Decentralized Autonomous Organizations (we’ll call them DAOs for short) aim to solve all these issues and more using the power of Web3. But before we talk about how DAOs work, let’s first break down the acronym and understand what is a DAO and why they matter.
What is a DAO ⁉️
Let’s break down what a DAO is by its individual definitions!
- An entity becomes decentralized when it distributes its decision-making power across many individuals or branches.
- In our context, for an entity to be autonomous, it means that it can continue its function without the need for human oversight or input.
- Organizations are structures to manage people and funds over a common mission.
Now let’s put it all together! A Decentralized Autonomous Organization (DAO) is a structure to manage people or funds that can operate without the need for human oversight where decision-making power is shared by its members.
Birthed following the rise of self-executing smart contracts, DAOs aim to solve the problems faced by conventional organizational structures. Within a DAO, there exists no central decision-making authority that members must trust to interpret, execute, and listen to their proposals.
Why DAOs Matter 🤔
While stereotypical companies are governed by a closed board of directors, DAOs are governed by the people who make up the DAO. It is a more democratic system. Those democratic rules are upheld by predictable and transparent pieces of code created and agreed upon by the community. In short, this means that DAOs are more democratic than conventional organizations. Through the predictability of a DAO smart contract, organizations are able to execute decisions through a predefined set of rules that is immutable unless members themselves decide otherwise.
This approach solves the principal-agent problem introduced in the first section. Agents within a system no longer need to trust the principal to act in their best interest during conflicts of interest. Instead, members within a DAO only need to trust the smart contract code that anyone can view and see.
This transparency enables DAOs to make decisions that are best for its members and foster more robust communities.
Although you will hear more about examples of DAOs later, an interesting single-purpose DAO is the Constitution DAO that aimed to purchase a piece of the US Constitution. Although this group did not end up winning the auction, it demonstrated the power of DAOs to organize communities as it raised and returned over $47 million.
You can check out their website if you want to learn more:
To summarize, DAOs broaden the applications and reach of an organization.
- DAOs distribute decision making, which can broaden the variety/creativity of decisions/initiatives due to more people being allowed to make proposals vs a board room/executive team
- DAOs improve reach by enabling community members to see how decisions are made and participate in making those decisions through the full transparency of the smart contract.
However, this can come with its own very real drawbacks.
- Distributed decision making also means slower decisions as many proposals require days or weeks to become approved when compared to a board room’s more instantaneous timelines.
- Transparent code also means transparent code. If there are vulnerabilities within a smart contract, hackers can exploit and attack the DAO. There have been a few high profile hacks with very real consequences. The DAO, the first DAO intended to be a decentralized venture capital fund, serves as an example – suffering a hack that lost nearly $60 million worth of Ether.
Even with this, DAOs are constantly evolving and improving to this day, offering a very real utility to communities, companies, and more.
Now that you know why DAOs matter, it’s time to figure out how they work!
Made by Larry Peng