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Decentralized Autonomous Organization (DAO) Definition

date May 21, 2022 time 6 min read 102 views

Decentralized Autonomous Organization (DAO) is an organization that is run entirely by computer programs and lines of code. Understandably, the DAO is capable of functioning independently of a central authority.

Blockchain technology has completely transformed our financial system in the fourth industrial revolution. However, the trustlessness and immutability of blockchain are not only useful in financial applications like bitcoin.

One of the potential applications of blockchain is the creation of a self-governing system. Blockchain technology could allow these entirely new types of organizations to operate autonomously without the need for central coordination. It’s DAO. And the following will explain what DAO is and how it works. Let’s drive-in!

What is DAO and how does it work?

What is DAO? DAO stands for Decentralized Autonomous Organization,  an organization that is run entirely by computer programs and lines of code. Understandably, the DAO is capable of functioning independently of a central authority.

DAO can work with external data and execute contracts-based orders using smart contracts – all without the need for human intervention. Decentralized Autonomous Organization (DAO) is typically managed by a group of shareholders that are created by some token mechanism.

Rules and transaction records of DAO are stored transparently on the blockchain. The rules are usually decided by a shareholder vote. Proposals are typically used to make decisions in a DAO. If a proposal receives a majority vote of shareholders (or meets another rule in the network’s consensus rule-set), it will be implemented.

Functions of Decentralized Autonomous Organization in some ways like a company or a country, but it is still decentralized. Traditional organizations have a hierarchical structure and many layers of bureaucracy, whereas DAOs do not. Instead, the DAO uses economic mechanisms to align the interests of the organization with the interests of its members, often through the use of game theory.

Members of DAO are not bound by any formal contract. They are linked together by a common goal and network incentives tied to consensus rules. These rules are completely transparent and are written in the organization’s open-source software. Because DAOs operate across borders, they may be subject to a variety of legal enforcement applications.

Decentralized Autonomous Organization, as the name suggests, is distinguished by decentralization and autonomy. It’s decentralized because no single entity has the power to make or enforce decisions. It’s also self-sufficient because it can work on its own.

Once deployed, a DAO cannot be controlled by a single party but rather by a community of participants. If governance rules are defined in a well-designed protocol, they will guide actors toward outcomes that are most beneficial to the network.

Simply put, the DAO provides an operating system for open collaboration. This operating system allows individuals and organizations to collaborate without having to know or trust each other.

DAO provides an operating system for open collaboration, allowing individuals and
organizations to collaborate without having to know or trust each other (Source: Pixabay)

Compare Decentralized Autonomous Organization with some other platforms

The best way to comprehend DAO implementations is to compare the various levels of the most popular cryptocurrencies and Defi protocols:

  • Bitcoin represents the most basic of DAO rules. Essentially, blockchain is a peer-to-peer (P2P) network that allows open access to users to make transactions, validate them, and add new blocks. However, it is not a decentralized autonomous organization as Bitcoin lacks the complex governance rules that are characteristic of DAOs.
  • Ethereum is the 2nd generation blockchain because it supports smart contracts. Smart contracts are required for the operation of DAOs. However, Ethereum is not a DAO in and of itself, but rather a framework for developing its projects.
  • Uniswap is the first Defi protocol that has pioneered automated market makers (AMMs), making it the most popular decentralized exchange (DEX). Currently, Uniswap holds $8.73 billion of TVL (according to DefiLlama) across liquidity pools by liquidity providers. The network has its own UNI governance token, which is used to vote on improvements and fund liquidity pools. As such, Uniswap is a comprehensive DAO, but one must own 1% of UNI’s total supply in order to propose new governance rules or adapt existing ones.

Advantages and disadvantages of Decentralized Autonomous Organization

Advantages

  • Decentralized Decision Making: it is managed by its members so they can make an important decision directly and quickly.
  • Efficiency and automation: The majority of its rules and policies are established from the beginning.
  • Transparency: Everything that occurs within the organization is recorded on the blockchain and is accessible to all.
  • Non-decentralization: it allows anyone to collaborate globally, regardless of location, race, social status, etc. The use of blockchain technology allows for equal access to company resources and voting processes. Contracts and rules are executed automatically.

Disadvantages

  • Legal risks: No regulation governing the acceptance of organizations such as DAO, so the participant will be held legally accountable.
  • Security: Once DAOs are deployed, they are very difficult to change; operations must occur exactly as specified in the smart contract.
  • Manipulation: Many decisions are complex and academic but many voters may not understand or be aware of what they are voting on which leads to poor decisions.
  • Frequently delayed: In an emergency case, having to wait for a vote on adoption can have a negative impact on the DAO.
  • Privacy: Proposals have to be put on a chain for a vote before being implemented means that the development plan is completely public. Therefore, competitors can know the future direction of the project.
  • Centralized entity: An entity or organization that has a higher voting power than other members. Create a centralized feeling right in the voting of the protocol.

Potential and Projections of Decentralized Autonomous Organization

DAO’s development is currently said to be linked to blockchain and decentralization.

The potential of Decentralized Autonomous Organization

DAO’s development is currently said to be linked to blockchain and decentralization. Furthermore, as traditional organizations record numerous incidents of abuse of power and asset manipulation, causing significant damage to the entire business, the DAO model is becoming increasingly popular around the world. most interesting world.

Governance is a standard use case for project tokens in defi alone; the larger the project, the more valuable this use case is. Almost all of the top projects with the highest TVL are governed by the community, with decisions suggested and voted on by token. The DAO model has become a “must-have” for the evolution of defi protocols.

With DAOs being used in a variety of other fields such as social, services, and so on, the amount of value that DAOs hold has enormous growth.

Prediction of Decentralized Autonomous Organization

Currently, many DAOs apply tokens to leverage the Shared-based DAO model such as Yield Guild Game, Jenny DAO, Whale, BitDAO, etc. The goal of this work is to help scale DAO to a new level, when anyone can join it.

The DAO has a long way to go before it is fully mainstream. DAOs are not all efficient. In fact, most DAOs will be idle for an extended period of time. Like investing in cryptocurrency, there is always the possibility that the value of a DAO’s governance token will be zero.

Its future will have a framework in place to allocate resources, share revenue appropriately, and avoid internal conflicts. At the same time, the above-mentioned DAO limitations will be gradually addressed.

Summary

DAOs allow organizations to break free from traditional organizational models. Instead of a central entity coordinating the participants, the governance rules are fully automated and will guide actors to the best outcomes for the network.

The Bitcoin network can be compared to a simple DAO. Currently, there are only a few similar models in use. The key to creating a good DAO is developing an effective set of consensus rules for dealing with complex coordination problems among participants. The real barrier to the formation of DAOs is not technological, but rather social.

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