What are DAOs and what is expected of them?

What are DAOs and what is expected of them?

Claudia Roca

Apr 18, 2023

Apr 18, 2023

Apr 18, 2023

What are DAOs and what is expected of them?
What are DAOs and what is expected of them?
What are DAOs and what is expected of them?

The need of human beings to create groups that work together gave us what we know as societies today, but... What does all this have to do with DAOs? Calm down, calm down, let's get to it.

In the world of cryptocurrencies, we can say that DAOs are a similar version of organization, but in the cryptosystem.  

To put it more clearly: teams of people who have come together to support a cause or a mission and use blockchain tools like smart contracts and tokens to make it happen. Basically, a partnership in a newly emerging system of technology.

If you want to better understand what DAOs are read on.

What is a DAO?

Are you familiar with vending machines? We can set an example with them. The machine uses our payment to automatically reorder items in addition to giving us a snack in exchange for our money. 

In addition, this machine makes its own rental payments and cleaning service orders. We can say that it’s quite self-sufficient, but we also have some power.

We, and other users, have a say in what refreshments are ordered and how often the machine should be cleaned. Why? Because we invested money in it. All those processes were previously written in code, so it has no administrators.

We just have to take this example to cryptocurrencies with the first example: Bitcoin. This cryptocurrency eliminated intermediaries in financial transactions, this management model has gained strength in the cryptocurrency community. 

Similar to this, the main goal of DAOs is to create an organization or business that can function effectively without hierarchical management.

How does a DAO work?

DAOs seem to be, from a theoretical point of view, a reliable and secure way to collaborate with others across borders who share your interests. The truth is that there are many approaches to help you understand what a DAO is, but let's take it one step at a time. 

Imagine something that is somewhere between a cooperative and an NGO. There are people who make monetary contributions and with them, DAOs contribute to the growth of popularity, charity, environmental projects, investment, among others.

In a nutshell, DAOs are networks of people working together through the network, using cryptographic tools and platforms for a specific goal or interest.

Similar to everyday life, there have always been communities on the Internet that came together for a common interest. 

These interests can range from preserving a historic structure to working on the conservation of a bird to exploring collections, projects, or events. That's why we give you an example at the beginning.

The development of this technology, together with the level of scalability offered by the cryptocurrency to manage funds, is what is determined as the DAOs. In conclusion, we can say that a DAO is a group of people who unite around a common goal or interest. 

They seek methods to raise money in cryptocurrencies and that they manage their operations using a clear set of rules that are codified in smart contracts, published on the blockchain, and secure. They will operate automatically and transparently as a result.

What must a DAO have in order to operate?

Before implementing popular smart contracts, a DAO must have some rules under which it will operate. If it has already determined them during this process, the DAO must enter the funding phase

To do this, it must produce tokens that can be purchased and/or used to pay those who work for the DAO. Let's look at this with an example: you get the tokens if you mine a coin from the platform where the DAO is managed.

On the other hand, users have the right to vote to affect the operation of these DAOs by making an investment in one and buying their tokens, hence it’s important to have a way to extract the token.

When this has already been accomplished, the DAO can operate independently of the creators and all users. In addition, another fundamental aspect is that it must be open source so that transactions can be recorded

Finally, all decisions made afterward must be by common agreement among those who bought shares during the first stage of development. Then, the rest of the network involved must vote on the proposal to determine whether it should be implemented or not.

Can I become a shareholder in a DAO? Why would I do that?

Buying Ethereum or Bitcoin and having a wallet to store the coins already makes investing in a DAO relatively simple. After that, all you have to do is buy specific DAO tokens that are of interest to you, which are comparable to buying shares in an organization.

When the initial funding phase is over, you will be able to present your different proposals, vote for them or others, but most importantly, receive benefits. Our increased voting power within the DAO will be directly related to the number of tokens we buy.

But stop for a moment there, entrepreneur, first of all, you must know what you are getting into. You must be sure of the project before you invest, something you can do by researching the DAO project that has caught your eye. 

The underlying codes of DAOs are always open source and completely transparent, so only we have the opportunity to check for bugs.

How is a DAO organized?

Imagine any DAO as a treasury. All contributors contribute something into such a treasury, whether it is Ether, which is Ethereum's currency or any other cryptocurrency of the many on the market.

