A decentralized autonomous organization (DAO) enables groups of people with similar interests (businesses, non-profits, etc.) to run their organization without a hierarchical authority figure and instead through decentralized governance. Members of the DAO can work together to run the entity in complete transparency. The organization’s rules are encoded in a transparent computer program, and members can control the code without fear of outsiders influencing it. This autonomy distinguishes DAOs from traditional organizations and makes them an appealing business model. We shall understand in depth this popularized business model, the pros and cons of DAO, and the difference between DAO and traditional organizations.
Decentralized autonomous organization (DAO)
An organization without centralized command is a decentralized autonomous organization (DAO). Decisions are made bottom-up by a community centered around a particular set of regulations implemented on a blockchain. DAOs are internet-based businesses that are cooperatively owned and run by their users. They have internal treasuries that are only open to members with their consent—the group votes on suggestions over a predetermined period to make decisions.
What is a Decentralized autonomous organization?
An organization created by rules encoded as a computer program is a decentralized autonomous organization (DAO), sometimes a decentralized autonomous corporation (DAC). It is frequently transparent, managed by the organization’s members, and unaffected by a central government. DAOs are, in general, member-owned organizations with decentralized leadership. A blockchain stores the program rules and financial transaction history of a DAO.
Uncertainty surrounds this form of corporate organization’s exact legal standing. Developers established one of the original DAOs to streamline Bitcoin transactions and automate decision-making. A DAO must prioritize security since exploits can cause it to lose millions of dollars in treasury savings.
How do Decentralized autonomous organizations work?
DAOs use smart contracts, essentially chunks of code that execute automatically when criteria are met. Smart contracts are now used on many blockchains, though Ethereum was the first to use them. These smart contracts define the DAO’s rules. Stakeholders of DAO have voting rights and can influence how the organization operates by voting on or developing new governance proposals.
This model prevents DAOs from being flooded with proposals by requiring a proposal to be approved by a majority of stakeholders. The method for determining the majority varies from DAO to DAO and is specified in smart contracts.
Features of DAOs
One of the crucial features of digital currency is its decentralized nature. It thus suggests that they are distributed across multiple computers, networks, and nodes rather than being governed by a single organization such as a government or central bank. Virtual currencies can sometimes use their decentralized nature to achieve levels of privacy and security that traditional currency transactions cannot.
As a result of cryptocurrencies becoming decentralized, a group of developers invented decentralized autonomous organizations, or DAOs, in 2016.
A DAO’s mission is to promote the management and monitoring of an entity that resembles a corporation. The absence of a centralized authority, however, is what makes a DAO work; the collective governing body is made up of participants and leaders.
Differences between DAOs and traditional organizations
All employees of a traditional corporation are subject to employment contracts that govern their interactions with the business and one another. Their rights and obligations are governed by written agreements and upheld by a legal system that is governed by the country in which they live. The legal contract will specify who can be sued in court for what if something goes wrong or someone doesn’t keep their half of the bargain.
DAOs, on the other hand, entail a group of individuals interacting with one another following an open-source protocol that self-enforces its rules. The native network tokens are given as compensation for maintaining network security and doing other network responsibilities.
Due to the inherent token-related consensus rules, blockchains and smart contracts align the interests of all stakeholders by increasing transparency and lowering transaction costs. Tokens are used to motivate individual behavior to work together toward a common objective. A DAO’s members are not formally bonded together by a legal entity or by formal legal contracts. Instead, they are guided by rewards associated with the network tokens and completely open regulations that are included in the software and are upheld by machine consensus. No bilateral agreements exist. The protocol or smart contract, which governs all network participants’ behavior, is the single controlling law.
Pros and Cons of DAOs
There are innumerable reasons why a company or organization might decide to pursue a DAO structure. The Pros of a DAO include the following:
- Decentralization – A DAO can decentralize power over a much broader range than a single individual (CEO) or a small group of people (Board of Directors).
- Encourages Participation – Voting, token burning, and other forms of participation in a DAO encourage token holders to act in the entity’s best interests.
- Publicity – Votes within a DAO are placed using blockchain and made public. People are compelled to act following their beliefs about how their votes and judgments will be made public.
Along with their various Pros, DAOs have their own set of Cons that include the following:
- Elongated Timeline – In a DAO, every user has the opportunity to vote. Taking into account time zones and external priorities, this necessitates a much more extended voting period.
- Needs Functional Understanding – While DAOs bring together a diverse group of people, one of their primary challenges is that this diverse group of people must learn how to develop, strategize, and communicate as a single entity.
