The majority of individuals are unfamiliar with DAO, thus they are wondering, “What is DAO?” They are unsure whether DAO is blockchain technology, just another coin, or a legal company in a general partnership because they are used to conventional corporate frameworks.
DAO stands for Decentralized Autonomous Organization which is run by a group of its members and distinguished by transparent computer code. A DAO is sometimes described as “an online community with a common bank account.” You could compare it to a mutual fund, except participants in the fund make investment decisions rather than a central manager.
There is no requirement for managers or executives to make choices regarding daily operations, board meetings, or board resolutions because the rules in a DAO are embedded in code. Hierarchal & bureaucratic barriers that characterize traditional business structures that are familiar to most people are successfully removed by this.
Smart contracts, which automatically carry out actions or transactions when certain conditions are met, are the foundation of DAO operations. Since these immutable smart contracts are typically implemented on blockchains, anyone may examine and confirm each financial transaction conducted by the DAO. A DAO’s members just need to trust the code; they are not required to trust one another.
On the Ethereum blockchain network, a group of developers was the first in their try to create a DAO. DAOs, however, did not have a great beginning. In 2016, the first DAO was introduced and “hacked.” In the end, it caused the hard fork of the original Ethereum network. (You can learn more of the web3 terminology from our web3 dictionary).
The DAO’s intelligent and incorruptible contracts contain the encrypted rules of the organization. Depending on how many DAO tokens they own, owners have voting rights. They use this tactic to have an impact on the organization‘s operations.
Like in a traditional business organization, DAO members can make proposals and vote for governance. A majority of DAO members must vote in favor of a proposal in order for it to pass. Every DAO has a different definition of what a majority vote is. The governing smart contracts contain information about this agreement as well.
What function does a DAO serve?
Creating autonomous, decentralized groups for like-minded people where each member has a say in what the DAO accomplishes is the basic concept underpinning the majority of DAOs. They are therefore ideal for groups and communities working together toward a common objective. There are over 180 DAOs (tracked by deepdao.io) with $10B+ in assets under management and nearly 2 million members.
How does a DAO function?
A list of directions: As smart contracts, DAOs are encrypted. They establish regulations that operate in various ways and are readily available online. These regulations aren’t self-sufficient, though; in order to comply with them, individuals must still accept the contracts and do a few duties without the assistance of the program.
The financial stage. These guidelines are used to collect money from the general population. Tokens must first be created and used as a medium of exchange or reward. Then, in a manner comparable to that of shareholders, they give investors the ability to vote.
The DAO’s creators “lose” control of it after fundraising is finished, and users take over management. DAOs are intended to be open, safe, and impenetrable to hackers. The open-source code is made available to the public since transactions and rules are published in the Blockchain.
The DAO then operates at full capacity. The ability to vote gives users a voice in decision-making since each stakeholder can submit new proposals, which are then put to a vote by all stakeholders to determine whether or not they should be adopted. The DAOs code always specifies the percentage that determines the majority rule.
How do I start a DAO?
Either utilize a DAO builder tool that does it all, or write your own smart contract using code. You can employ a group of developers at this stage to hasten the procedure. Aragon is a well-liked framework for developing DAOs. Users can create and manage DAOs on the Ethereum blockchain using this tool.
A group can start a new project as a DAO by carrying out the following three steps:
- Development of smart contracts
- The creation of funds through various investment rounds
A group of developers will be in charge of creating smart contracts in the initial phase. They can only modify the established rules through their governance mechanism after they launch the DAO. In order to prevent missing any important details, they must test the smart contract scripts using a Test-net.
How the DAO can exercise governance and receive cash is determined by the funding phase. Typically, tokens are sold to raise money to support the DAO.
As part of several fundraising rounds, the developers or members of their teams approach potential investors with a range of token prices and sign contracts with them, promising to send tokens once the DAO is completely operational. The potential investors receive voting rights in exchange for these tokens. Through a series of smart contracts, this technology gives each DAO the ability to manage an organization.
Lastly, after everything has been effectively set up, the deployment step begins. The DAO is then launched onto the blockchain. Upon deployment, the DAO’s stakeholders will decide the organization’s future using encrypted business rules. It’s vital to highlight that after the smart contracts are deployed, the people who created them have no more influence over the project.
What Advantages Does a DAO Offer?
- All members are able to have an opinion on the organization’s core functions.
- Decisions are made jointly because there is no management team.
- Shares can be bought and sold directly between members.
- Members of the organization may get dividends.
- The algorithm handles a lot of business operations without the need for human involvement, resulting in:
- Fewer errors.
- Cheaper transaction costs.
- Corruption is avoided.
- No human bias
What Dangers Can a DAO Pose?
- Anyone who loses their cryptographic key will be removed from the group since they cannot be recovered.
- Some DAOs’ programming codes contain bugs from time to time, which might result in unintended obligations and investment losses.
- Certain disputes might not be covered by the smart contract code, making it difficult to resolve them through the traditional legal system.
- Users might need to evaluate and confirm decisions prior to their execution because the algorithm is only as good as its programming instructions.
Types of DAOs:
- Protocol DAOs / Community DAO
- DeFi Protocol DAO
- Philanthropy DAOs
- Collector DAOs
- Investment & Venture DAOs (for example LIFT99 DAO)
- Grants DAOs / Launchpad DAO
- Social DAOs / Creator DAOs
- Media DAOs
- Sub DAOs
- Entertainment DAOs
- Service DAOs
- DAO operating system
Which types of the community should consider becoming a DAO?
Any community can become a DAO. Here are some examples:
- Communities of Artists, Creators, Musicians -> Social DAO or Media DAO
- NFT collectors community -> Collector DAO
- Agencies & talent hunting -> Service DAO
- VC & funds -> Investment DAO
- The philanthropic organization, charity -> Philantrophy DAO
- Entertainment platforms -> Entertainment DAO
- Communities of news and blog writers -> Media DAO
- DeFi startups -> Protocol DAO
- Willing to take the risk despite the downsides
- Ready to embrace decentralization, automation, and other benefits
- Want safe and secure transactions that are free of government, or other external restrictions
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