOs can create a more democratic and fair system to run an organisation.

FAQ

What Is A DAO In Crypto?

A Decentralised Autonomous Organisation is an innovative organisational structure that operates through smart contracts and community voting to make decisions.

Unlike traditional organisations, DAOs are governed by a group of members all without a central authority, and acting in the best interests of the organisation.

Why Are DAOs Important?

Unlike traditional organisations, DAOs are governed by a group of members all without a central authority, and acting in the best interests of the organisation.

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