What is DAO?
What is DAO?
Imagine a vending machine that not only takes money from us and gives us a sandwich in return but also uses that money to automatically reorder products. This machine also orders cleaning services and pays the rent itself. Also, as we invest money in that machine, both we and other users have a say in which snacks it will order and how often it will need to be cleaned. It has no administrators, all those processes were pre-written in a code.
This is, broadly speaking, how a DAO or a Decentralized Autonomous Organization works. The idea of this management model has been circulating in the cryptocurrency community since Bitcoin managed to get rid of intermediaries in financial transactions. Similarly, the main idea behind DAOs is to establish a company or an organization that can function fully without hierarchical management.
It is essential to make a distinction between a DAO as a type of organization and the DAO, which is simply the name of one of those organizations. The project was one of the first attempts to create a DAO and it failed spectacularly on the inside due to an error in its initial code.
How does DAO Works?
Initially, Bitcoin was considered the first fully functional DAO, since it has a set of pre-programmed rules, works autonomously, and is coordinated through a distributed consensus protocol. Since then, the use of smart contracts has been made possible by the Ethereum platform, which has brought the creation of DAOs closer to the general public and shaped its current look.
To learn more about the topic: What is Ethereum, the multi-use Blockchain of smart contracts
But what does a DAO need to be fully operational? First, a set of rules by which it will work. Those rules are encoded as a smart contract, which is essentially a computer program, that exists autonomously on the Internet, but at the same time needs people to perform tasks that they cannot do on their own.
Once the rules are in place, the DAO enters a funding phase. This is a very important part for two reasons. First of all, a DAO has to have some type of internal property, in this case, they would betoken that can be spent by the organization or used to reward certain activities within it. Second, by investing in a DAO, users gain voting rights and subsequently the ability to influence its operation.
Once the funding period is over and a DAO is deployed, it becomes a fully autonomous body, completely independent from its creators, as well as from anyone else. They are open-source, which means that their code can be seen by anyone. Furthermore, all financial regulations and transactions are recorded on the blockchain. This makes DAOs totally transparent, immutable, and incorruptible.
Once the DAO is up and running, all decisions about where and how to spend your funds are made by consensus. Everyone who bought a stake in a DAO can make proposals about its future. To prevent the network from being spammed with proposals, a monetary deposit may be required to submit such a proposal.
Subsequently, the interested parties vote on the proposal. To take any action, the majority needs to agree to do so. The percentage required to reach that majority can vary depending on each DAO, as can be specified in your code.
Essentially, DAOs allow people to exchange their funds with anyone in the world. This can be done in the form of an investment, a charitable gift, fundraisers, loans, and so on, all without an intermediary. A potentially significant problem with the voting system is that even if a security hole was detected in an initial code, it cannot be corrected until a majority votes on it. While the vote is taking place, such hackers can exploit a bug in the code.
“Finally, it is important to note that a DAO is not capable of building a product, writing code, or developing a piece of hardware. Instead, a contractor can be hired to perform a required task. This appointment is made through the same voting process, while a smart contract will ensure prompt payment once the task has been successfully completed.”
How to Become a DAO Shareholder and What for?
Investing in a DAO is relatively easy, especially if we know how to buy Ether or Bitcoin and we already have a wallet to store the coins. All we really need to do is buy tokens from a particular DAO, which is roughly equivalent to buying shares in a company.
Once the financing phase is finished, we can make proposals, vote on them, and even obtain benefits. The number of tokens purchased will be correlated with the amount of voting power that we will obtain within the DAO.
However, before investing, we must be sure about the project to know exactly what it is getting into. DAOs are completely transparent and their underlying codes are always open source, which means that only we have the opportunity to review such codes to make sure there are no errors in them.
What is a Dapp?
Dapps, or Decentralized Applications, are essentially unstoppable applications, running on different Blockchains and powered by smart contracts. The main difference from ordinary applications is that Dapps are completely autonomous, do not require an intermediary to function, and are basically immune to censorship. In other words, they establish a direct connection between a user and a service. Through this, users can fully control the information and data they share.
Read more here: What are smart contracts? Complete guide?
