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Cover image for The Ultimate Handbook for understanding DAOs (Decentralized Autonomous Organizations)
Sahil Chatterjee
Sahil Chatterjee

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The Ultimate Handbook for understanding DAOs (Decentralized Autonomous Organizations)

A Decentralized Autonomous Organization or DAO is like a digital group that relies on blockchain and smart contracts. There is no central governing body for DAOs; they are owned and operated by their members.

The Origin Story: A Brief History of Decentralized Autonomous Organizations (DAOs)

Unlike traditional currencies, digital currencies do not have central authority over them. They are spread across various computers, networks, and nodes instead of being stored in a centralized location.

A group of developers inspired by the decentralization of cryptocurrencies brainstormed the idea of a Decentralized Autonomous Organization. The thought process behind this was to build a platform where businesses and individuals can manage their projects without intermediaries like banks, governments, etc. People participating in a DAO collectively make decisions instead of a central authority.

The first decentralized autonomous organization, named The DAO, was founded in 2016. The DAO failed because of a hack that would split Ethereum into two blockchains: Ethereum and Ethereum Classic. But ever since then, the concept of DAOs has been evolving and gaining popularity.

Understanding How DAOs Work

Smart contracts are the foundation of a DAO. They are contracts written in code that can automatically execute when both parties comply with the terms of the agreement. Thanks to these smart contracts, DAOs can operate without human intervention. The DAO community uses these smart contracts to establish rules for itself. Every potential member can see these smart contracts and verify and audit them to understand how the protocol works.

The next step is all about gathering funds to keep things moving smoothly. That's why these protocols sell tokens to raise funds, and the people buying these tokens secure voting rights. Post-funding, the codes are uploaded to a blockchain platform or decentralized network where members can use the DAO.

Surely now you're wondering about these voting rights I mentioned earlier? Well, the best part about DAOs is once their codes are finalized, no member has the authority to change them. But if the DAO needs necessary changes, votes are gathered from every member, and changes are made once they reach a consensus.

The Good and Bad of DAOs

Let's take a look at the good things first:

  • Decentralization eliminates the need for any governing body.
  • It brings a group of like-minded people together.
  • The publicly visible voting system promotes accountability and responsibility.
  • It encourages collaboration and a mindset of working together.
  • It fosters cooperation and collaborative thinking.

Now let's look at the downsides:

  • A large number of voters make the decision-making process time-consuming.
  • Participants also need to spend a lot of time voting.
  • The technology is complex, making it necessary to educate all stakeholders.
  • DAOs without proper security protocols can be vulnerable to theft.

Examples of DAOs in Use Today

Here are a few decentralized autonomous organization examples you should know about:

  • Uniswap
  • DAO Maker
  • Decentraland
  • BitDAO
  • Decred
  • UkraineDAO
  • Dash
  • ConstitutionDAO
  • Aragon
  • Compound

Potential challenges that DAO might face in future

  • Due to their decentralized nature, DAOs need a proper infrastructure like traditional currencies.
  • DAOs encounter regulatory issues related to taxation, insurance on investments, and other issues on a policy level.
  • Security concerns will remain high shortly due to smart contracts' vulnerability to thefts that have drained millions in the past.
  • DAO's "one person, one vote" policy may stand in the way of effective decision-making because some decisions require specific expertise.
  • While the concept behind DAO was to allow an average individual to participate in decision-making processes, only some DAOs have a participation fee that an average individual can hardly afford.

Wrapping it up

DAO will play a significant role across various industries shortly. And there is a split among people's opinions about the idea that DAOs are a promising alternative to our traditional ways. People appreciate DAOs for creating an inclusive and collaborative environment, but will they stand the test of time? This question will remain because of the potential challenges that DAOs may face. But despite the challenges, experts believe that DAOs can be the key to a decentralized future.

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