What is a DAO?

• A DAO is an organizational structure driven by token holder votes and smart contracts, aimed at democratic and decentralized decision-making.

• Unlike traditional corporations, where decision-making is often centralized, a DAO provides each token holder with voting rights, making for a more democratic decision-making process.

• DAOs use smart contracts on blockchain to capture rules and governance, increasing transparency and reducing human intervention.

• Voting processes within a DAO are facilitated by technology such as Snapshot, where token holders can directly influence decisions through a voting portal.

• Well-known DAOs include Tezos, Maker DAO, Cardano, Ethereum, and UniSwap, each with unique approaches to decentralization, governance, and community engagement.

What does DAO mean?

DAO is an abbreviation for Decentralized Autonomous Organization, meaning a decentralized autonomous organization. What an organization is, you know. By the way, an acronym is a pronounceable abbreviation.

Decentralized, or decentralized, refers to not centralized. Centralized projects have a form, where power lies with a specific number of people and the rest must do as they say, also known as a hierarchical structure. Decentralized projects distribute power to everyone who participates or has invested in the project.

Autonomous in this case means self-governance. Everyone has voting rights based on how many tokens they own.

What is a Decentralized Autonomous Organization?

A DAO is a new form of organization in which decisions are implemented through voting on proposals that are then automatically executed by a smart contract.

Voting is possible if you possess tokens that allow you to vote, the governance tokens.

The concept of a DAO was conceived in 2013 by Vitalik Buterin of Ethereum and Daniel Larimer of EOS.

The difference between a DAO and the traditional business form

In a traditional corporate form, you have a boss or a board of directors and possibly shareholders.

The directors decide which way a company will go. If there are shares, the shareholders get together and vote on what decisions should be made regarding a company's future, such as whether to hire people, cut back or issue more shares to raise capital. In this case, the directors implement what the shareholders, who own the company, have decided.

Sometimes it happens that the shareholders have very different ideas than the directors. In that case, the interests of the shareholders and those of the company will have to be carefully weighed against each other.

In fact, the rest of the employees usually have little say, which is a distinct disadvantage of the traditional organization.

In decentralized autonomous organizations, decisions are made based on how many governance tokens someone has. Suppose there are 1000 governance tokens and you have 10, then you usually put 1% of the voting power in the balance. So in this way, everyone can have a say, as long as you own tokens. This spreads power more evenly among participants.

How does a Decentralized Autonomous Organization work?

The DAO stands for decentralized governance. The idea is that more and more things will be decided by the users and holders of the governance token and less and less by the traditional administration and developers.

If all decisions are made by holders of the governance token, the creation of the decentralized autonomous organization is complete. The idea behind it is collective ownership of the platform.

A DAO is arranged through smart contracts, which are pieces of programmable rules and agreements that ensure that certain actions are performed automatically when the conditions in the contract are met. In that contract, blockchain technology captures the most important things for the organization, such as rules, structure, governance, in short, everything important to keep the organization running. Then this smart contract is stored on a blockchain and anyone may look at this contract.

First, the essentials will have to be in place. You will have to have an open source blockchain that has the smart contracts on it. Developers hammer these things together in such a way that once implemented, a DAO is created. From then on, decisions will be made according to the rules from the smart contract.

Smart contracts are immutable, so it is essential that this is done properly, otherwise you can start all over again.

When the smart contract is well put together, it is time to take care of participants. After all, people have to start voting on all kinds of proposals, and they can only do that if they own governance tokens. Often there is also a token issue policy, usually stating in a white paper how they will be marketed.

Selling governance tokens not only takes care of voting, but also financing. Developers must also be paid, as well as a variety of other things that cost money. Governance tokens can be offered in a variety of ways, such as at a ICO, an IEO or by otherwise getting them to the general public and investors.

Once a DAO is established, it will always exist even if humanity were long extinct. This is because the smart contract is immutable.

How does voting for a DAO work?

A DAO has a voting portal, where you can go through a wallet connection to it. You can then use the governance tokens in your wallet to democratically vote on a proposal or make one up yourself.

