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Decentralised Autonomous Organisation (DAO) explained

HomecryptocurrencyDecentralised Autonomous Organisation (DAO) explained

A decentralised autonomous organisation (DAO) is a non-centralized organisation. Decisions are taken at the community level, controlled by a system of regulations implemented on a blockchain.

DAOs are decentralised autonomous organisations (DAOs) that are cooperatively owned and governed by their members. They include coffers that are accessible only with the agreement of their members. Decisions are made through proposals that are voted on by the group over a specified period of time.

A DAO operates independently of hierarchy management and can be used for a wide variety of purposes. These organisations enable the creation of freelancer networks in which contracts combine their cash to pay for program subscriptions, philanthropic organisations in which members authorise payments, and group-owned venture capital businesses.

Before proceeding, it is essential to identify a DAO, a web organisation, from The DAO, is one first of its kind. The DAO was a 2016 initiative that eventually collapsed, resulting in a catastrophic split in the Ethereum network.

How DAO operate?

As indicated before, a DAO is an organisation in which decisions are made from the bottom up; the organisation is owned by a collective of members. There are many methods to engage in a DAO, the most common of which is via the possession of a token.

DAOs are powered by smart contracts, that are simply bits of code that run automatically when a set of predefined conditions is satisfied. Nowadays, smart contracts are implemented on a variety of blockchains, but Eth was the first to do so.

The DAO’s regulations are defined by these smart contracts. Individuals who own a stake in a DAO are subsequently granted voting rights and have the ability to influence how the company functions by voting on or proposing new governance ideas.

This strategy protects DAOs from being inundated with proposals: a proposal will succeed only if it is approved by a majority of stakeholders. The method used to calculate that majority differs amongst DAOs and is stated with in smart contracts.

DAOs are completely self-contained and transparent. Because they are based on open-source blockchains, their source code is publicly accessible. Additionally, anybody may examine their built-in treasuries, since the blockchain maintains a complete record of all financial activities.

Typically, a DAO is launched in three stages.

Constructing smart contracts: To begin, a programmer or group of programmers must construct the DAO’s smart contract. They may only modify the rules established by these contracts after launch via the governance system. This requires them to thoroughly examine contracts to ensure they must not forget critical information.

Just after smart contracts are developed, the DAO must choose a method of financing and governance. Typically, tokens are issued to generate cash; these tokens confer voting rights to holders.

After everything is configured, the DAO must be deployed to the blockchain. From this moment on, investors make decisions about the organization’s future. The founders of the organisation — individuals who developed the decentralized applications — no longer have any more influence over the initiative than other stakeholders have.

Why are DAOs required?

DAOs offer significant benefits over conventional organisations due to their internet-native nature. One key benefit of DAOs is the absence of the necessity for two parties to trust one another. While a typical organisation demands a high level of confidence in its leaders — particularly on behalf of the investors — DAOs need just code to be trusted.

Going to trust that code is made simpler by the fact that it is publicly accessible and can be thoroughly tested prior to deployment. Each action taken by a DAO after its debut must be authorised by the public and is entirely public and verifiable.

This kind of organisation does not have a hierarchical structure. Nonetheless, it may perform activities and expand while being managed by investors via its native cryptocurrency. Due to the absence of a hierarchy, any stakeholder may submit an innovative proposal for consideration and improvement by the whole group. Internal conflicts are often simply resolved via the voting method, in accordance with the smart contract’s pre-written regulations.

By enabling investors to pool their assets, DAOs enable them to participate in early-stage enterprises and decentralised initiatives while also sharing the risk and potential gains associated with them.

The principal-agent conundrum

The primary benefit of DAOs would be that they resolve the principal-agent issue. This issue arises when a person or organisation (the principle) has a conflict of interests with others who make choices and act on their account (the agent).

Problems may arise in a variety of circumstances, the most prevalent being the connection between investors and a CEO. The agent (the CEO) may operate contrary to the principal’s interests and objectives (the stakeholders) and instead behave in their very own self-interest.

Another common instance of the primary dilemma comes whenever the agent takes on excessive risk in order to alleviate the principal’s burden. For instance, a trader might use excessive leverage to pursue a performance incentive, secure in the knowledge that the business would pay any losses.

Through community governance, DAOs resolve the principal-agent issue. Stakeholders are not compelled to join a DAO and do so only after becoming familiar with its rules. They are not required to accept any agent functioning on their behalf, but rather operate as member of a collective with aligned incentives.

The interests of token holders align because the very structure of a DAO entices individuals not to be harmful. They will have seen the network flourish because they have invested in it. Acting in opposition to it would be against their self-interest.

