What is a DAO?
KEY TAKEAWAYS:
- A decentralised autonomous organisation is a form of crypto community where
members are involved in the governance of the Protocol. - A DAO is different from all other systems because there is no central power (e.g.
boards of executives) that determines the progress or changes of the protocol. - In a DAO all votes are made public making the system very transparent for all users.
- The DAO is the first ever DAO to exist, and it was created to for a more efficient
crypto economy. - In a DAO, security is optimised has members need to pay more close attention in
order to dissuade hackers from stealing their funds.
What is a Decentralized Autonomous Organization (DAO)?
A decentralized autonomous organization, or DAO as commonly known, is a system of governance in which the community or a group of individuals determines the future of a protocol or project in the Crypto ecosystem. People must decide on upgrades and other user feature benefits when a protocol or project is put on a DOA.
What a DAO does, in effect, is that these decisions are made by the community of users and not by a specific executive body. Individuals who use the protocol, or are a part of the business, suggest upgrades and proposals, which everyone then votes upon.
In a similar light, the DAO is a form of democratic government since the people are in control of the protocol. They determine what to do, when to do it, and how to do it. A decentralized autonomous organization is fully transparent since smart contracts are used in the DAO.
Once a vote is passed on a subject matter for the protocol, no one can change it unless the community votes against it at a later time. This system has many incentives, as members will only vote and propose changes that are beneficial to all of them. If they vote for a bad change, upgrade, or treasure action, it will hurt the value of their token. In most cases, members are very critical of their actions because they don’t want their tokens devalued.
How Does a DAO Work?
A DAO is created by a group of individuals. These are usually the first set of community members who come together to design how the protocol will be governed. They usually set the rules with the use of smart contracts so they are transparent and accessible to those who are interested in funding the protocol. Once this is done, the protocol is pushed out for others to benefit through funding. As an enthusiast, you can fund the protocol by purchasing a token after going through a protocol’s smart contract and protocol details. The money you pay in is then used to fund the DAO treasury.
A DAO community is made up of token holders. As a user who has invested funds in a protocol and been issued a token, you can propose changes and upgrades to a token as you wish. The reason why this is so is that it is believed that because you have funded the protocol by exchanging your money for the protocol token, you will have the best interests of the token at heart.
When a change is proposed, the DAO passes this information to token holders, who then vote for or against the change; however, only some have the same vote weight. Vote weights are shared according to the number of tokens you hold as a user. If you hold 400 tokens in a protocol, it is guaranteed that you will have more voting rights than someone who holds less, and you will have less vote weight than someone who holds more.
Because DAOs run on smart contracts, once a code (change, upgrade, et cetera) is pushed through a vote and passed, it can no longer be changed, the only way to change this is if a community member proposes a change, and is passed by a vote through the DAO system.
This feature means that no authority or executive body can tweak the rules of the DAO; it is entirely up to the community of token holders to decide.
Examples of DAOs
DAOhaus:
The DAOhaus is a community-owned protocol created to breed more DAOs. This DAO serves as a garage used to develop and launch DAOs. As a user or a DAO creator, if you are looking for a platform to launch your DAO, then we advise you to use the DAOhaus.
Uniswap:
Uniswap uses its governance token – UNI, to allow its users the right to vote on its changes and future. The Uniswap protocol was created to help automate transactions between cryptocurrency tokens created on the Ethereum blockchain.
Therefore, Uniswap is a cryptocurrency exchange platform that uses DAO to build and deliver its service to the crypto ecosystem.
ConstitutionDAO:
In November 2021, there was a bid for the original copy of the constitution of the United States of America. A group of individuals created the ConstitutionDAO to crowd-fund and bid for the document. A total of 17,000 people became a part of the ConstitutionDAO, and they later pooled a total amount of $ 47 million.
The protocol lost the bid and had to return the money each community member donated.
MakerDAO:
The MakerDAO platform is created for users who just want to vote on protocols. As a token holder on the Maker protocol, all you do is vote on changes. By doing this, you get to contribute to creating the first unbiased stable coin of the crypto ecosystem – DAI.
History of The DAO
In 2016, there was a clamor for the decentralization of the financial systems in the world and the adaptation of cryptocurrencies and other decentralized forms of handling and managing assets. This event gave birth to the decentralized autonomous organization.
The DAO was created as a modern decentralized organization in 2016 to act as a venture capital fund. Those who had DAO tokens could earn from the organization by investing their money in it. At this point, their profit was gotten from dividends or the appreciation of the coin value, like is done with cryptocurrency when one holds it.
Sometime in April 2016, the DAO system was launched. This was possible because the Ethereum protocol engineer, Christoph Jentzsch, released the open-source code for an Ethereum-based investment. This release came with its complication, as a user hacked the system and was able to siphon over $ 50 million worth of ETH from the DAO wallet during the sales and development process of the DAO.
This happened because some developers found a bug in the DAO smart contract that could allow the funds to be siphoned by a malicious user. While the community tried to cover its tracks and put forth a code to correct this, the hacker attacked and got the money out.
After this event, it was necessary to do something to the hackers and get back these funds. At this point, around 14% of all the Ethereum coin in circulation was invested in the DAO, and this event was creating negative publicity for ETH. The hackers defended themselves by saying the smart contract allowed them to carry out the action. Hence, the money was theirs and legal.