However, this contribution gives some power to make other contributions that will be discussed with the other contributing members of the DAO. At the end of the day, it’s all about discussing the way forward for the project with the investors' funds. 

No one in a decentralized organization has full access to the treasury without the consent of the group, which is essential to ensure transparency. In addition to this, all decisions are made, as we said before, by common agreement and through voting, guaranteeing the participation of all parties. 

It’s worth noting that it’s impossible to dispose of the cryptographic treasure protected by DAO smart contract, based on the blockchain without such approval, so it has a higher degree of security.

Unlike traditional companies or organizations we have seen so far, in DAOs there are no CEOs with the power to take action with the DAO fund. Thanks to the blockchain at its base, the entire economic record is transparent and immutable.

In addition, the DAO's own open and visible code itself clarifies how interactions, voting, and fund movements are handled. 

This is how this new technology solves the problem of fund management in institutions and organizations where the entire weight of decisions falls on a certain group of people.

What are the advantages and disadvantages that DAOs offer the market?

The Decentralized Autonomous Organization has had a revolutionary impact on the financial sector and is beginning to be considered for deployment in other sectors. 

Although it’s a relatively new technology, we're not going to lie to you, it comes with its pros and cons.

Advantages 

  • Security and transparency: security and transparency in all transactions on the platform are two qualities that define DAOs. Every action is documented in a blockchain ledger that is impenetrable to interference external to the organization.

  • Independent to external controls: this is a defining quality and a major benefit of decentralized organizations. Because computer algorithms control all aspects of DAOs' operations, they do not react to external agents. These financial institutions often do not rely on intermediaries for their operations and control, in contrast to traditional financial institutions that rely on government actors.

  • Automatic execution: they are structured in computer code that executes independently based on the behavior of the protocol. As a result, the rules of a DAO do not need to be understood because they are carried out automatically when the required conditions are met. Depending on the behavior of the protocol, they are organized into computer code that executes automatically. Because the rules of a DAO are automatically executed when the predetermined conditions are met, they do not need to be interpreted.

  • Universality: thanks to their decentralized nature, these organizations can provide their services to anyone, so they are not limited by borders, they eliminate them. Many people's access to services is being democratized thanks to these organizations because they are no longer restricted to geographical areas.

  • Organization creation: organizations can be created relatively quickly with DAO. In the blockchain, you can get started with single programming. DAOs also challenge the traditional organizational hierarchy. No one in the organization has more power than another; everyone can share ideas and cast their own votes.

Advantages of DAOs

Disadvantages

  • Difficult to understand rules: some programming tasks for a DAO can be challenging when performed on a young technology such as blockchain. Making decisions while automating tasks can be very difficult. Large sums of money could be lost with a single programming error.

  • Lack of regulation: it may not be possible to follow the regulation of a DAO in some nations. This is closely related to the lack of regulation of blockchain technology and the cryptocurrency ecosystem in some nations.

  • Security issues: many mentioned a more serious problem within these organizations after the Ethereum DAO hack: security. A considerable sum of DAO funds was lost as a result of the attack. Numerous people believed that poor design and bugs in the code caused this problem.

Examples of some DAOs

There are many ways to be part of a DAO, but as we told you before, you should do some research since you would be an investor. It’s possible that because of this, some projects will be more interesting and attractive to you than others. However, for you to identify some DAOs in the future, here are some examples.

1. Technological

There are technological DAOs, such as platforms to buy and sell NFTs, where you can see a great variety of them on their platform. There are also some that help to finance other projects or the creation of products on the web 3.

2. Governance

These are the governance tokens of a platform. Imagine that tomorrow META, a company that owns Facebook, Instagram, and WhatsApp decides to release a cryptocurrency on its platform. That would be your opportunity to be an investor in a governance token.

3. Philanthropy

These would be those DAOs projects that would be focused on coordinating humanitarian aid, through donations, transparent and reliable supply collections. 

4. Real estate

Here enter the metaverses, those that allow you to purchase land within a digital world as those that you can get benefits in the medium and long term.

Conclusion

DAOs can be a new method for organizations, small and medium-sized projects to find funding through a decentralized methodology subject to current technology. Although it has many details to correct, it looks quite promising for the future.

That’s why if you want to continue expanding your knowledge on this topic, you’re in time to do so, as DAOs can be an excellent source of work in the coming years for the technology area.