What is Decentralized Autonomous Organization (DAO)?

Decentralized Autonomous Organization (DAO)

Blockchain technology allows unique methods of exchanging currency and information while automating complicated procedures in a relaxed and secure way. A decentralized autonomous organization (DAO) is an organization that operates entirely and independently on blockchain technology, following rules recorded through smart contracts as well as its underlying key agreement. DAOs are “trustless” systems since they do not need human interaction or centralized management

DAO: A Possible Solution to the Principal-Agent Problem

A decentralized autonomous organization (DAO) is a blockchain-specific organizational architecture that tackles the principal-agent problem, a persistent difficulty in practically every sector and organization. An individual or organization (the “agent”) can make choices or start taking actions in the name of another person or entity (the “principal”); there is an inherent risk due to the democratic candidates’ divergent goals and preferences or connecting directly to critical information. 

Currently, this quandary is a widespread issue affecting a wide range of public and private institutions. DAOs are “trustless” systems because they aim to solve this issue by minimizing or eliminating the requirement for hierarchical human involvement or centralized coordination. DAOs serve a critical role in resolving the principal-agent dilemma by ensuring that incentive structures and information sharing within an organization. Blockchain protocols are the alignment of incentives, while DAOs apply the same argument to companies and administrations. A perfectly designed DAO balances the motivations of stakeholders controlling a company or decentralized platform, from inventors to token holders, users, and the wider community. The potential consequences of adopting DAOs on a large scale are vast, as are the real-world challenges of properly using DAO-enabling technology.

How Does DAO Function?

While the particular underlying mechanics that enable a DAO vary amongst blockchain projects, there are many fundamental stages that a DAO must go through to launch sustainably:

Setup of smart contracts: The fundamental rules must be created and encoded in a series of payment systems. This phase is unquestionably the most critical step in developing a long-term and autonomous DAO, as any initial mistakes or overlooked details can destabilize the project later.

Funds: Once the founders of a DAO have built its governing intelligent contracts, the DAO needs funding to function. People or companies interested in attending to the DAO’s growth can buy or otherwise attain the DAO’s native token, which probably resulted in obtaining voting rights.

Consequently, all token holders become stakeholders who can propose changes to the DAO’s future. Suppose the DAO’s token payout policy and the consensus procedures outlined in its fundamental intelligent contract framework are well-designed. In that case, the DAO’s stakeholders will automatically work together to achieve the best possible result for the whole DAO network. Consequently, the resultant DAO organization may exist independently of its founders or any other strong government. Furthermore, because DAOs are publicly available, blockchain tracks all their rules, payments, and activities, ensuring total transparency and unlinkability. They’ll vote to achieve this by pursuing particular network incentives established by the DAO’s underlying consensus rules.

Using DAO in the Real World

Because DAOs represent a significant divergence from the form and functioning of conventional organizations, these organizations face various legal and practical issues; whatever legal difficulties that arise are likely to need dealing with numerous regional laws and any applicable cross-border legal connections.

Furthermore, since modifying a DAO’s code or intelligent contract structure needs a majority vote, bad actors may exploit a bug or design defect before the DAO’s stakeholders can fix the problem collectively. This vulnerability damaged one of the Ethereum blockchain’s first crowdfunding efforts: in 2016, The DAO was hacked due to flaws in its code base, resulting in a contentious hard fork of the Ethereum network to relocate cash taken from The DAO to a new smart contract. The attack was a watershed moment in blockchain, and avoiding another such breach has been a top concern for developers ever since.

Nonetheless, DAOs have gained significant popularity in the market. At the moment, several interesting blockchain initiatives, notably in the decentralized finance (DeFi) scene, have completely implemented decentralized governance systems. A non-exhaustive list of extant blockchain initiatives that exemplify the fundamental ideas of a DAO is as follows:

Bitcoin: 

The Bitcoin network is the first primitive DAO since it runs entirely in line with an accessible consensus system that controls the behaviour of a vast network of unknown members. The Bitcoin network, on the other hand, lacks the complicated governance systems commonly associated with a DAO and is seldom referred to as such.

Dash is a peer-to-peer (P2P) cryptocurrency that allows for quick payments and private transactions. Given that the network’s governance tokens were divided up in a direction that extreme wealth to a small collection of stakeholders, granting them disproportionate voting power over the project.

MakerDAO is a decentralized financing network based on the Ethereum blockchain that powers the stablecoin DAI. The MakerDAO Foundation has guided the project’s advancement since its founding and initiated a few critical alterations in April 2020 to reach total decentralization. This involved giving MKR holders ample direct authority over the program’s undistributed supply, constructing a process for electing paid contributions and enhancing the voter participation process to benefit more minor stockholders. 

Uniswap: 

Uniswap introduced a native governance token, UNI, in September 2020 to turn Uniswap into a decentralized neighbourhood system. However, the Uniswap community has expressed concerns about the degree of decentralization provided by Uniswap’s governance model, particularly considering the requirement for a minimum threshold of 1% of the total UNI supply to offer governance suggestions. This sum helps stop 99% of UNI holders (each has the less than 1%) from introducing a proposed change to Uniswap’s protocol.

Many blockchain initiatives established with decentralized ideologies are on their way to realizing the objective of total decentralization, as seen in the examples above. However, it’s worth noting that the more stakeholders a DAO has, the more decentralized it gets. This is a significant reason why so many current blockchain initiatives allow for some major decisions in the early phases of the project before reaching the size necessary to become a full-fledged DAO. And, since most DeFi initiatives are just a few years old, many of them have yet to convert into full-fledged decentralization, even though reaching DAO status is often a primary aim of these projects.

Conclusion

While building and executing highly sustainable, actual-worth DAOs presents major hurdles, DAOs offer a potentially game-changing new method of company governance. Many firms may consider using DAO platforms to automate some portions of their fundamental business operations as the legal ambiguities around DAOs. While the rising complexity of modern-day business financial models necessitates DAO stakeholders adapting their systems, the objective of developing transparent and identity organizations is now a reality.

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