More

    Explaining Decentralized Autonomous Organizations (DAOs)!

    A DAO is a digital organization that runs on a distributed ledger such as a blockchain where all members possess equal power with no one person in charge. In other words, no single institution like a government or central bank controls them.  Instead, the governing body of leaders and participants all hold the power collectively.

    The idea of DAOs or Decentralized Autonomous Organizations was coined in 2014 by Ethereum founder Vitalik Buterin. In a blog published on ethereum.org, he outlined the basic qualities of DAOs, and decentralized applications (dApps).

    Intrigued? Let’s dive in!

    How does a DAO work? 

    The golden rule of DAOs is the elimination of central authority. And the goal is to promote oversight and management of an entity similar to a corporation. In detail, this type of organization runs its special autonomous code for the equal distribution of power.

    At its core, it’s made up of smart contract-coded rules on the blockchain that are divided among a variety of computers, networks, and nodes. These codes govern things like fund allocation and dictate decision-making.

    For example, based on the outcome of a decision, specific codes may be implemented to increase the circulating supply, burn a select amount of reserve tokens, or issue select rewards to pre-existing token holders.

    How are they funded?

    A community of individuals decides to pool their capital in order to make investments. So, they issue a governance token to fund the treasury. This token is typically the first step to raising funds.

    How? Members get to purchase the tokens, or they are distributed to members who actively contribute to the DAO as a reward. It’s important to note that tokens assign voting power and ownership across members, so investors tend to buy A LOT of them to up their influence and authority.

    What are the benefits of DAOs? 

    Benefits of DAOs

    • Increased autonomy, transparency, & improved security. 
    • Automate the financial processes associated with a distributed organization.
    • The fundraising process for a new idea in the DAO is a relatively fast process.
    • All members get a fair vote in the organization.
    • Smart contracts streamline DAO operations like the distribution of returns and gains.
    • All members have an insight into the rules of the organization especially when it comes to allocating investments and decisions.

    What are the risks of DAOs? 

    Risks of DAOs

    Voting Speed

    In the case of public companies, a CEO or manager makes a single vote to decide a specific action or course for the company to take. For DAOs on the other hand, every user must vote on decisions pushing for a much longer voting period.

    Lack of Expertise

    In any company, certain decisions require very specific or deep expertise that not all members possess in equal measure. So, broad consensus is not the best option at all times.

    In some cases, assigning a small group of people with the relevant skill and expertise makes for better decision-making. However, this might increase the risk that the smaller group may not do what is in the best interests of the broader membership.

    Vulnerability to hacks

    Since everyone can look at the code of a DAO, this makes it more vulnerable to hackers as they are very familiar with how it works! How? They can reverse engineer an attack.

    They can go as far as testing it before deploying it to make sure it works! Basically, attackers work on the DAO’s loopholes to legally abuse funds against the interests of shareholders.

    Legal Implications

    DAOs are still largely unregulated as governments are still sorting out their legal status. As a result, there is still uncertainty for members and investors regarding tax and legal risks.

    Final Words on DAOs

    DAOs introduce an exciting new alternative to conventional business management systems and organizational structures. However, it’s essential to acknowledge that it may take some time for governance, risk management, and security concerns to align with the higher vision.

    We DO believe that the efforts aimed to tackle the challenges and risks associated with DAOs will yield successful and efficient solutions. However, it’s gonna take us several years to reach the model with the least flaws.

    As always, stay tuned for more!

    LEAVE A REPLY

    Please enter your comment!
    Please enter your name here

    Stay in the Loop

    Stay in the loop with blockchain Witcher and get the lastest updates!

     

    Latest stories

    You might also like...