Blockchains could enable entirely new types of organizations that can run autonomously without the need for coordination by a central entity. One of the exciting examples of blockchain application to governance is Decentralized Autonomous Organization (DAO). Let’s see what it is and how it works.
What is a DAO?
A Decentralized Autonomous Organization (DAO) is an organization governed by computer code and programs.
Through smart contracts, a DAO can work with external information and execute commands based on them – all this without any human intervention. A DAO makes the decentralized ownership of an organization possible.
Members of a DAO are not tied by any formal contract. They are instead bound together by a common goal and network incentives tied to the consensus rules. Once a DAO is deployed, it cannot be controlled by a single party but is governed by a community of participants. The DAO framework can be considered the last piece of a puzzle that pushes the entire blockchain ecosystem to become fully autonomous and decentralized.
Why do we need a DAO?
One of the core benefits of a Decentralized Autonomous Organization is that it eliminates the need for a mutually acceptable trusted third-party intermediary in a true sense. A completely decentralized financial system is concerned, simplifying the transaction process significantly.
A DAO uses the blockchain-based distributed ledger to securely track the financial exchange of information across the internet through trusted timestamping. It would also eliminate the need for the repetitive recording of interactions between parties across different records, thereby reducing operational and transactional costs. In essence, the blockchain data could replace public documents, courtesy of a loosely coupled peer-to-peer smart contract collaboration.
How does it work?
A DAO can help an organization run without human managerial interactivity through the use of smart contracts. Unlike traditional companies, a DAO, through open-source code, is operated entirely by its community. Therefore, it relies on smart contracts for the smooth and automated functioning of an organization.
The concept of a decentralized organization isn’t entirely new per se. Smart contracts have always had the potential to automate some working mechanisms and functionalities of decentralized organizations, if not all, making a DAO an instrumental and exciting concept on paper. It enables the functioning of a model where business activities can be automated and executed fully decentralized.
Examples of DAO
DAO is a way of structuring a company where the operating rules are digitally coded through smart contracts published into a blockchain. They can be helpful in different peer-to-peer interactions and scenarios, including decentralized venture funds and devices connected to the Internet of Things (IoT).
One possible example here could be driverless taxi cabs controlled by a DAO. It could power the set of instructions for picking up passengers, where to send profits, how those profits are distributed among relevant stakeholders, and even when to refuel or recharge the vehicle. Fully autonomous cars are one of many potential ways we can use DAO in the future.
Following are some of the existing DAOs:
- Dash (DASH)
- The DAO (DAO)
- Angur (REP)
- MakerDAO (DAI & MKR)
Potential issues with DAO
Participation of shareholders in DAOs can be a little tricky and problematic.
A legal aspect of a DAO is not as clear and straightforward as conventional organizations.
A DAO’s code is difficult to repair if broken, leaving security bugs and loopholes open to exploitation.
The Bottom Line
A DAO reduces the need for human intervention, thus creating a more efficient system. It further saves operational costs while reducing risks associated with human behaviour.