Fortunately, there is all kinds of software developed for a DAO, such as Snapshot. This program can record when you voted, how many governance tokens you had, what you voted for and what you voted on.

After counting the votes, the program will announce the result and a smart contract will usually implement it.

Many platforms also work with the possibility of proposals by developers. After all, they know best how the technology works. Because governance token holders can vote on such proposals, developers get feedback from users, who often have other things on their minds than developers. This leaves the most realistic and desirable proposals.

There are some peripheral issues to mention, such as a minimum number of tokens you must have often, a waiting period and a small amount you must pay for a proposal to prevent spamming, but this is how voting works in broad terms.

It is important to note, however, that a program like Snapshot records your number of tokens, to prevent you from buying a lot of additional tokens once you have seen the proposal.

Some DAOs also work with informal channels. For example, people talk on social media channels about how things are going and if certain wishes or problems come up, this could bring about a proposal being made on the official DAO channel.

One of the great advantages of a decentralized organization is that hard forks few occur because you can just vote on proposals, where before you had no choice but to opt for secession if enough people disagreed with the course.

The first DAO

In fact, Bitcoin was the first DAO, but it is not seen that way. Bitcoin is decentralized, autonomous and the participants are the miners. Improvements here, however, are not performed by smart contracts and voting is not done by governance tokens.

The first real DAO is famous and infamous. Since they lacked inspiration, they had called themselves "The DAO." They also lacked insight, as you can now read.

The DAO launched a DAO on Ethereum's network in 2016, putting a whopping 14% of all ETH in circulation at the time into their smart contract, 12.7 million Ether. This represented a value of $250 million, an unprecedented amount at the time.

At one point, it was shown that there was a bug in the smart contract that could possibly be exploited. On June 17, 2016, a hacker also found this vulnerability and sluiced 3.6 million ETH into his wallets worth $70 million. The smart contract could be manipulated with a loop, where a transaction could be both sent and returned, effectively causing funds to come in to the hacker but not sent. This was repeated several times, until he "settled" for 3.6 million ETH.

A blockchain is decentralized and immutable, so no one could do anything. Or could they?

One rule in the smart contract stated that your tokens had to be on a wallet for 28 days before you could forward them.

Then something unique to the world of blockchain happened. The immutability of a blockchain was flouted and a hard fork was implemented, restoring the blockchain to the state it was in, several blocks before the hacker struck.

So this was done through the Ethereum blockchain! This caused a big schism in Ethereum circles. There were two sides at the time: one side felt that a blockchain was immutable and that one should take the loss and the other side felt that this breach and this bug was so severe that one had no choice.

The first batch continued on the original blockchain and called itself "Ethereum Classic" from then on.

The other party continued via a hard fork as none other than "Ethereum"! Many people think that Ethereum Classic separated itself, but that is so not true. Ethereum is a hard fork of Ethereum Classic, the original blockchain. Anyone who sees the proportions now can hardly believe that. This is the reason for The DAO's fame.

So when people sometimes talk about an Ethereum killer, it is best to refer to Ethereum itself!

So The DAO showed that the immutability of a blockchain is not 100%, although it has never occurred since, as far as we know.

Other well-known DAOs

Tezos has multiple DAOs in its ecosystem and tries to run things as decentralized and autonomous as possible through the Tezos DAO.

Maker DAO is one of the most successful DAOs established. If you hold their MKR token you may vote through their DAO. Their DAI stablecoin is well known.

Cardano uses the hybrid form, with both ADA coin holders and IOHK and the Cardano Foundation determining the direction of Cardano.

Ethereum uses a lot of off-chain governance, which you could explain as polling an atmosphere and then doing something with it. All sorts of things are discussed on social media channels, forums and on GitHub, and if these informal conversations involve certain issues frequently, a proposal to improve the Ethereum network follows.

UniSwap, meanwhile, is also a DAO, although it must be said that it is more like a plutocracy, as you have to have quite a lot of tokens (around 1%) to also be allowed to make a contribution to the proposal bag.

Advantages DAO

1. Inclusion. Everyone gets to co-determine the course of a DAO. You only have to buy governance tokens and you get to vote. You can also make your own proposals, making it feel more like your own project.

