What are DAOs (Decentralized Autonomous Organizations) and how do they work?

The development of blockchain and smart contracts has ushered in a new type of organization without hierarchy or centralized control. They operate autonomously and unite people from all over the world around common goals. Their main advantages are transparency and automation.

 

In today’s article, let’s discuss key aspects of DAOs: what these organizations are, how they emerged, and what their future might be.

DAO Definition

A DAO is an organization based on blockchain, operating using smart contracts and without centralized management.

A DAO does not have a CEO, board of directors, economists, and managers like traditional companies. Decisions on the management and disposal of capital are made by the community through voting. Holders of DAO native tokens have the right to participate.

History of DAO Emergence

Decentralized organizations were first talked about in 2013. However, at that time, they were not DAOs but DACs – decentralized corporations. All their subsidiaries were decentralized, shares were tokenized, and transactions were made publicly. Each transaction had a public code that could be easily verified. Over time, the concept improved and became more universal.

The first decentralized organization “The DAO” was launched in 2016 on the Ethereum blockchain.

How do DAOs work, and why are they needed?

In simple words, a DAO is a decentralized application where rules are integrated into the software code. The mechanism for managing such organizations is provided by smart contracts.

What are DAO tokens, and what do they affect? It is a cryptocurrency issued by a decentralized organization. Everyone who owns them can participate in voting. The number of tokens determines the participant’s degree of influence.

There are investment, educational, social, analytical, legal, and other types of DAOs. Such organizations are created mainly for testing new technologies, collective investment, increasing the involvement of participants, and reducing bureaucracy and costs.

Benefits of DAOs

Having found out what DAOs are, let’s talk about the reasons for their popularity. A number of advantages are presented below:

  • Decentralization and democracy: decisions in the DAO are made based on voting by participants, which contributes to a more democratic and transparent process;
  • Automation: DAO allows for programmable transactions and fund distribution;
  • Publicity: all transactions and decisions are recorded on the blockchain and can be verified by each participant;
  • Community participation: managing the organization by voting increases the ownership of the participants;
  • Flexibility: the absence of complex hierarchies allows for implementing new ideas and innovations quickly.

Disadvantages of DAO

Among the DAO’s disadvantages, experts mention:

  • A low security level: smart contracts may contain errors in the code, which leads to vulnerabilities and security threats;
  • The complexity of management: sometimes, decisions are made too slowly due to the need to gather a majority of votes;
  • Lack of regulation: participants may be left unprotected if their rights are violated;
  • Liability issue: in case of mistakes or failures, it can be difficult to determine who is responsible for the decisions made.

Legal aspect

The status of DAOs is not defined in most countries. Currently, the activity of these structures is regulated at the legal level only in Wyoming and Vermont (US states), as well as in the American Virgin Islands.

Development prospects and opportunities of decentralized autonomous organizations

DAOs have high potential in different areas. Analysts believe that their development will contribute to a more equitable and inclusive society. The following is expected in the future:

  • The emergence of robust and flexible tools for managing DAOs;
  • Expansion of DAO application areas (from finance to philanthropy);
  • Creation of more democratic governance models;
  • Reduced reliance on centralized structures;
  • Risk management and increased security;
  • Integration of DAOs with real economic structures.

FAQ

1. How do decentralized autonomous organizations interact with cryptocurrency?

DAOs have native tokens that entitle them to participate in voting. Cryptocurrency can be traded on exchanges.

2. What are the risks associated with participating in decentralized autonomous organizations?

The list of risks includes:

  • Bugs and vulnerabilities in smart contracts;
  • Hacker attacks;
  • Lack of legal status of the organizations.
3. What perspectives are open to individual participants within the DAO?

DAO members can vote, put forward their proposals and ideas, receive remuneration, create new projects, and develop skills and experience with DeFi.