What exactly was The DAO?

The DAO had been an early incarnation of decentralised autonomous organisations in the contemporary age. It was founded in 2016 with the intention of operating as an automated venture capital fund.

Those who held DAO tokens might profit from the organization’s investments by receiving dividends or capital gains on the tokens’ value. The DAO was first hailed as a groundbreaking idea, raising $150 million in Ethereum (ETH) in one of the most successful crowdfunding campaigns of all time.

The DAO was created on April 30, 2016, after the publication of open-source code for an Eths investment company by Ethereum protocol developer Christoph Jentzsch. Investors purchased DAO tokens by sending Ether to the DAO’s smart contracts.

A few weeks into the public offering, several engineers raised worry that a flaw in The DAO’s smart contracts may enable bad actors to drain the organization’s cash. While a governing proposal was being considered to address the flaw, an attacker exploited it and stole approximately $60 million in ETH from The DAO’s wallet.

About 14% of all ETH in existence at the time was invested in The DAO. The breach dealt a severe blow to DAOs in principle and to the then-one-year-old Ethereum network in particular. As everyone tried to find out what to do, a discussion erupted among the Ethereum community. Initially, Vitalik Buterin, Ethereum’s co-founder, advocated a soft fork that would ban the attacker’s address and prohibit them from transferring cash.

The attacker, or someone impersonating them, then reacted to that proposal, stating that the money were gained in a “legitimate” manner in accordance with the smart contract’s terms. They stated they were prepared to sue anybody who attempted to seize the monies.

The hacker also promised to pay ETH miners with a portion of the stolen assets in order to avert a soft fork. Following the argument, it was concluded that a hard fork would be the best approach. That hard fork restored the Ethereum network’s record to before DAO was attacked and reallocated the stolen cash to a contract that enabled investors to retrieve them. Those opposed to the move opposed the hard split and advocated for an old iteration of the network, dubbed Ethereum Classic (ETC).

DAO Disadvantages

Autonomous decentralised groups are not without flaws. They are a fairly new concept that has generated considerable controversy because to persistent worries about their legality, security, and structure.

For example, MIT Technology Assessment has said that it believes it is a terrible idea to entrust the public with critical financial choices. While MIT revealed its opinions on DAOs in 2016, it looks as if the corporation has never revised its stance — at least publicly. Security concerns were also highlighted by the DAO attack, since faults in smart contracts might be difficult to rectify even after they are discovered.

DAOs may exist in various countries and are not governed by any legal structure. Any legal concerns that develop will very certainly need individuals concerned to navigate a maze of regional laws in the course of a lengthy court struggle.

For example, in July 2017, the United States Securities and Exchange Commission published a report concluding that The DAO traded securities in the form of Ethereum blockchain tokens without permission, therefore breaching elements of the country’s securities legislation.

DAO Examples

Over the previous several years, decentralised autonomous organisations have gained pace and are now completely integrated into a number of blockchain initiatives. For example, the decentralised finance (DeFi) field makes use of DAOs to enable applications to become completely decentralised.

As per some, the Bitcoin (BTC) blockchain is the first example of a decentralised autonomous organisation (DAO). The network grows via community consensus, despite the fact that the majority of network members have never met. Additionally, it lacks a centralised governance framework, requiring miners and nodes to declare support.

However, by today’s standards, Bitcoin is not considered a DAO. By current standards, Dash will be the first fully decentralised autonomous organisation, since the initiative has a governance system that lets stakeholders to decide on how the treasury is used.

Other, more sophisticated DAOs, such as those created on atop of the Ethereum blockchain, are crucial for the implementation of cryptocurrency-backed stablecoins. In certain circumstances, the organisations that founded these DAOs gradually relinquish control over the project in order to eventually become irrelevant. Token holders may participate in voting on governance proposals that include hiring new contributors, adding additional token as collateral for their currencies, and adjusting other settings.

In 2020, a DeFi lending system introduced its own governance token, which was issued via a liquidity mining process. In essence, everybody who engaged with the system would be rewarded with tokens. Since then, more initiatives have duplicated and altered the idea.

Currently, the number of DAOs is lengthy. It has evolved into a distinct notion that has gained traction through time. While some initiatives are currently pursuing total decentralisation via the DAO model, it’s worth noting that they are just few years old but have yet to accomplish their ultimate aims and objectives.

DAOs, as internet-native organisations, have the ability to fundamentally alter how corporate governance is conducted. While the idea grows and the legal grey area in which they operate is clarified, an increasing number of businesses may adopt a DAO model to help control some aspects of their operations.

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