What is a DAO and How does DAO work?

DAO (or ” Decentralized Autonomous Organization“) is a community-led entity without a centralized authority. It is completely autonomous and transparent. Smart contracts set the foundational rules and execute the agreed-upon decisions. At any point, proposals, voting, and even the code itself can all be made public.

A DAO is ultimately governed by its members, who collectively make crucial decisions about the project’s future, such as technical upgrades or treasury allocations. In general, members of the community create proposals regarding the future operation of the protocol. Then members vote on each proposal. The smart contract will accept and enforce any proposals that reach a predetermined level of consensus.

This framework allows for community collaboration and the elimination of familiar hierarchical structures found in large corporations. The protocol is overseen by each member of the DAO at a different level.

The alignment of incentives is a key element of the framework’s elegance. It is in each individual’s best interests to vote honestly and to only approve protocols that are in their best interest.

A robust, healthy protocol will attract more users, which in turn will increase the value of tokens each DAO member has in their possession. As the protocol succeeds so does the token holder.

Why is it important?

Trusting someone to run an organization that will involve funding and money is a big deal. It’s difficult to trust someone you have only interacted with online. DAOs are transparent and easily verifiable without having to trust anyone in the organization.

Smart contracts are more susceptible to corruption, centralization, and other human foibles than organizations that use humans. A vending machine cannot be corrupted unless it is hacked, modified, or broken. A DAO member can vote on governance proposals or add functionality to the DAO.

Let’s look at investment DAOs. Traditional finance is opaque about where and how money is being spent. Investment DAOs such as Syndicate give members more control over their investments, allow them to vote on worthy projects, and remove the frustration of not knowing where their money is being invested.

What does a DAO do?

A DAO, as mentioned above is an organization in which decisions are made from the bottom up. It is owned by every member of the community. Participation in a DAO is possible in many ways, most commonly through the ownership of tokens.

Smart contracts are essentially code blocks that execute automatically when a certain set of criteria is met. Although smart contracts can be deployed on many blockchains, Ethereum is the first to use them.

These smart contracts are the foundation of DAO’s rules. The stakeholders in DAOs get voting rights that can be used to influence the operation of the organization by creating or deciding on new governance proposals.

This model stops DAOs from being spammed by proposals. A proposal can only be approved by the majority of stakeholders. Smart contracts specify how the majority is determined. It varies from DAO-to-DAO.

DAOs can be fully autonomous and transparent. Anyone can see their code because they are built using open-source blockchains. Because the blockchain records all financial transactions, anyone can audit their built-in Treasurys.

Today and the Future of DAO

DAOs have been used to fund many different purposes, including investment, charity, borrowing, and buying NFTs. You can get a better idea by looking at DAOs. They can accept donations from anywhere in the world, and members can choose how to spend them.

Imagine being co-owner of an Artist’s song using cryptocurrency only on an internet-based company. Jenny DAO purchased its first NFT in May 2021. It was an original song by Steve Aoki and 3LAU. This DAO provides fractional ownership to NFTs. Its members will have the ability to supervise the purchase of NFTs, and Unicly protocol smart contracts will control the vault where these NFTs are added.

The voting system could have a problem in that, even if a security flaw was found in the initial code, it cannot be fixed until the majority votes. Hackers can exploit a security hole in the code while voting takes place.

DAOs are owned and managed jointly by all their members, each member having an equal voice. Analysts and industry insiders agree that this type of organization is rising in prominence and could even replace some of the traditional businesses.

Brands and businesses need to keep up with current trends in order to influence how consumers interact with them and how they engage with them. DAOs may not yet be ubiquitous, but they are gaining popularity with many creators.