At this point, the co-founder of ETH, Vitalik Buterin, was proposing a soft fork that would blacklist the hacker’s wallet address, preventing them from moving the funds. At the end of the day, the community voted on what to do. The hackers tried bribing some community users to vote on their behalf. Still, the community decided to use a hard fork instead.
With the hard fork voted for, the protocol was rolled back to a time before the theft happened. It reallocated the stolen funds to a smart contract that allowed investors to withdraw them.
Key Benefits of DAO
Decentralization:
The foremost benefit of a decentralized autonomous organization is decentralization. In a typical organization, the decision-making is left in the hands of a few people, usually known as the executive team or board of directors. Often, there is a noticeable gap between their decisions and the favor of the majority.
In a DAO system, that is not the case. The community (holders of a DAO token) decide through a vote. The decentralized system gives the people a right to power and grants a sense of ownership.
Community:
There is no DAO without a community; hence, the second benefit of a DAO is creating a community. The community creates a collective sense of ownership that doesn’t discriminate against its members.
With an internet connection, anyone from around the world can come together to contribute to a DAO and help build a vision as they champion the course of a protocol that has been created.
Participation:
With the decentralized feature, users feel like they are part of the extensive system, making participation possible. As a user with a token, you get to vote, propose change, and determine the protocol’s future. This requires you, as a user, to act in a way that benefits the protocol, and you must participate.
Transparency:
When votes are cast in a DAO system, the results are made public for the community to see. In a DAO system, votes are taken via the blockchain because the smart contracts are directly tied to the result, eliminating third-party influence. The results are then published afterward for the community to see.
This transparency act discourages community members from voting in ways that will harm the future of the DAO.
Also read: What are NFTs?
Limitations of a DAO:
Like every other concept, even the DAO has its limitations. There are two significant limitations to the DAO, which experts have repeatedly raised.
Security:
Because the DAO is still a work in progress, many security concerns exist. The events of 2016, where a hacker got their hand on a crowd-funded ETH worth over $ 50 million, raised security concerns for the DAO. This makes the DAO susceptible to manipulation if no significant technical expertise is implemented.
As a user who places trust in the DAO system due to its decentralized nature, it becomes an issue of faith when the DAO is prone to attacks.
Inefficiency:
DAO runs into a problem of inefficiency. Experts have come out to say it is inefficient to put some decisions in the hands of the community, as some expertise are needed to know what’s best for a protocol. Also, there is the issue of consistently voting before a change or bug can be fixed.
When bugs are noticed in a smart contract, no third party has the authority to quickly fix them. Instead, the community must act to fix this. Experts say the time taken to get this done opens up the protocol and the DAO to malicious acts and is an inefficient way to run an organization.
Also read: What is Bitcoin halving?
How to Launch a DAO
Having gone through the list of benefits and limitations of a DAO, if you are still looking for how to launch one of your own, here is a step-by-step guide to help launch your DAO.
1. Deciding the DAO Structure:
Having a DAO is a brilliant idea; however, there are better solutions in some cases. As a user, you want to highlight your vision and missions and your short- and long-term goals and determine if a DAO fits. Before launching one, you must decide if your business will benefit from a DAO.
2. Deciding the DAO to Build:
Once you have decided to go ahead with the DAO because your business will benefit from it, the next step is deciding what type of DAO to build. There are a ton of DAOs out there, and the type to use is solely based on your type of business or protocol.
There are DAOs for protocols, ventures, media, entertainment, grants, and any other business you have in mind. It is easy to decide the type of DAO based on your business.
3. DAO Token Allocation:
Once a DAO is chosen, the next step for you is to determine how you want to allocate your tokens. Tokens are used for many things, like crowdfunding, governance, getting developers involved, and other benefits. You want to strategically decide and plan how you allocate your tokens.
While giving tokens, it is essential to ensure that a balance exists between token allocation and treasury balance. This is so that the DAO doesn’t go bankrupt and has enough balance to do business.
4. Determine DAO Token Supply and Rewards:
As a DAO launcher, the next step is determining how you want to supply tokens and what rewards or value your token will hold. For some DAOs, all a user needs is one piece of token to be a community member. In contrast, for some DAOs, users need to accrue a certain amount to be members.
You should note that while low-priced cryptocurrencies have less volume and lower returns, they are traded more in the ecosystem because they have more quantity. It is proper to base your supply and reward decisions on your business visions and goals.
5. Establishing the DAO Treasury:
After deciding what type of DAO you intend to build, the token allocation strategy, and the supply and reward scheme, the next stage is establishing your DAO treasury. This is done to reserve funds for transactions and business ventures. Your treasury is the fund you use for strategic investments and business expenses.
At this point, you also want to create a smart contract that prevents a single party from withdrawing funds from the treasury for safekeeping.
6. Building the DAO:
At this point, you are ready to build your DAO. There are two ways to do this. You can either develop your DAO from scratch if you have the expertise or an exceptional technician to do this for you or use the existing DAO template in the ecosystem. Some of these templates already use the Ethereum blockchain as a base and will only need you to set up a few things.
With platforms like Colony, DAOStack, Aragon, and others, you only need to input your settings. These include settings such as the legal framework, minting tools, and other features you want the protocol to have.
7. Building a Community:
The final step is building a community. Once you deploy your DAO, your next action is to grow and develop your community. There are applications you can use to publicize and make your DAO known to people and the crypto ecosystem. Social media platforms are also an excellent way to get people to invest and become community members.
Remember that DAO is a considerable success because of the community, so you should pay close attention to building your community.
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