What Is DAO And How Does Work?

One of the major reasons why people are so invested in cryptocurrencies is because of their decentralized features. This means that no governing body is directly regulating the crypto coins. Instead, the control is distributed among nodes, computers, and networks. Furthermore, they provided better security and privacy compared to the traditional currencies and their methods of distribution. Because of this decentralized concept, developers created a project called “DAO”.

However, DAO is different from the DAO Project that was created in 2016. But despite that, they have similar functions and purposes. But first of all, let us define “what is DAO?”

What is DAO? 

The first definition of “what is DAO” is in the meaning of its abbreviation which is Decentralized Autonomous Organization. From the name itself, we can easily decipher that DAO is an independent organization that is regulated by multiple governing bodies. But most precisely, DAO is defined as an organization controlled by its members with a present central figure that has rules encoded in a computer program.

How does DAO work?

After covering “what is DAO”, let’s find out how it works. The members of DAO are usually investors who have crypto tokens which allows them to have voting rights in the organization. Since a central or third-party figure is absent in this organization, rules and decisions are made solely by the members. 

The rules and regulations that they have in DAO are usually encoded in a blockchain. This prevents data stored to be manipulated by anyone including individual members. For changes to be made to the data, they need to go through the voting process.

How is DAO created?

Knowing how DAO is created is as important as knowing the answer to “what is DAO?” and how it works. To put it simply, there are three steps in creating a Decentralized Autonomous Organization. These steps are smart contract integration, token funding, and DAO launching.

The rules and regulations of DAO are created through smart contracts. Thus, a group of developers is needed to create smart contracts. Smart contracts are made through codes that contain the terms and conditions. These contracts are self-executing once they are integrated into a blockchain. Thus, a DAO’s smart contract will also be fused into a blockchain or a similar medium. 

The next step is to source funds for the organization. Since DAO is an internet-native organization, it is most efficient to use cryptocurrencies. Usually, crypto tokens are sold to members to have voting rights within the DAO. Typically, the more tokens the DAO members have, the more authority they have. However, that depends on the terms they have inscribed in the smart contract.

Once the smart contract and the funds are set, the last step is to launch the DAO. This is done by integrating the smart contract and the funds onto the blockchain. The moment DAO is fused in the blockchain, it will be difficult to alter. All the members can do is control the DAO through voting. 

DAO versus “The DAO” Project

DAO and “The DAO” project are not only similar in name but also in their purpose and function. However, “The DAO” is a failed project launched back in April 2016. It has gathered over US$ 15 million as its funds which are fueled by ether. However, there were security vulnerabilities discovered and it was not addressed sooner. Thus, by June 2016, The DAO project was attacked by hackers who obtained around US$50,000,000. This resulted in the shutdown of The DAO project.

However, the DAO that is present today is not just one organization. The most successful DAO so far arguably is Bitcoin. Furthermore, the interest in DAO re-emerged after Decentralized Finance or Defi became popular in 2020. As a result, many developers who learned from the mistakes of The DAO Project are developing more DAOs that are impenetrable by hacking or other security threats.

Why is DAO important?

Apart from learning “what is DAO?”, it is essential to understand why it is important. There are two significant things that DAO can provide better than the traditional centralized organization. Those are less human trust and a non-existent organizational hierarchy. 

The idea of creating DAO is to lessen human error. Because of this, instead of trusting humans, DAO members will have to trust the codes of their smart contracts. Since the smart contracts operate autonomously and blockchains cannot be altered, DAO members are sure that their organization information and funds will not be stolen. Moreover, the codes are not only available publically but can also be tested before deploying them on the blockchain.

Since every DAO member is equal in standing among each other, it is easy to pitch in ideas and solve internal conflicts. If a DAO member pitches in a new idea, it will be evaluated by everyone in the DAO. They can collaborate to improve the idea and then vote on it for it to be included in the blockchain. Voting is also the process undertaken when there are problems that arise in the DAO.

Where can DAO be used?

Since DAO is an organization, its technology can be used in various human groups with different missions and purposes. It can be used for investing, charity works, fundraiser activities, NFT transactions, and so much more. In the case of investing, a DAO can have many investors in its group. Then, they can decide which venture or business they want to put their money in through voting. 

Conclusion

Although DAO is currently used as an alternative to certain organizations, experts are looking for ways to integrate it into other fields.  Sooner or later, companies, residential communities, and even a country’s government may be managed by DAOs. Since this will shape the future, it is best that people not only know “what is DAO” and how it works. But also, it is vital to know how it is created, its importance, and where it can be applied.

* We hope this information will help you in your investment process, but this is not investment advice. Every investment carries risk, especially in this industry, so DYOR before making a decision.