DAOs are basically a very ambitious type of decentralized application. As described in the Ethereum white paper, they fall under the category of “other”, which includes voting and governance systems. The other two types of Dapps are money management apps and apps where it’s all about money, but they also require another piece (insurance, charity, property, etc.).
“The DAO” is the name of a particular DAO, which was created by a German startup called slock.it and which specialized in “smart locks”, allowing people to share their property on a decentralized version of Airbnb. The DAO was rolled out in May 2016, when it was funded through a token sale. Somehow, the project managed to become the most successful crowdfunding campaign in history for its time, having raised more than $ 150 million.
The DAO code was not perfect, and since it was open-source, available for everyone to see, someone found a bug to exploit. Thus, on June 17, an anonymous hacker or a group of hackers began to divert money from the DAO to a “daughter DAO”, which copied the structure of the original DAO. Before the leakage of funds was stopped, the hacker managed to steal more than $ 50 million worth of Ether.
Even though a bug in the DAO code was exploited to steal the funds, the hacker seriously undermined Ethereum’s reputation as a hosting platform and the very concept of DAOs. In addition, it caused the Ethereum network to split in two before the solutions that emerged to repair said hack and generated the birth of Ethereum Classic.
However, it is important to realize that all of this could have been avoided by further testing the code. Perhaps, this hack was an important milestone in the development of DAO history that showed potential weaknesses and, no doubt, such weaknesses will be taken into consideration by future DAOs.
Advantages of DAOs
It is undeniable that the very concept of DAOs is extremely exciting as it strives to solve everything that is wrong with the way modern organizations are run. A perfectly structured DAO gives each investor the opportunity to shape the organization. There is no hierarchical structure, which means that each innovative idea can be presented by anyone and considered by the entire organization. With a set of pre-written rules that every investor knows before joining the organization, as well as the voting system, they leave no room for discussion.
In addition, since both the presentation of a proposal and the vote in favor of it require the investor to spend a certain amount of money, it pushes him to evaluate his decisions and not waste time on ineffective solutions. Finally, as all the rules, as well as each of the financial transactions, are registered in the Blockchain, available for review by anyone, the DAOs are completely transparent. Everyone who participates helps decide how to spend the funds and can keep track of how those funds are spent.
Disadvantages and Criticisms
DAOs, like almost everything else connected to cryptocurrencies, are an extremely new technology and, to some extent, revolutionary. Naturally, projects like this will attract a lot of criticism. For example, MIT Technology Review considers the idea of entrusting the masses with making important financial decisions to a bad one who will probably not pay any profit. In their article, they say that a lot in the world will have to change for DAO-related projects to be successful on any scale.
Aside from a rather conservative sentiment that investments cannot be trusted to the masses, there are other concerns surrounding DAOs. The most pressing issue, especially after the Ethereum DAO hack, is a security issue and is related to the “unstoppable code” principle. During the attack, observers and investors watched helplessly as the funds were diverted from the DAO, but could not do anything, as the attacker was technically following the rules. Of course, such attacks can be avoided if the code is well composed and free of errors.
Finally, for startups that operate as DAOs to be able to conduct business outside of a Blockchain network and communicate with a physical world of financial instruments and intellectual property, it is necessary that there be some type of legal framework that supports the existence of DAOs. . Legal insecurity is an issue that has been plaguing the world of cryptocurrencies because the technology within it is so new and radically different, yet the solution seems to be only a matter of time.
Essentially, any autonomous organization with a decentralized system of governance and budget can be called a DAO. This makes virtually all decentralized cryptocurrency networks a DAO, especially considering the initial crowdfunding period that precedes the official launch. Next, we will see a shortlist of some of the best-known successful DAOs within the world of cryptocurrencies.
- Dash – An open-source, peer-to-peer cryptocurrency that offers instant payments and private transactions. In this project, the users who participate directly in decision-making and budget management are the “ MasterNodes ”, users with more than 1000 Dash to their credit.
- Digix Global – The golden rule in peer-to-peer digital assets. Each Digix Gold token represents 1 gram of LMBA standard gold and is secured in vaults.
- BitShares – A decentralized cryptocurrency exchange, which markets itself as a fast and fluid trading platform, providing the freedom of cryptocurrencies combined with the stability of the dollar.