What is DAO?
Table of Content
What Is DAO?
Suppose you have a vending machine which takes money from you and provides sandwiches along with reordering products automatically. Also, with this machine, it will order cleaning services and pay the bill on its own. So, when we invest our money in the machine, we order the snacks, and it gets cleaned after one use. Thus, this machine has no administrators. So, this machine works on the pre-written codes.
However, this is the working of the Decentralized Autonomous Organization (DAO). In the cryptocurrency community, this DAO management model is circulating. It is circulating at the time when bitcoin managed financial transactions by getting rid of intermediaries. Simultaneously, the main aim of DAOs is to establish a company that works properly fully without any hierarchical management.
So, it is important to know the difference between a DAO under the type of organization and the DAO. This is one of the names of these organizations. However, this project was made to create a DAO, which eventually failed because of the mistake in the initial code.
How Does DAO Works?
At first, Bitcoin was considered as the fully functional DAO. Since then, it has had various sets of pre-programmed rules. These rules work autonomously and with distributed consensus protocol. After that, the Ethereum platform has made possible the use of smart contracts. In addition, it has also brought the creation of DAOs more known to the general public and shaped its new look.
To learn more about: What is Ethereum, the multi-use blockchain of smart contracts
So, how can DAO be fully operational? The first is a set of rules for its process. These rules are encoded with a smart contract. It is an important computer program that exists autonomously on the internet. However, it helps people to perform the tasks that they are not able to do by themselves.
The DAO begins a funding phase once regulations are in place. This is a crucial section for two reasons. To begin with, a DAO must have some form of internal property, in this case, a token that may be spent by the organization or used to reward specific activity within it. Second, users get voting rights and, as a result, the capacity to affect the operation of a DAO by investing in it.
Moreover, the DAO will be deployed after the funding period gets over. Thus, it will become a fully autonomous body or fully independent from its creators and from others. It is open-source, which means the code can be viewed by anyone. In addition, all the financial regulations and transactions are recorded in the blockchain. Thus, making DAOs transparent, incorruptible, and immutable.
All choices on where and how to spend your assets are made by consensus once the DAO is up and running. A DAO’s future can be proposed by anyone who owns an interest in it. A monetary deposit may be expected to send such a proposal in order to prevent the network from being inundated with proposals.
The idea is then voted on by the relevant parties. To take any action, a majority of people must agree. As indicated in your code, the percentage required to obtain that majority can change depending on each DAO.
Most importantly, the DAOs will allow you to exchange your funds with anyone around the world. It can be done in the form of loans, investments, charitable gifts, and many more. It is significantly a problem with the voting system, even if the security hole is found in the initial code. Though it cannot be corrected until all the votes are on it. But some hackers can exploit a bug in the code at the time of voting.
“At last, it is crucial to know that DAO is not able to build a product, develop a piece of hardware, and write a code. Rather, in place of this, a contractor will be best hired to perform these tasks. Thus, appointments are made with the voting process. Also, a smart contract will make sure the prompt payment after the task has been perfectly done.”
How To Become A DAO Shareholder And What For?
If you choose to invest in DAO, then it is easy. Especially, if you know how to purchase Ether or bitcoin. But we have the pocket to store all the coins. All you are required to do is purchase tokens from a DAO, which is equal to the buying share of a company.
We can propose proposals, vote on them, and even receive advantages once the fundraising phase is over. The amount purchased will be proportional to the amount of voting power we gain in the DAO.
However, we must be certain about the project before investing so that we know exactly what we are dealing with. DAOs are entirely transparent, and their underlying code is always open source, which means that we are the only ones who can examine them to ensure that they are free of mistakes.
What Is A Dapp?
Decentralized Applications (Dapps) are unstoppable applications that are important to run on different blockchains. It is powered by smart contracts. However, the main distinction between ordinary applications and Daaps is that they are fully autonomous. Thus, it does not require any intermediary to function as they are immune to censorship. Simply, they will establish a connection between the service and a user. Following that, users are allowed to fully control the information or the data they may share.
Read more here: What are smart contracts? Complete guide?
DAOs are a form of decentralized program that is quite ambitious. They fall under the category of “other,” which encompasses voting and governance systems, according to the Ethereum white paper. Money management applications and apps that are all about money are the other two sorts of Dapps, however, they both require another piece of software (insurance, charity, property, etc.).