2. Efficiency. Smart contracts perform everything automatically, which means less sand in the machine, as in many centrally managed projects and companies.

3. Speed. Once the outcome of a vote is known, the smart contract is implemented immediately.

4. Transparency. The DAO's smart contract is publicly available on the blockchain.

5. Continuity. Hard forks can hardly occur because token holders decide for themselves.

6. Trust. You don't have to trust anyone to participate in a DAO. You only have to trust the DAO's smart contract.

7. Involvement proposals. If there is disagreement, it can be resolved through a vote on the dispute. In the extreme case, someone can decide to sell their governance tokens and leave the project behind. So a solution is always possible.

8. No central management. Since these are usually expensive experts, a DAO can work much cheaper than a centrally run organization.

Disadvantages DAO

1. Mistakes in smart contracts. Suppose you create a smart contract for a DAO and there is a mistake in it, you can start all over again, because smart contracts are immutable.

2. Money loss. Should there be an exploitable flaw in a DAO's smart contract, participants and token holders can lose a lot of money. The DAO may even go bankrupt or be abandoned. Wealthy DAOs in particular need to pay enormous attention to this.

3. Organization voting. Since a certain percentage must agree and a round of voting must be organized, this can all cause delays.

4. Legal aspects. A DAO is not yet recognized as legally valid in many countries. Also, a DAO is not attached to a country border and is a bit of an outlaw in the crypto world. If a judge can be involved at all, from which country or region? Borderless cooperation can thus have unintended consequences.

5. Plutocracy. The participants with the most tokens carry the most weight and vote primarily in their own favor. This is of course familiar in publicly traded companies, but this may very well start to apply to DAOs as well.

6. Regulation. Once all kinds of regulations come into play in the field of crypto, the DAO might come under fire. If there is no legal area where laws can be applied, how do you deal with that as a regulator? The only option for directors would be to buy more than half of the governance tokens and decide that the DAO should stop or behave differently, which would be rather absurd.

7. Copy cats. Developers work their asses off to test a smart contract endlessly, and then when it is finally bug-free, others get to copy this open source code for free and start a DAO with it.

Starting a DAO yourself

If you've been reading for a while you might well want to start one of these yourself. It is well known by now that our writing style can cause thirst and cravings. Still, a warning is in order, because everyone knows you should never start a DAO on an empty stomach or with a dry mouth!

Anyway, enough joking, so there is a place where you can start your own DAO in the foreseeable future. Just as you can very easily start a token via ERC-20 on Ethereum, so you can set up your own DAO at Aragon via simple steps.

You don't need a line of code; it's a bit like the transition from MSDOS to Windows. Everything is made visual and you can fill in the parameters yourself.

You start simple and small. As the community grows you can coin governance tokens and let them decide through this token. If it becomes successful then you can start working with very specific smart contracts, by which time you will also have enough money to hire a few developers.

If you don't get out that well there is plenty of help at their website.

What's more, you can make a nice splash at a birthday party by mentioning in passing that you have started a DAO.

The future of the DAO

Since Bitcoin and cryptocurrency the term decentralized has become a magic word in crypto circles. It seems that centrally managed companies have gotten a bad name with this community. Everything must be decentralized, more decentralized and most decentralized.

Well, then you're in the right place at a DAO. It almost can't get much more decentralized, unless we go down another layer and give our pets a voice too. But then again, what do they know about cryptocurrency?

Autonomous is also hot in the world of blockchain and crypto. Everyone is their own bank, their own coin, their own DAO. The world is getting a little further away from centrally run companies and agencies. People increasingly want to have their own voice in what the future is going to look like.

And that is entirely possible with a DAO. Right now, DAO may be something where you think of cryptocurrency and blockchain, but it may well trickle down to the "real world" and centrally managed companies will start giving employees more and more say and tapping into their human potential.

It may also go the other way around, namely that more and more workers will leave centrally run organizations and unite in a kind of DAO. Borderless collaborations will also become more normal.

Be that as it may, the future of the DAO looks bright. The future is much more decentralized and autonomous than we are used to. So our prediction is that at some point the term DAO will have become mainstream and more and more will be added.