- Inefficiency – Due to the necessity of managing far more people, a DAO may become mired in pointless administrative activities.
What are the different DAO membership types?
There are various DAO membership models. Membership can influence the voting process and other important DAO components.
- Share-based membership – Share-based DAOs are still relatively open but have additional permissions. Anyone interested in joining the DAO may do so by submitting a proposal and typically providing some kind of tribute, like coins or labor. Shares stand for ownership and direct voting. A member’s proportionate share of the treasury is theirs to keep at all times. This is usually used by smaller, more human-focused organizations like charities, worker cooperatives, and investing clubs. Additionally, they can control protocols and tokens.
- Token-based membership – Token-based memberships are typically permissionless, depending on the token used. These governance tokens can typically be traded on a decentralized exchange without a permit. Others need to be won by demonstrating liquidity or some form of “proof of work.” In any case, the right to vote is available merely by having the token. This is usually employed to control large-scale decentralized protocols or the coins themselves.
- Reputation-based membership – Reputation serves as evidence of participation and confers DAO voting rights. Reputation-based DAOs do not give contributors ownership rights, in contrast to token- or share-based membership. DAO members must acquire a reputation by involvement; it cannot be purchased, transferred, or delegated. Prospective members can freely submit proposals to join the DAO and request to receive reputation and tokens as payment in exchange for their contributions because on-chain voting is permissionless. This is commonly used for decentralized protocol creation and governance, but it also works well for a wide range of organizations, including charities, worker cooperatives, investment clubs, etc.
How do you launch a DAO?
DAOs have nothing in common with traditional organizations. Although it may appear far-fetched, several DAOs are now operating and making money thanks to their unique business model.
- Identify goals and prepare a mission statement – This is likely the most crucial phase because it’s where you’ll decide how the DAO will operate and what its objectives are. A mission statement has the benefit of being completely customizable, allowing you to incorporate anything you desire. Verify if the DAO’s objectives can be accomplished with the resources at your disposal.
- Build DAOs community – Creating a DAO community is arguably the trickiest step in the process. It starts with choosing members for the community, a tricky part of which is creating a communication hub that helps to draw interested people into decentralized groups. To practice open communication, the DAO must maintain open lines of communication with its members. Keep in mind that DAOs lack a managerial structure; thus, for the organization to function, its members must be honest with one another.
- Use community tools – It is essential to keep in contact with the members via the various tools and discuss DAO-related tasks like voting or discussing organizational changes to make sure that they are in a loop. Chat platforms like Discord and Telegram are excellent tools for protecting your DAO’s obligations. Additionally, forums can be a fantastic tool for communication. Discord, for instance, allows server owners to control who can join the server, potentially removing the possibility that others will learn about your DAO’s activities, especially if it has membership requirements.
- Prepare funding goals – What adds value to the DAO is its bank account. This element of the DAO enables the community to use the funding to carry out its purpose.
- Setting up the Treasury – The design of the treasury relies on the DAO kind. You can deposit money into the treasury, for instance, if your DAO charges a usage fee. The same principles apply to DAOs that offer membership access using different tools like non-fungible tokens (NFTs).
- Acquiring Tokens – The DAO’s native token, a type of virtual currency, is available for purchase by people or organizations interested in joining the organization. Voting privileges can be allocated to members according to their token holdings. To influence the organization’s destiny, they may also hold equity in it.
- Discover governance – DAO members must participate in discussions and ideas that could have an impact on the DAO’s development. Voting will be required on amendments and actions before the group can proceed. Let’s examine these businesses’ governance structures in more detail.
- Official Government – Off-chain and on-chain formal governance fall into two types. Off-chain governance entails conversations that ultimately result in the official voting for governance. Token voting is a part of on-chain governance. The typical governance flow of a DAO entails the following: Discussions over video calls and debates about issues about the organization, Utilizing forum suggestions to reach a loose agreement, Obtaining a firm consensus by a symbolic vote, and Putting recommendations into action after approval.
- Discretionary Governance – Delegated governance is a technique that DAOs can use. One or more working groups or a group of people receive specific rights from the community. It’s vital to know when these groups should intervene. The last thing you and your neighborhood want to do is go through a formal governance procedure that can take several weeks to complete to make one choice.
Get expert help for your crypto asset valuation with Eqvista!
A DAO’s core assets are crypto. To get a company valuation, investors and traders must comprehend the asset’s value. This would enable them to undertake insightful research and maintain track of developments in the Bitcoin market. To help you value crypto assets, Eqvista’s expert valuators are here. We have deep insights into the many facets of crypto since Eqvista has extensive years of experience in the business.