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What are DAO’s and how do they operate?

The concept of a DAO is truly fascinating. In today’s article, let’s try to break down things a little and try to understand how a DAO functions. In simple words, imagine that you & other people are running a company without knowing each other and sending your own proposals autonomously in a decentralized way all using the blockchain. Isn’t it some futuristic tech? DAO’s are making this a reality for many protocols operating in the Defi space.

DAO’s stand for (Decentralized Autonomous Organization), or a company that is represented by rules encoded as a transparent computer program, which is controlled by the voting members and not influenced by any centralized group or person. The DAO’s offer voting rights or Governance rights to their protocols by issuing tokens for the same. These rules are embedded inside the code, and no managers are needed further to look if the rules are being followed or not.

Modern-day Internet protocols prefer functioning by this structure where every member gets equal power to vote. I recently came across this Twitter handle, “IndiDAO” that is planning to fund the initial stages for blockchain-based projects in India.

The core essence of a DAO is to distribute the power from a few people’s hands to everyone who has voting rights for the protocol. Trust has always been the core of blockchains. With further decentralization of power, & the automatic exchange of values, folks all around the globe can engage in a more effective way to manage these organizations.

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Bitcoin: It’s all where it started

The very first DAO that was ever considered to be fully functional was Bitcoin. The reasons for the same are also obvious. Bitcoin code is visible publicly and has a predefined consensus. To make any changes to the Bitcoin network, the majority of the miners have to agree towards the same for it to get implemented. It is a wonder how well coordinated DAO’s are today and the future looks quite prosperous for me personally.

Fast forward to 2020, we had a massive craze for various Defi protocols. If you’re not sure about what is Defi, let me break that down for you as well. The short and simple explanation for Defi would be the exact opposite of Centralized Finance (ie, Cefi). The banks or the so-called middleman make their money in the form of transaction fees & various charges. The aim of Defi was to make the tasks of banks possible without their need. Today we have various Defi protocols that allow lending and borrowing on their network which is one of the main tasks for the banks. Other than that, Defi apps can allow users to stake their stable coins and earn interest on top of that. The rapid valuation of the Defi space is growing exponentially and is valued at well over $100 Billion dollars, this shows the rising potential it has.

Now, back to our discussion on DAO’s. So far, I’ve only praised the concept but that doesn’t mean it’s totally great. I read in an article, even if there’s a bug that could be exploited in a DAO, no one can change that single-handedly even if he/she is aware of the same. They need to follow the entire process of raising a proposal for that and in the meantime, it could be exploited. That’s a scary possibility which I thought to highlight.

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What makes DAO’s unique?

The best part perhaps about every DAO which makes them so unique is that every single transaction ever done by the DAO is visible on the blockchain. This removes the need for a 3rd Party to audit the transactions done by the company. The trust of a DAO lies in the Smart Contract backing it. The rules & regulations for the protocol are managed by that same piece of code. No one can edit or modify that piece of code without others noticing it. This makes DAO’s so unique and transparent to operate.

In order to make any changes, every single member of the DAO must vote for the proposal. This is unlike the “Board of Directors” and removes the lack of transparency and trust. On one hand, where traditional companies are private, DAO’s are more public and everyone knows what is happening inside the company.

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Cost Effective

So far, I believe a DAO is the most efficient and cost-effective way of running a business. You don’t need people who would look after the day-to-day operations. There isn’t any single point of weakness like a traditional business. Everything is predetermined based on the smart contract. A DAO requires no managers, middlemen, employees, or executives. This saves a lot of operating costs and can help to run a business even with no profits at all or very thin margins.

With the help of DAO’s an autonomous future looks closer than anticipated. Although there’s a lack of infrastructure today, maybe someday in the future we will have fully decentralized companies running off blockchains needing no middlemen. What’s your take on DAO’s let me know.

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