Decentralized Autonomous Organization
DAO stands for Decentralized Autonomous Organization. The concept of a DAO was first proposed by Bit Shares, Steemit, and EOS (Block. one) founder Dan Larimer in the year 2015, and was further refined in the year 2016 by Ethereum’s Vitalik Buterin. A decentralized autonomous organization is decentralized, autonomous, and an organization- as the name already suggests. It is a whole organization that is automated. It stores rules and processes in code. DAOs are often stateless and distributed over millions of computers. No single government could decide to take it down.
Components of DAO:
- No central legal entity: In DAO, there is no central legal entity, this means that no single entity is responsible for regulating the project.
- Self-enforcing code: Smart contracts are created and extensively tested to make sure important details are not overlooked.
- Token acts as an incentive for validators: Tokens are used in DAO for validators to motivate them and to ensure active, fair, and quick participation.
Need of DAO
Beginning an association with somebody that includes financing and cash requires a great deal of confidence in the individuals you’re working with. Yet, it’s difficult to believe somebody you’ve just at any point associated with on the web. With DAOs you do not need to trust the other individual within the gathering, simply the DAO’s code, which is 100% straightforward and evident by anybody. This opens up countless new freedoms for worldwide joint effort and coordination.
Traditional Organization Vs DAO
Comparison:
DAO
- Casting a ballot is needed by individuals for any progressions to be implemented
- Votes were counted, and results were carried out consequently without a believed intermediary.
- Completely democratized.
- Administrations offered are taken care of consequently in a decentralized way.
Traditional Organization
- Depending on the structure, changes can be requested from the sole party, or casting a ballot might be advertised.
- If casting a ballot is permitted, votes are counted inside, and the result of casting a ballot should be taken care of physically.
- Usually progressive.
- Requires human taking care of, or halfway controlled mechanization, inclined to control.
Steps For Launching a DAO
There are three major steps for launching a DAO:
- Smart Contract Creation: In this step, a developer or a group of developers create a smart contract behind the DAO. It is very important for the developer to extensively test the smart contracts before launching to make sure that they do not overlook important details. After launch, only the rules set can be changed through the governance system.
- Funding: After smart contracts are created and launched, the DAO needs to determine a way to receive funding. Sometimes, the tokens are sold to raise funds. These tokens give holders voting rights.
- Deployment: Once everything is set up and on track, the DAO needs to be deployed on the blockchain. From this point onwards, stakeholders decide the future of the organization. The developers who created the smart contracts, no longer influence the project.
How Do DAOs Work?
So far we are using people to “store” information instead. In order to know how much hiring a new person would cost? – There is a person answerable in the human resources department. Similarly, to get movement costs repaid?- There is a separate person responsible for this in the accounting.
- In a DAO, there is a code for that. Computers will take over much of the decision-making and operations we see nowadays. The final control, however, is still with humans, the shareholders. Shareholders have voting rights just like in regular corporations. They dictate the general direction and accept or decline initiatives.
- The general idea is to bring the benefits of blockchain technology to management.
- The blockchain is immutable, precise, and consistent. It is also transparent and open so that anyone could review companies. Strong consistency makes DAOs reliable business partners.
- Such an organization is also harder to put under pressure. It will be difficult to ban it from operating somewhere. As it is controlled by the organization members and not influenced by a central government authority to put under pressure.
DAO Membership
There are various models for DAO membership. Membership can decide how casting ballot functions and other key pieces of the DAO.
- Token-based membership: Normally completely permissionless, contingent upon the token utilized. For the most part, these administration tokens can be exchanged for permissionless on a decentralized trade. Others should be procured by giving liquidity or another ‘evidence of work’. In any case, just holding the symbolic awards admittance to casting a ballot. Ordinarily used to administer expansive decentralized conventions as well as tokens themselves.
Example: MakerDAO’s token MKR is generally accessible on decentralized trades. So anybody can become tied up with having cast a ballot power on the Maker convention’s future.
- Share-based membership: Offer-based DAOs are more allowed, yet at the same time very open. Any imminent individuals can present a proposition to join the DAO, typically offering recognition of some worth as tokens or work. Offers to address direct democratic force and possession. Individuals can exit whenever with their proportionate portion of the depository. Regularly utilized for all the nearer sew, human-driven associations like foundations, laborer assemblages, and venture clubs. Can administer conventions and tokens too.
