What is DAO: Complete Explanation

A DAO, or decentralized autonomous organization, is a type of business organization that can be set up to run just about any kind of business. However, it does so in a rather unique way. In order to be truly decentralized, the power of decision-making and process has to be decentralized. Any middle figure to manage the business procedure or choose between multiple options can often lead to company-wide decisions being made without the concern for shareholder voting.

DAOs eliminate the need for middlemen by utilizing blockchain smart contracts. Smart contracts are essentially programs that run on blockchain technology. That means that business decisions, treasury funds, hiring procedures, payroll management, and every other administrative task are handled autonomously according to an agreed-upon set of procedures outlined in the DAO’s smart contracts.

That means the only humans involved in a decentralized autonomous organization are the company’s shareholders. Every decision is discussed thoroughly and decided upon by vote. The resulting decisions are used to script out automated management sequences for every business decision to be made.

The simplest way to think about how smart contracts work for decentralized autonomous organizations is this: The company’s assortment of humans come up with how they want their business to operate. A programmer then writes a strict code that tells the smart contracts how to make decisions based on what the company’s shareholders decided. Every single decision is made this way from treasury fund management to the hiring process. Payroll is even dictated through smart contracts. The result is a business with no administrative team.

Like other blockchain technologies, DAOs smart contracts are open-source. That means that shareholders and the public alike can take a look through the code to find out how the DAO makes decisions. This can sometimes lead to vulnerabilities as malicious actors can also freely look through the code to find a vector of attack. More often than not, the open-source nature leads to community-driven improvements.

The very concept of DAOs is blockchain technology-driven and wildly altruistic. There’s no CEO, no CFO, no board of directors, and no middle-management team with an attitude problem. DAOs are collectively managed and owned by the members. The organization’s treasury is built-in so that no single entity has the authority to access it without group approval. DAOs are truly trustless organizations and that can be a major benefit for expensive endeavors.

Pros!Cons!
TrustlessVulnerable to malicious attacks
AutonomousNo business secrets
Open Source
Decentralized
Can’t Be Shut Down

Most DAOs in existence currently are used for software development and further blockchain development. Much like any other industry, blockchain developers need methods to manage business transactions and finance. In line with their beliefs in decentralization, what better way to manage their development business than decentralized finance (DeFi). Utilizing bitcoin and other cryptos to further the development of dApps, or distributed applications, in the metaverse is a perfect match for blockchain developers.

DAO: An Exact Definition

Decentralized Autonomous Organizations, or DAOs, are internet-driven business organizations that use smart contracts, blockchain technology, and crypto to automate business administration. Key defining factors for a DAO include automation through smart contracts, decentralized ownership, built-in treasury, and complete transparency.

The idea is to remove as much chance for human error or greed to make bad decisions. In this manner, any failed business decision falls directly upon the members of the DAO. With full open source transparency, every aspect of the business can be monitored and group decisions can be trusted to be carried out without personally knowing the other members of the DAO.

Most existing DAOs are in the software development industry. Theoretically, any business can be run as a DAO if the logistics can be figured out.

How Does DAO Work?

DAOs are created like any other business. A group of investors forms a joint venture. The investors sit down together or meet up online to discuss the goals of the venture and how to run the operation. Instead of hiring a large administrative team to run business operations, the business operations are automated through the use of open source and transparent smart contracts on blockchain technology. Even the venture’s treasury is set up on a blockchain ledger and managed through group approval and smart contracts.

Members of the DAO meet regularly to discuss potential changes and vote on any decisions brought to the group. Nothing can be changed in the smart contracts without approval by vote. Dividends, charity donations, payroll, and administrative actions are all done automatically by the smart contracts on the blockchain. That means that if for some reason the members of the DAO were to remain inactive, the smart contracts would continually run the DAO as-is.

All the normal business functions like hiring employees or contractors and paying them are decided by bid and handled by smart contracts. In keeping with the theme of blockchain business, most employees are paid in crypto like bitcoin.

A good example of how DAO can operate is the intention behind the first one ever made: The DAO. The DAO was created to be a crowdfunding organization for dApp developers. The Ethereum community wanted a way to safely gather funds from the community to use for democratically voted on projects. Members who contributed to the DAO would receive DAO tokens. Potential projects would be pitched to the community and community members would then use their DAO tokens to vote on plans and even receive rewards if the project was profitable.

How Do You Create DAO?

To create a DAO, you’ll need to know about:

As you may have deduced, this is a job for a skilled blockchain developer. The good news is that if you do not wish to become a developer there are plenty for hire. If you are just learning to code, you can follow some boilerplate examples found online to quickly set up a DAO. Keep in mind that the code will be open source and needs to be functional for the DAO to work properly.

Here are the steps to setting up a DAO:

Step 1: Create a Mission Statement

This is a key step to creating any business. You’ll want to define the purpose and mission behind the DAO you wish to create. It’s hard to organize a business without a goal for the business plan to reach.

Step 2: Build a Community

As a DAO has no corporate management or middlemen, you’ll need to build a community to support it. The quickest way to build a community is to evangelize your mission statement to find like-minded individuals. Without a community, it will be difficult to raise the funds your business needs to grow and succeed. Finding members will take some time, but it may help if you use community forums and discussion platforms like Discord to find interested parties.

Once your community expands, it’s important to establish frequent and open communication. The DAOs have no managerial components outside of their members. You’ll want your members to be active and invested to be successful.

