DAOs are blockchain-powered network that allows people to collaborate with unknown entities from all around the world and enforce a common set of rules. All DAO’s help in decision making in an autonomous & transparent method; all of which is in the very code that can be audited publicly by anyone.
Ultimately a DAO is governed entirely by the network token holders who collectively make decisions in the organization. The decisions include future prospects of the project, such as technical upgrades and treasury allocations.
Wikipedia elaborates DAO as an organization represented by rules encoded in a transparent computer program. As the rules are embedded into the code, no managers are needed which removes the bureaucracy or hierarchy hurdles.
What is a DAO?
DAOs vary from typical companies which are run by a board of members, shareholders, CEOs, etc. DAOs have a set of rules written down in the code and network participants enforce it with the help of computers running the common system.
Some of the widely used DAOs are Uniswap, Aave, Maker, Curve, Compound, Sushiswap, etc. You can find the entire list here.
Bitcoin can also be considered as a DAO since it also has a set of predefined rules and functions without any central supervision. The network participants including miners, token holders, exchanges, etc coordinate with each other through a consensual protocol to sustain governance in the network.
Who Governs a DAO?
Ultimately, a DAO is entirely governed by its individual members who collectively vote on important decisions about the future of the project. People including retail investors like you & me can join any DAO by multiple methods but the most common route is via the possession of a token.
EPNS for example has a weekly rockstar NFT contest where the most active contributor is selected using a proposal-based mechanism & is awarded 2500 $PUSH token as an incentive to vote on future proposals.
How does a DAO Work?
A Decentralized Autonomous Organization takes decisions collectively decided by the network participants. The Smart Contract which is basically bits of code is then executed automatically if a set of conditions are met. These smart contracts set the regulations in a DAO.
With a stake in DAO, members can use their voting rights to vote and impact the organization’s functioning by voting on proposals. This helps each individual member of the DAO to oversee the protocol at some level.
A beauty of this mode of governance is the alignment of incentives. That is, it is in the individual’s best interest to be forthright in their voting to only approve proposals that serve the protocol’s future in the best interest at some level.
Steps to Launch a DAO
DAOs are launched in three phases.
- The process starts with a group of people & developers building the DAO’s smart contract. It can be considered as a crucial step since the initial utilities and the product is designed during the development stage. The rules written in the smart contract can only be modified with Governance structure after launch. Therefore, rigorous checks must be done to ensure the details of the contracts are secure.
- Once the product is formed, the DAO decides on how to raise and accept new funding & how to implement governance. Commonly the tokens are sold at a certain price before launch to private equity investors who also get voting rights by holding these tokens.
- After the steps mentioned above are completed, the DAO is uploaded on the blockchain. From this stage, every step forward is decided by the stakeholders including the sustainibility of the organization. Even though the Smart Contract was written by the founding team, their influence on the project gets minimised.
What makes DAOs different?
A DAO’s financial transactions & rules are stored on the blockchain. This not only eliminates the need for a third-party audit but also helps simplify the process using smart contracts. The integrity of a DAO depends only upon the underlying Smart Contract. No one can edit the details of the Smart Contract without other people noticing it.
To date, we are all used to companies backed by legal status and registered on a specific location. DAOs can perfectly work without both of these and can be structured as a partnership.
There is one problem despite all the upsides in a DAO. Suppose a security vulnerability is spotted in the initial code, it can’t be corrected without the majority votes by token holders. This process of fixing can take time and hackers can make use of the bug to exploit user funds. Therefore multiple smart contract audit firms like Certik, HashEx, Blockchain Labs, etc are actively engaging with Web 3.0 startups to fix the initial bugs in the code before deploying them onto the internet.
How to get involved in a DAO?
Once you’ve found a project with good fundamentals, team members and you find it interesting, there can be multiple ways of getting involved in a DAO. A small opinion on this note, not all the DAOs operates with 100% decentralization. Therefore, it is important to go through a rigorous process of filtering bad projects from good ones.
For DAOs offering governance rights to the token holders, it is important to understand what sort of voting rights are being granted and what sort of proposals are at stake.
DAOs like Uniswap allow token holders to vote on distributing a portion of fees that the protocol collects among themselves. In other protocols like EPNS, token holders can decide on a lot more activity than just the fees. EPNS allows freelancers to join and receive compensation for their work by the way of proposals. It widely varies.
MakerDAO for instance allows token holders to get involved in governance by voting on changes to the maker protocol. They have introduced the world’s first unbiased stable coin DAI.
A majority of the crypto community became aware of DAOs likely due to the defi boom in 2019 & 2020. Several yield farming and DEX platforms rely on governance models to shape the platform in the future along with its use cases.
Major players like Uniswap, Aave, Compound have emerged from the space which makes it too big to ignore for regulators. How India and other nations regulate the Defi space is yet to be seen through the upcoming bill.