Example: MolochDAO is centered around financing Ethereum projects. They require a proposition for enrollment so the gathering can evaluate whether you have the important mastery and funding to make educated decisions about possible grantees. You can’t simply purchase admittance to the DAO on the open market.
Ethereum and DAOs
Ethereum is the ideal establishment for DAOs for various reasons:
- Ethereum’s own agreement is conveyed and set up enough for associations to trust the organization.
- The agreement code can’t be changed once live, even by its proprietors. This permits the DAO to run by the principles it was modified with.
- Agreements can send/get reserves. Without this, there is a need for a believed delegate to oversee a bunch of reserves.
- The Ethereum people group has demonstrated to be more synergistic than cutthroat, taking into consideration best practices and emotionally supportive networks to arise rapidly.
Advantages of DAO
- Decentralization: DAO emphasizes being driven by a collective rather than an individual. With DAO, participants have a much stronger say in the organization’s direction.
- Community Driven: DAOs make it easy for communities worldwide to connect and build a prospering vision together. DAO is accessible to Individuals who may have had the opportunity in the past to connect and work together.
- Principle-agent dilemma: One of the main advantages of DAO is that it provides a solution for the principle-agent dilemma. This dilemma is a conflict in priorities between a person (principle) and the entities making decisions on their behalf (agent). One of the common examples of this is problems between Stakeholders and CEOs. DAO solves this problem through community governance. Here, principles don’t have to trust agents who work on their behalf instead they work as a part of a group whose incentives are aligned.
Disadvantages of DAO
This section lists some of the disadvantages of DAO:
- Security: DAO can be launched with just a few lines of code and given the immense tech stack a well-run DAO requires to operate effectively thus security remains a vulnerability as it requires significant technical expertise and it is expensive to keep best security practices implemented.
- Slow Decision Making: With DAO scaling there comes an issue of getting everyone to vote on proposals in a timely manner and with different time zones and investor priorities, keeping DAO participants up to date can be challenging.
- The Bikeshedding Effect: Parkinson’s Law of Triviality states that the amount of time spent discussing an issue in an organization is inversely related to its importance in the scheme of things. This is also known as bike-shedding. It can have a negative impact on personal productivity as it causes inefficient management of time.
- No legitimate structure for circulating DAOs: DAOs can be circulated across different locales, and there’s no legitimate structure for them. Any lawful issues that might emerge will probably require those required to manage various territorial laws in a convoluted fight in court. In July 2017, for instance, the United States Securities and Exchange Commission gave a report not really settled that the DAO sold protections as tokens on the Ethereum blockchain without approval, disregarding bits of protection law in the country.
Future of DAO
The DAO as initially imagined had not returned as of mid-2020. Regardless, interest in decentralized independent associations as a more extensive gathering keeps on developing. While there are many waiting concerns and potential issues with respect to lawfulness, security, and construction, a few investigators and financial backers accept that this kind of association will ultimately come to conspicuousness, maybe in any event, supplanting customarily organized organizations.
Criticism of DAO
There are likewise a couple of drawbacks to DAO:
- One significant issue of being open-source is that securing business insider facts will end up being more troublesome.
- Additionally, potential hackers can more easily detect weak spots in the system as they can openly access the source code. In rare cases, they could even slip their pieces of code into the software without being detected by the community. That way they could create their own loopholes.
Conclusion
DAOs are an exciting idea, and they come with their pros and cons. The well-known DAO is called … “the DAO”. It was a form of investor-directed venture capital fund founded in 2016 that got famous for its failure. In its ICO the DAO collected a staggering $ 150 million. More than 18.000 investors participated. Shortly after that, the account of the DAO was hacked. Unknown attackers stole $ 50 million worth of Ethereum. As a result, Ethereum had to execute a hard fork to restore the funds. That is why we now have Ethereum and Ethereum Classic. Ethereum is the version where the hack was erased. Investor support subsided after the incident. The event has been a famous example of how fragile DAOs can be to certain attacks