DAO
A DAO (Decentralized Autonomous Organization) is a mechanism that enables online communities to form and coordinate economically. It is a new kind of digital and economic entity that runs as code and is owned and controlled by its members. DAOs make it possible for an online group with members from anywhere in the world to pool capital and hard-code rules — entirely in software — for how that capital will be managed and deployed. Those rules are then enforced by the underlying blockchain.
- Decentralized so, the rules cannot be changed by a single individual or centralized party;
- Autonomous, so they operate based on logic written into a smart contract, without human. intervention. They will continue to function for as long as the underlying blockchain continues to function;
- Organizations or entities that coordinate activity among a distributed community of stakeholders — for example, developers and users on a given blockchain network.
DAOs are examples of what is known as “on-chain governance“. In traditional corporate governance, for example, companies have bylaws that dictate certain policies, such as how a board is elected. A DAO extends this concept into the digital world by encoding bylaws into smart contracts.
Governance
In the context of crypto, governance is a fancy word for politics. It refers to the key decisions associated with maintaining and updating cryptonetwork protocols. As with every human organization, aligning interests and beliefs among human participants to reach agreement is the goal of governance.
Some cryptonetworks use “on-chain” governance to make decisions. For example, every user might submit a transaction to “vote” for or against some proposal. But even in a system with on-chain governance, there is always an informal “off-chain” process occurring at the level of human beings. If I don’t like the outcome of a vote, I can just turn my computer off and leave the network.
On-chain governance approaches tend to be transparent but inflexible, while off-chain governance is often opaque and messy yet more adaptable to unforeseen situations. Yet even though blockchains do rely on social consensus at some level, formalizing the rules on-chain and making actions transparent are a powerful mechanism that makes blockchain governance a political as well as a technological innovation.