Imagine a machine that automatically records your preferences without a manager to automate these processes. This is precisely how a DAO or Decentralized Autonomous Organization works. The main idea behind DAO is the establishment of an organization, fully functional without any hierarchical management.
Working of Decentralized Autonomous Organizations
The idea of DAO came into existence shortly after the launch of Bitcoin as it was deliberated that if Bitcoin can do away with financial intermediaries, then an organisation can function without human leadership. Bitcoin was initially considered to be the first-ever fully functional DAO, having a set of pre-programmed rules, autonomous functions and coordination through a distributed consensus protocol. However, it further inspired the use of smart contracts on Ethereum to bring the creation of DAOs closer to the public and shaped their outlook. But what is required to operate a DAO fully?
- A set of rules, according to which it will operate
- The rules are encoded as a smart contract
- Once the rules are set, a DAO enters a funding phase
For this, DAO needs to have some tokens that can be spent by the organisation or used to reward specific activities. By investing in DAO, users will acquire voting rights and gain the ability to influence the way it operates.
After the funding period is over, the DAO becomes independent of its creators. It is open source and can be viewed by anyone. All the rules and financial transactions get recorded on blockchain, which makes DAOs fully transparent, immutable and incorruptible.
Once operational, the decisions on allocation of funds can be made when a consensus is reached. The stakeholders can consequently make proposals regarding its future. To prevent the network from being spammed in the future, a monetary deposit could be required; subsequently, the stakeholders can vote on the proposal.To perform any action, the majority needs to agree on doing so. The percentage required to reach that majority can vary according to a DAO.
DAOs enable people to exchange its funds with anyone in the world, in the form of an investment, a charitable donation, money raising or borrowing- all without an intermediary. One significant loophole with the voting system is that even if a security crack is found in an initial code, it can’t be rectified until the majority votes on it. While the voting takes place, hackers can exploit such a bug in the code.
How to become DAO shareholder?
Investing in a DAO is an easy job if you know how to buy Ether or Bitcoin and possess a wallet. Simply, tokens of DAO need to be purchased.Once the funding phase gets closed, one will be able to make proposals, as well as vote for them and perhaps even, make a profit.
Advantages of DAOs
Undeniably, the concept of DAOs is exhilarating as it strives to solve everything that creates unworkability in the way modern-day organisations function. A correctly structured DAO can provide every investor with an opportunity to shape the organisation. There’s just no hierarchical structure, which means every innovative idea can be put forward and the entire organisation would consider that.
Video Source: Ethereum
As all the rules and financial transactions get recorded on blockchain, available for everyone to review anytime, DAOs are entirely transparent. This will increase people’s trust in the decentralized form of ledgers more than ever.