DAO stands for Decentralized Autonomous Organization, which is responsible for coordinating the operation of a project through smart contracts, where there are no bosses or managers.
This type of blockchain technology has revolutionized the functioning and operability of many industries, positioning itself in the financial and creative sector.
To learn a little more about Decentralized Autonomous Organizations we invite you to read the following article, originally produced by Binance.
What is a DAO?
A Decentralized Autonomous Organization or DAO is a community-led group governed through tokens or Non-Fungible Tokens (NFTs) that grant members voting rights.
As the name suggests, DAOs are decentralized and autonomous. A DAO’s rules are stored on an open-source blockchain, meaning anyone can view its code and transaction logs.
A central entity does not drive decisions in a DAO but through proposals shared with the project community, who then vote on them.
How does a DAO work?
A DAO functions similarly to a corporation, except that it operates without a hierarchical structure; it attempts to provide a new democratic process through decentralized governance.
Unlike a traditional organization, the members of a DAO are not bound by any formal contract. Instead, they are bound by a common goal or incentives written into its rules.
Initially, Bitcoin was considered the first fully functional DAO, as it has a pre-programmed set of rules, operates autonomously, and is coordinated through a distributed consensus protocol.
Since then, the use of smart contracts has been made possible by the Ethereum platform, which has brought the creation of DAOs closer to the general public and shaped what they look like today.
But what does a DAO need to be fully operational? First, a set of rules according to which it will operate. Those rules are codified as a smart contract, which is essentially a computer program, existing autonomously on the Internet, but at the same time needing people to perform tasks it cannot do on its own.
Once the rules are established, the DAO enters a funding phase. This is a very important part for two reasons. First, a DAO has to have some kind of internal property, in this case it would be tokens that can be spent by the organization or used to reward certain activities within it.
Second, by investing in a DAO, users gain voting rights and, subsequently, the ability to influence its operation.
Connection between DAOs and NFTs
One of the ways in which non-fungible tokens and DAOs are closely connected is in the form of DAO collectors. A DAO collector is an organization that pools funds to acquire and issue NFTs.
Investing in an NFT project can require significant capital that could be difficult for smaller dealers to afford.
Collector DAOs allow multiple people to own a piece of an NFT. An example of a collector DAO is APE DAO, a system that fractionalizes Bored Ape Yacht Club NFTs, allowing multiple users to own a fraction of the same asset.
However, the connection between DAOs and NFTs is not just limited to collector DAOs.
DAOs can also help create NFT projects through community governance. Community members and creators can make decisions together and contribute ideas for the future direction of the NFT project.
In addition, they have the potential to help smaller projects or creators build a dedicated community. However, unlike some well-known celebrities and artists who already have a large following, not all emerging creators will have a dedicated community from the start.
Like a crowdfunding platform, collector DAOs can help raise funds and create engaged communities for different NFT projects by allowing people to vote for the projects they most want to see succeed.
In conclusion, DAOs can be a beneficial tool to support the growth of existing and emerging NFT projects. As the NFT space continues to grow, we are likely to see more projects incorporating DAOs.
Advantages of DAOs
It is undeniable that the very concept of DAOs is extremely exciting, as it strives to address everything that is wrong with the way modern organizations are run.
A perfectly structured DAO gives every investor the opportunity to shape the organization. There is no hierarchical structure, which means that every innovative idea can be presented by anyone and considered by the entire organization.
With a set of pre-written rules that every investor knows before joining the organization, as well as the voting system, there is no room for discussion.
Moreover, since both the submission of a proposal and the vote in favor of it require the investor to spend a certain amount of money, it pushes him to evaluate his decisions and not to waste time on ineffective solutions.
Finally, since all rules, as well as every single financial transaction, are recorded on the Blockchain, available for review by anyone, DAOs are completely transparent.
Everyone who participates helps decide how to spend the funds and can track how those funds are spent.
Disadvantages and criticisms
DAOs, like almost everything else connected to cryptocurrencies, are an extremely new and, to some extent, revolutionary technology. Naturally, projects like this will attract a lot of criticism.
For example, MIT Technology Review considers the idea of entrusting the masses with making important financial decisions to a bad one and one that probably won’t yield any benefits. In their article, they say that much in the world will have to change for DAO-related projects to succeed on any scale.
Aside from a rather conservative sentiment that the masses cannot be trusted with investments, there are other concerns surrounding DAOs. The most pressing problem, especially after the Ethereum DAO hack, is a security issue and is related to the “unstoppable code” principle.
During the attack, observers and investors watched helplessly as funds were siphoned out of the DAO, but could do nothing, as the attacker was technically following the rules. Of course, such attacks can be prevented if the code is well-composed and bug-free.
Finally, in order for startups operating as DAOs to conduct business outside of a Blockchain network and communicate with a physical world of financial instruments and intellectual property, there needs to be some sort of legal framework to support the existence of DAOs.
Legal uncertainty is an issue that has been plaguing the world of cryptocurrencies because the technology within it is so new and radically different, however, the solution seems to be only a matter of time.
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