What is a DAO?
The Web3 space could not exist without DAOs. In this lesson, we talk about DAOs, how they work, their principles, how they are governed, and how they differ from traditional companies.
Before diving into this course, you should have already read about:
By the end of this course, you will be able to answer the following questions:
What is a DAO?
How do DAOs work?
What are the principles of a DAO?
How does a DAO make a decision
How do DAOs and companies differ?
What is a DAO?#Copy URL to this article section
A Decentralized Autonomous Organization (DAO) is a group of like-minded individuals who chose to operate primarily in the web3 or cryptocurrency space. The group is decentralized, which means that there is no central leadership, and it is not governed by any one person or group that makes decisions for the whole organization. A DAO is also autonomous, which means it does not answer to any government or authority.
It is important to differentiate between a DAO and The DAO. The latter was an organization formed by developers in order to facilitate and automate transactions involving cryptocurrency. However, due to programming errors and attacks, hackers were able to access 3.6 million ETH in June 2016. In September of the same year, The DAO token was delisted in several digital currency exchanges.
Having learned from the mistakes of The DAO, there are currently a lot of DAOs across different fields and areas of interest. Examples of DAOs are the Merit Circle DAO, PathDAO, YGG DAO, and Avocado DAO. There may be many DAOs in the web3 space right now, but they all operate the same way — via smart contracts.
What are smart contracts?#Copy URL to this article section
Smart contracts are accounts that are stored in the Ethereum blockchain that are coded to run when specific conditions are met. Because they are in the blockchain, smart contracts cannot be modified by the developer once the codes have been uploaded. These codes are open-source—anybody can have access to them and check them.
Learning smart contracts
Smart contracts can be used for lots of different purposes, such as running a DAO. This ensures that the automated operations run within the preset rules by the DAO, such as safeguarding the treasury. Because smart contracts allow trustless (i.e. no central figure or individual to oversee the system) and permissionless (i.e. everyone can participate) participation, they are the lifeblood of DAOs.
What are the principles of a DAO?#Copy URL to this article section
Generally, DAOs uphold the principles of anonymity, decentralization, autonomy, democracy, and transparency.
Anonymity#Copy URL to this article section
Unlike corporations, individuals making up a DAO do not need to meet up or share their identities with each other, since all discussions are done online, and smart contracts automate the decisions.
Decentralization: no central leadership#Copy URL to this article section
Compared to traditional corporations, a DAO doesn’t have board members that get to decide on the future of the organization. Everyone is free to discuss and propose actions that should be taken by the DAO.
Decentralization Principle of DAOs
Autonomy and democracy#Copy URL to this article section
In corporations, only board members and high-ranking officials such as the CEO decide on the future of the organization; lower-ranking officials and employees rarely, if ever, get a say in how the company should run itself.
In DAOs, everyone gets an equal chance to be heard. In the voting process, members who hold the governance token of the DAO can vote. This empowers individuals and ensures every voice is heard.
Transparency#Copy URL to this article section
Since DAOs are governed by smart contracts, before a proposal is voted on, everyone can access the code that executes the proposal. Anybody in the DAO can raise concerns about potential vulnerabilities of the code, as well as suggest fixes to it. This ensures that when the proposal is passed, it is going to do exactly as the proposal entails.
How does a DAO make a decision?#Copy URL to this article section
Starting a DAO requires funding. To attract investors, DAOs usually issue native tokens. These tokens are called “governance tokens” because they are primarily used to vote for proposals within the DAO.
A DAO’s success usually trickles down to the governance token holders in the form of airdrops. These rewards, as well as voting rights, can make governance tokens attractive and popular for retail investors.
The Merit Circle DAO#Copy URL to this article section
The Merit Circle DAO
Merit Circle is a gaming DAO. Decisions are made by people who hold the governance token ($MC token). Learn more about Merit Circle as a DAO here.
If you wish to see the decision-making process in the Merit Circle DAO, you may check out the MC governance forum here.
What is the difference between a DAO and a traditional company?#Copy URL to this article section
DAOs take pride in moving away from traditional companies. The table below compares these:
DAO vs Traditional Companies Comparison Table
DAOs are gaining traction as they give members power and control over what happens. They are more than just spectators or consumers; they are active participants in identifying the direction of the DAO. Furthermore, members are given access to every proposal, and this level of transparency is becoming more and more valuable in a world where people are used to depending on a select few to make decisions for them.