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Decentralized autonomous organization (DAO)

Decentralized autonomous organization (DAO)

A decentralized autonomous organization (DAO) is a blockchain-based organization operating with no central location, headquarters, or centralized decision-making authority.

Overview

Decentralized autonomous organizations (DAOs) are blockchain-based organizations operating with no central location, headquarters, or centralized decision-making authority. The DAO is a software running on a blockchain that offers a built-in model for the collective management of its code. Rather than being governed by a limited group, such as boards, committees, or executives, DAOs use a set of rules in code and enforced by a network of computers to be governed. Members holding a given asset are given the power to vote on proposals and updates, with the weight of their vote proportional to the amount of the given asset they hold.

These could be considered internet-native businesses intended to be collectively owned and managed by the members. This means no single member has the authority to make changes without approval of the group, with those decisions governed by proposals and voting to give all members a voice.

DAOs need to have a set of rules, a funding like tokens, and voting rights for establishing operation rules in order to be fully functional. Further, it needs a secure structure to allow investors to configure the organization. Although security can be an issue, as if a potential flaw or hole is found in the code, it cannot be corrected until the majority votes to fix it.

Smart contracts

Decentralized autonomous organizations are built using smart contracts to set the rules (bylaws) of the organization as a method of decentralizing trust with the organization, and to users or customers of the organization's products and services. When conditions of smart contracts are met within the organization, the actions stipulated in the smart contracts are automatically executed, helping to ensure compliance and rule enforcement within the organization in real time. This allows organizations to make decisions based on pre-defined rules and conditions.

Token holders and governance

For most DAOs, those who own the tokens of the DAO and hold or stake the token, depending on the contract, are given a governance position in the DAO, allowing them to vote on proposals and the direction of the DAO. This, in part, works to solve the problem of funding for decentralized autonomous organizations. In turn, those who hold these token can profit from the organization through benefitting from price appreciation of the token as more people want to hold a governance position within the organization.

The use of decentralized token holders for proposals and governance is intended, as well, to solve the principal-agent dilemma. This dilemma occurs when the priorities between a person or a group (the principal) are in conflict with those making decisions and acting on their behalf (the agent). This could be the relationship between stakeholders and a CEO, such as the CEO making a decision that is not in line with the priorities and goals of the stakeholders. This dilemma can also occur when the principal takes excessive risk while the principals bear the burden. DAOs solve this problem through the token holders, or stakeholders, and community governance. This means the stakeholders do not need to trust an agent acting on their behalf, and instead work as a group with aligned incentives.

Use Cases

Decentralized autonomous organizations (DAOs) are being used for many purposes, such as investments, charities, fundraisers, borrowing, or buying NFTs without intermediaries. For example, Jenny DAO allows members of the organization with fractional ownership of NFTs, with members able to oversee the purchases of the NFTs.

With the increase of the metaverse and related concepts, the DAO is growing in popularity, with some analysts and industry insiders believing that this type of organization will come to prominence and potentially replace some traditional companies. In keeping with this, many businesses are developing new ways to engage with consumers and with how consumers engage with them.

History

The first decentralized autonomous organization was Bitcoin, which created a monetary platform without the need for banks, bank managers, or a governing central authority. However, the first formal proposition of the concept of a decentralized autonomous organization was in an article published on September 7, 2013 by Daniel Larimer titled "Overpaying For Security."

The early DAO was an organization that was designed to be automated and decentralized, and it acted as a form of venture capital fund based on open-source code and without a typical management structure. This was fully decentralized and made use of the Ethereum network to stay unaffiliated from any nation-state. The developers of DAO believed they could eliminate the human error and manipulation of investor funds by placing the decision-making into the hands of automated systems and a crowdsourced process. This was designed to allow investors to send money anonymously to anywhere in the world, and it provided those owners tokens and allowed them to vote on possible projects.

Timeline

February 15, 2022
A DAO outbid a billionaire for an original copy of the US Constitution last year and nearly won. What a DAO is, and how it could change the future of business

Further Resources

Title
Author
Link
Type
Date

A DAO outbid a billionaire for an original copy of the U.S. constitution last year and nearly won. What a DAO is, and how it could change the future of business

Tristan Bove

Web

February 15, 2022

Decentralized Autonomous Organization

July 17, 2017

Decentralized Autonomous Organization (DAO)

Nathan Reiff

Web

January 25, 2018

References

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