Well, to state its meaning, the term DAO stands for “ decentralized autonomous organization”. It is described as an open-source blockchain protocol governed by a group of rules, that is created by its elected members AND it can automatically execute certain conduct without the need of any intercessors. Further, both the program rules and later conduct are recorded on a transparent and secure blockchain charge, which can not be tampered with and that’s all thanks to an inflexible timestamp and so the distribution of the information to the network members.
Basics of DAO
DAO runs on a Blockchain and you must be thinking about where the DAO is written? It is written on Ethereum Blockchain. And in Ethereum, they are written in Solidity Language. Two points are required to understand when you call something a DAO:
- An organization with a group of participants with a common goal.
- An organization that is governed by code that is decentralized, open, and transparent.
Now, if the system is well designed, the organization will organically evolve towards achieving the common goal.
But wait… How does a DAO work?
Let’s clarify by an example:
The first example is a DAO that is called DAO and it’s confusing, I know!, And to define it simply, it is a decentralized venture capital fund. In this case, the group of participants is investors with the same goal of maximizing their returns, and coding works as follows: Smart contracts (built on top of the Ethereum blockchain) will draw votes from shareholders (i.e., people holding DAO tokens) first to invest in them and how much to invest. When more stocks close, you have more weight in the vote. Once the votes have been recorded, smart contractors will automatically allocate money based on the results of the vote. Now, you must be thinking… how is it different from venture capital fund?
Difference from traditional venture capital fund
Well, traditional venture capital funds have the Principal-Agent Problem, wherein, by an agent I mean the board of directors, and by the principal, I mean the investors who have money in the fund. The agent takes action on behalf of the principal but the agent’s actions are more incentivized by his self-interest than that of the principal’s. In other words, the board of directors does what’s adequate for themselves as opposed to what’s adequate for the investors. Therefore, DAO investors vote directly on the projects they need based on how much they hold (or tokens).
While the DAO failed, DAOs are not just abstract concepts as of the moment. Possibly the most well-known exemplification of DAO is the MakerDAO (which is sometimes also called as Maker game), which presently has a thriving and fast-growing ecosystem. People from the MakerDAO have the common end of creating a stable coin, DAI, that can be used by anyone, anywhere, anytime.”
For making it simple;
- MakerDAO is a Company
- DAI is the Product,
- Risk Parameters are the Features of the product
- and MKR holders are the Shareholders.
Constitutionally, 1 DAI is collateralized by 1 USD worth of ETH, and MKR holders bounce to make a series of calls to assure that the price always stays stable and DAI exhaustively collateralized. It’s very similar to centralized organizations, where decisions like these are made by board members and executives. Or if a company is public, you may be able to vote by holding stocks (or ownership in the company).
Likely, in MakerDAO, anyone who owns MKRs can vote on decisions. Further, do note that in MakerDAO, voting is done via the Maker Governance Portal, which is a user-friendly front-end to the smart contracts that make up the Dai Credit System where you can also interact directly with those smart contracts. To vote here, you need to lock up the tokens.
Benefits of DAOs
- Transparency: DAO users can see the code that controls the network as well as any transactions that take place on the blockchain. This improves transparency when compared to a centralized network.
- More effective association: Instead of using a trusted third party to perform tasks on the network, DAOs use a list of pre-defined options and conditions to make these contracts automatically. This eliminates the cost and safety risks that come with third-party involvement.
- DAOs provide investors with a unique opportunity to come up with proposals and ideas for improving the private sector.
Thanks to the autonomous structure of the DAO, any investor can submit an offer, regardless of their stake in the network. Submission of proposals also costs money, which improves the quality of submitted proposals by ensuring that users of submission have stock in submission.