DAO or Decentralized Autonomous Organizations are the latest crypto facets gaining quick mainstream popularity. Built upon blockchain architecture, DAOs provide the token holders better power in terms of organizational function. Yes, a DAO token holder can vote his/her opinion on company operations and address issues accordingly. The user community has the final say in determining the price of a DAO asset.
Understanding Decentralized Autonomous Organizations
As the name suggests, DAOs lack the presence of any centralized authority. The organization operates on the principles of pre-established digital rules. The absence of a hierarchical structure makes DAOs very similar to Bitcoin in functional operations.
The seeds of DAO began in 2016 with the completion of a machine-operated organization construction. The primary objective had been the transfer of funds through a digital system, without any involvement from external intermediaries. Ideas with the highest popularity and relevance receive the maximum number of votes. Despite being popular, the initial pilot project had security flaws, allowing hackers to gain access to over 3.6 million ETH in a network consisting above 10000 members.
How Does a DAO Function?
Decision-making within a DAO starts from the bottom up. The ownership of the organization, as explained above, belongs to a group of members, and token ownership is among the most common ways to participate in a decisive process.
Smarts contracts constitute a significant part of the DAOs. These contracts execute by themselves on fulfillment of predetermined objectives or criteria. Smart contracts are popular across all blockchain networks, with Ethereum being the first network to implement them.
The use of smart contracts helps in maintaining order across a DAO environment. DAO stakeholders enjoy voting rights which allow them to impact the operation of the organization, or propose new governance ideas. Majority stakeholder approval also prevents the DAO from countless proposal spamming. The method of determination for the majority is not fixed and is usually mentioned in individual smart contracts.
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The 3 Steps of a DAO Launch
Launching is the most important event of decentralized autonomous organizations. On a general note, there are 3 steps involved during the launch, namely:
Smart Contract Building
As explained before, smart contracts are the essential building blocks of a DAO serving as a constitution. Hence thorough testing is essential to ensure proper governance. The QA testing protocols are rigorous and safeguard correct implementation.
On the completion of smart contract creation, the DAO aims to figure out the proper avenues for funding. Funding is integral to proper governance. Tokens are often put out for sale. People purchasing and holding the tokens acquire exclusive voting rights.
The DAO gets deployed on the blockchain network once its setup is complete. The DAO’s future is now officially at the hands of stakeholders. The smart contract authors are unable to exert any influence on the DAO any longer.
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Benefits of DAO Implementation
Decentralized autonomous organizations have multiple merits over conventional organizations, particularly the internet-relying ones.
One of the main advantages is their ability to function seamlessly without requiring inter-party trust. Smart contracts do not demand any trust between 2 parties. A transparent and verified environment just requires adherence to the absolute smart contract codes.
A DAO also has no use for a hierarchical structure. Contrary to general belief, the decentralized ecosystem is conducive to growth through collective input and collaboration. Any stakeholder can present an innovative idea for the organization to decide and work upon. Internal disputes and improvements can be easily settled through voting processes described in the smart contracts.
Autonomous organizations encourage fund-pooling among investors, allowing them to make investments in startups right at the beginning. This helps in risk-sharing, which investors stand to gain a profitable outcome.
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The global prominence of blockchain and crypto adoption has led to a massive increase in decentralized autonomous organizations. There have been global instances of NFT and DAO applications for a wide variety of causes, ranging from social collectibles (ConstitutionDAO), decentralized streaming (BlockcbusterDAO), freelancing platforms (HYVE), charity (Endaoment), and philanthropy (American Crypto Cancer Fund).