Like most things in the crypto world, a Decentralized Autonomous Organization or DAO is also a novel, self-sustaining unit. It is possible that you might have heard about DAO or the significance it holds in the quest for autonomy over organizational decisions. If you haven’t, don’t be disheartened. After all, DAOs came around only about 6 years ago. Let us dig deeper into what exactly is a DAO, how they work and how they make a profit.
What Are DAOs?
To understand what a DAO is, we first need to understand what a blockchain is. A blockchain is a system of storing data, a digital ledger which is more hack-proof and secure than any technology known to us. It basically decentralizes the process of storing data by spreading the scope of the information from one computer to a network of computers.
A Decentralized Autonomous Organization used in the context of cryptocurrencies or crypto DAO is basically a blockchain-based organization which is collectively owned or controlled by its members. They have built-in resources which no one can access without the group’s permission. All implementations are made by following a voting process which is fair and has been agreed upon by all members.
How are DAOs different from any traditional organization? Imagine if you have a difficult boss, but his say is the final one in any decision making process. This makes the organization’s decisions centered around one person’s wishes. Essentially, such organizations cannot be called autonomous. DAOs allow people to work with like-minded folks around the world, without having one single boss or leader who has control over decisions and funds. There are no CEOs in this setup, who can spend the funds as they wish and no CFOs who can manipulate the accounts if they wish. The grounds are leveled and only technology takes the front seat with blockchain-based rules baked into the code that define how the organization works. Every new implementation, and spending of funds, is decided mutually.
What is the Purpose of a Crypto DAO?
When an organization is formed, the members need to have a lot of trust within each other. It is not usually easy, when human tendencies weigh-in. With the internet taking over things, you might be in an organization which works with a number of people spread across the world. With DAOs, since the rules are already made, you don’t need to trust people but just the code. The tech is transparent and verifiable by anyone, anywhere in the world. Such a system opens up opportunities for better global cooperation without the need of hefty rulebooks and paperworks.
If we compare it to a traditional organization, the need of a DAO is easily understood. The manipulation of votes, or centralizing of decisions to a designated individual creates distrust. DAO then, is more democratic than any traditional organization. For example, we can also think of collective ownership of resources. Once a physical or digital asset is purchased, members of the DAO can vote on how the asset is to be used.
How Does DAO Work?
One important functionality that came into the cryptocurrency sphere, is the introduction of smart contracts with the Ethereum blockchain. If you know how smart contracts work, it becomes easier to understand how the rules of the DAO work. These rules are pre-decided by the core team of the community or the founding members through smart contracts. The foundational framework is visible and verifiable. It is also publicly auditable so anyone can understand the framework and protocol before joining in as a member.
Now that the rules are formed and written down into the code, let’s tackle the matter of funding. In a crypto DAO, this is done by token issuance. The protocol sells tokens to fill the treasury. In return for their fiat, DAO holders get voting rights proportional to their holdings.
DAOs are digital natives and a great drivers of autonomy which the Web 3.0 technology is all about. Especially in the NFT space, the role of DAOs becomes very clear. NFT DAOs can be formulated when a community of creators comes together to form a group via communication over social media for example and then goes ahead to solidify their agreement with the formation of a smart contract. They can pool funds, etc and steer their project in any direction. This is all possible with a web 3 crypto DAO project.
Types of DAOs
- Protocol DAOs: In a protocol DAO, the members can change the protocol of a DAO based on a voting metric. Decentralized Exchange, Uniswap for example, gives a voting right to token liquidity pool contributors to make governance related changes.
- Social DAOs: Platforms that enable collaboration and social networking and sharing of common interests are called Social DAOs. For example, Friends With Benefits is a web3 creator DAO which is focused on taking on creative projects and connecting with fellow-artists with a membership fee of 75 $FWB.
- Goodwill DAOs: Also referred to as philanthropy DAOs, these DAOs are focused on charity or nonprofit purposes. This allows DAOs like the UkraineDAO to create an impact. The UkraineDAO uses the domain ukrainedao.eth to bring donations for Ukrainian soldiers. The funds support the organization, Come Back Alive.
- Collector DAOs: The best example of a collector DAO is an NFT crypto DAO that is a group of creators which makes collective investments to buy NFTs or other assets. This also means shared ownership and a bigger spending capital. FlamingoDAO is a notable example which brought expensive NFT arts together. The most famous of these is the CryptoPunk #2890 bought for $760k USD.
- Venture DAOs: With shared capital or pooling of funds, venture DAOs invest in upcoming projects like a dApp, or a web 3 startup. For example, MetaCartel Ventures DAO is a community that works for collective investment in early-stage dApps.
Benefits and Limitations of DAO
It is easy to see how a DAO is beneficial for individuals who are looking to form a community.
Let us explore the benefits first:
- Decentralization of Power: As mentioned earlier, DAOs do not rely on one individual’s bias but the code is the ultimate boss. The rules are already established and no one, irrespective of position, can play with them.
- Global Collaboration: It is easier, with the smart contract in place, to collaborate with people globally without having to worry about trust.
- Delegation: It is easy to have a representative democracy in a DAO with effective delegation. For example, token holders can select a steward who will commit to a protocol.
- Transparency: In DAO, transparency is a given. All the data is publicly auditable so that potential members can have complete information before making a decision.
Some limitations of the DAOs are:
- Speed of Decisions: It is possible that in a crypto DAO, the decisions are made slower as compared to when the decision is made by a single individual. Since every member is given a chance to vote in a DAO, the decision comes a bit later but with complete fairness.
- Security: Many people have remained a bit wary of the fact that members can remain anonymous in the group and hence the information is available to a wide array of people. In addition, DAOs are also considered to be vulnerable to cybercrimes since the network’s tools are still under development.
- Education: Many people need to be involved and educated about a single decision and thus there are differences in levels of understanding. The diversity of the group also poses a challenge as they need to learn to grow and communicate together.
How Does a DAO Make Money?
DAOs usually raise money by trading their native token against fiat money. Many such tokens are listed on cryptocurrency exchanges as well. For example, Uniswap’s native token UNI is available to trade on exchanges. This token also represents ownership rights proportional to the amount owned, and also gives voting rights to its owners. The value of their native token appreciates over time depending on the success of the DAO’s operations.
Decentralized Autonomous Organizations are a futuristic vehicle to bring about complete autonomy and transparency in business functions. For Web 3.0 to be successful, the role of DAOs is undeniable. Even though the concept came around only as late as 2016, it is catching popularity fast and the many fields of implementations are being looked into. DAOs definitely broaden the scope of the way crypto and NFTs work and thus are an interesting area of development.
Please note that this is not trading advice. We recommend you to carry out your own research before making any trading decisions. This article is for informational purposes only.