Step 3: Use Your Community Tools

Building a community of support isn’t enough, you’ll want to integrate the same tools you used to form the community to keep it working. While DAOs are trustless organizations, the members still have to maintain interest in their operations. The best way to do this is to create a constant sense of connection. This can easily be done through the same forums and chat services that can be used to build a community.

Step 4: Set Funding Goals

The major draw to using a DAO lies in its treasury management. The ability for members to invest in ideas that drive the organization forward relies on the power and size of the treasury. You’ll want to establish how the treasury funds are organized and collected.

It may also be prudent to form a DAO token to allow individuals and other entities the chance to purchase voting rights that are proportional to their holdings. You can think of DAO tokens as a form of crypto share in the organization.

Step 5: Determine Governance

As previously mentioned, members of the DAO should be able to participate in discussions and vote to determine what proposals should be considered or undertaken by the DAO. You’ll want to plan out the method that works best for your community. Many forms of governance can be chosen with a formal method or by delegated entities.

A formal governance flow would appear like this:

  • DAO members discuss organization matters through chat or video calls.
  • Members reach a soft consensus through forum proposals.
  • DAO members then take a token vote on the blockchain.
  • If a proposal is passed, it can then be put in motion.

Formal governance isn’t too much different from how a council or governing board makes decisions. Sometimes, this can be a rather lengthy process that doesn’t have smaller issues or changes. In some cases, it may be better to delegate certain decisions to a working group or think tank in the DAO. This can lead to smaller functional or performance enhancements to be tested without the time drain of bureaucracy.

Step 6: Define Ownership

Just because the organization is decentralized doesn’t mean that it’s fair for every member of the board to carry the same weight in the company. Anyone who’s ever experienced a group project knows that participation and the value of efforts are not equal across the board. Most DAOs use either NFTs or fungible tokens to determine the weight of governance by participation or merit. It’s important to remember that the initial process that determines how future governance weight should be determined will be voted on by the group and essentially set in stone until a vote changing the process occurs. Take the time to think it through and develop a weighted system that works well and can be agreed upon.

With all of these steps completed, you have successfully started a DAO.

Where Did DAO Originate From?

The concept of an autonomous code-driven business has been hinted at by nearly every founder of crypto. It was the Slock.It team that managed to bring the concept to life with The DAO in May 2016. A rag-tag group from the Ethereum community driven by the want to decentralize everything started to build the smart contracts needed to set up the first DAO, aptly named “The DAO”. The framework for the project was developed open source by Slock.It and the Ethereum community took it from there.

The DAO was meant to be an open-source financial investor for dApp developers. Anyone in the community with a project could pitch their idea to the community and potentially receive DAO funding to put the idea to the test.

What Are the Applications of DAO?

The primary interest of DAO creators is to provide investment funds to potential decentralized blockchain technologies. dApps, or decentralized applications, are a large area of interest for blockchain developers as they can essentially prove the value of blockchain technology as more than just an option for financial ledgers.

In 2022, the list of dApps, DAOs, and development companies continues to expand. Even with this massive growth, dApps and blockchain tech is still in their infancy. Regardless, it has already found its way into software development, video game development, administrative tasks, promotion of art, data security, cloud computing, artificial intelligence, and finance.

As it continues to develop, DAO businesses may be able to take over where poor middle management has failed in physical environments rather than being internet-focused.

Examples of DAO In the Real World

DAOs have proliferated in the last few years. It may not seem like a growing industry at first glance, but if you take a closer look you can find thousands of DAOs in operation across different crypto blockchains, mostly dealing with Ethereum due to the support for smart contracts, unlike bitcoin which lacks them.

  • The DAO
  • DASH
  • Gitcoin
  • MetaCartel
  • Aragon
  • MakerDAO

What is a DAO, and What Do They Work On? FAQs (Frequently Asked Questions) 

What does DAO mean?

DAO is an acronym for Decentralized Autonomous Organization which is a type of business that has no CEO, administrative employees, or middle management. All decisions are made by the DAO members and enforced through smart contracts.

What is the purpose of a DAO?

DAOs are intended to provide open-source, decentralized, and autonomous governance to business organizations and possibly even future governance. The idea is to eliminate as much chance for greed or human error to take place with large amounts of investment funds. With every decision logged on the blockchain for the public and members to see, there’s no room for malicious decisions or improper actions.

What are the benefits of a DAO?

Due to automation and the need for group approval to access the treasury, DAOs are a completely trustless type of organization that is perfect for venture capitalism. Members of a DAO can invest in the capital of the organization without worrying about the identities and trustworthiness of the other members due to the actions being regulated by open-source smart contracts.

How does a DAO Treasury work?

DAO Treasuries are built-in to the smart contracts of the organization and require group approval to access. That means that even the creator of the DAO cannot access the capital without the entire group weighing in on the decision.

What is DAO in simple terms?

A DAO is an organization that is run by smart contracts that are decided on by the DAO’s members.

How does a DAO make money?

Most DAOs act as capital investment firms for development projects around the blockchain or decentralized applications. When a dApp is successful, the profits from the application are paid back to the fund. DAOs also gain capital by selling tokens for voting rights to members.

What is an example of a DAO?

There are many DAOs in operation to date. Some of note are MetaCartel, The DAO, and Gitcoin.

What is a DAO NFT?

DAO NFTs are non-fungible tokens that represent a portion of DAO ownership. NFTs are used to decide the weight of votes of DAO members. In most cases, DAO NFTs act as stock or company shares.

What is the difference between a DAO and a traditional business?

The main differentiating factor between a DAO and a traditional business is that DAOs use smart contracts instead of an administrative task force to run the operational portion of the business.

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