The “DAO” is the particular name of the DAO that was created by a German firm or startup known as slock.it and is specialized with smart locks. Thus, it allows people to share their property within a decentralized version of Airbnb. In addition, the DAO was started in May 2016, and it was funded with the token sale. In further years, the project managed to become the most popular crowdfunding campaign in history. Thus, it raised more than $150 million.
The DAO code wasn’t perfect, and because it was open-source and accessible to the public, someone discovered a flaw to attack. As a result, on June 17, an unidentified hacker or a group of hackers began diverting funds from the DAO to a “daughter DAO” that replicated the original DAO’s structure. The hacker was able to steal more than $ 50 million worth of Ether before the funds were blocked from being leaked.
Although, a bug in the DAO code was exploited in order to steal the funds. However, the hacker tainted Ethereum’s reputation as a hosting platform, as well as the concept of decentralised autonomous organisations (DAOs). Furthermore, it led the Ethereum network to split in two before fixes to the breach emerged, resulting in the birth of the Ethereum Classic.
However, it’s crucial to remember that all of this might have been avoided if the code had been well tested. Perhaps this breach was a watershed moment in DAO history, revealing possible flaws that will undoubtedly be taken into account by future DAOs.
Advantages Of DAOs
The notion of Decentralized Autonomous Businesses (DAOs) is undeniably fascinating, as it aims to fix everything that has been wrong with the way modern organizations are run. Each investment in a well-structured DAO has the potential to shape the organization. There is no hierarchical structure, which implies that anyone can offer an innovative concept, and the entire organization will consider it. They leave no space for debate because they have a set of pre-written regulations that every investor is aware of before entering the organization, as well as a voting method.
Furthermore, because both presenting a proposal and voting in favor of it involve the investor to spend money, it forces him to consider his options and not waste time on unproductive ideas. Finally, the DAOs are entirely transparent because all of the rules, and also each of the monetary operations, are recorded on the Blockchain and can be viewed by anyone. Everyone who takes part in the project contributes to the decision-making process and may keep track of how the funds are spent.
Disadvantages And Criticisms
DAOs are relatable to cryptocurrencies, and it is also a new advanced technology. Therefore, new projects like this may face many criticisms. For instance, MIT technology review considers this type of idea as entrusting the people while making essential financial decisions to a bad one who will be unable to pay any profit. However, if you read their article, you will know they say there is a need to change a lot in the world in order to make the DAO-related projects successful.
Besides a conservative sentiment, some investments cannot be trusted to the people while there are many other concerns too for DAOs. Moreover, security issues are the most concerning, especially after the Ethereum DAO hack. Thus, this issue is related to the “unstoppable code” rule. At the time of the attack, funds were diverted from the DAO, though observers and investors watched it helplessly. They are also unable to do anything because the attacker is following all the rules. Thus, such attacks can be avoided if the code was error-free and well-composed.
Hence, the startups which operate as DAOs can also conduct business outside of the blockchain network. Also, they will be able to communicate with financial instruments and intellectual property. So, it is important that there must be some legal work to support the existence of DAOs. In addition, legal insecurity is the issue that is troubling the world of cryptocurrencies. It is because it has advanced technology, which is radically different, and that’s why the solution is just a matter of time.
A DAO is referred to as an autonomous organization that has a decentralized system of governance and budget. Thus, making all the decentralized cryptocurrency networks as DAO virtually. Also, consider the first crowdfunding period as the official launch. Furthermore, here are some of the best-known or successful DAOs in the world of cryptocurrencies.
- Dash– it is an open-source, peer-to-peer cryptocurrency that offers instant payments along with instant transactions. In the Dash project, users are known to be “MasterNodes” who directly participate in the decision-making and budget management process. Thus, it also includes users with more than 1000 dash credits.
- Digix Global- the golden rule in this peer-to-peer project is digital assets. Every digix gold token is equal to 1 gram of LMBA or standard gold, which is safeguarded in the vaults.
- BitShares- It is a decentralized cryptocurrency exchange that markets on its own. It is a fast and fluid trading platform which is providing stability of the dollar along with the freedom of cryptocurrencies.