What Is A DAO, And How Does It Work?

DAO is short for Decentralized Autonomous Organizations. DAOs are a safe way to collaborate with like-minded people from anywhere in the world. How is that possible? How can you trust people you don’t even know?

You’ll find out in this blog post.

We’ll take you through all you need to know about DAOs, why we all need DAOs, and what sets them apart from traditional organizations.

What Is A DAO?

A DAO is a kind of organizational structure built with blockchain technology where people with a common purpose get to pool their resources together. Once a DAO is formed, members are jointly responsible for voting on its activities. DAO membership is project-specific and each has a set of rules to become a member. Note that you don’t necessarily become a DAO member just by being a token holder, you must understand how the DAO is governed.

Basically, with a DAO, there’s no central governing authority as they do not have any hierarchy.

Every DAO member has a voting power that is proportional to the number of tokens they hold, and no single person “owns” or “controls” the DAO, unlike how traditional CEOs operate.

DAOs rely on smart contracts instead of the common leadership structures of traditional organisations. These types of contracts are self-executing computer programs that perform certain functions when the customised conditions are met. They use them as tools to coordinate resources and efforts toward the common aim of the DAO.

One good example of a DAO is the Dohrnii DAO. Dohrnii DAO is a community of crypto enthusiasts who have the common goal of ensuring that everyone becomes crypto-empowered with the use of Dohrnii Academy as a tool to spread crypto and financial education, and the Dohrnii Marketplace to support investors and content creators alike.

The way decision-making works in a typical DAO model is through voting, and the extent of your voting right would be somehow correlated to the number of tokens you have. Again, each DAO has specific governance rules, which you should look into carefully to understand the dynamics.

Differences Between A DAO And A Traditional Organization

If you still don’t know what DAO is or how it works, let’s break it down further for you. The easiest way to do this is by comparing it with traditional organizations.

How Does a DAO work?

If you are familiar with how Bitcoin works, then it means you understand how a DAO works because Bitcoin is the first fully-functional DAO. Bitcoin operates on blockchain technology and doesn’t rely on a central authority as traditional banks do. Additionally, Bitcoin does not have a “team”, nor a “Management”, not even a CEO. As people continue to realise how effective Bitcoin is and its potential, they start to believe in the possibility of organisations without central management or leadership. Generally, for any DAO to work, it goes through the following stages:

Define Rules

This is the first stage, and it’s essential to get it right at this stage. For a DAO to be deployed successfully, it must have a defined set of rules. These rules are essential because they determine how the organization would work. It’s also crucial to get it right with these rules since they will be used in creating smart contracts for the DAO.

Smart Contract Creation

After the rules have been defined, the next phase is coding these rules into a series of smart contracts. Smart contracts autonomously exist on the internet, it’s important to factor a lot of things into creating them. Smart contracts determine the operational workflows, governance system, and incentive structures of the DAO. If all these are not adequately considered and coded into the smart contract, it will affect the smooth operation of the DAO in the long run.

Funding Phase

The funding phase is followed by the creation of smart contracts. The DAO cannot operate without funding, so a DAO’s creators also need to consider this. Funding can come in the form of creating and distributing internal property known as tokens. When you buy the governance token of a DAO, you are indirectly purchasing a voting right. It typically means the number of tokens you hold would determine your level of influence in the DAO. Another way DAOs are funded is through other organisations or foundations.

Deployment

The last phase towards the successful launch of a DAO is the deployment phase. It’s at this stage that the DAO becomes fully autonomous. As soon as the DAO gets sufficient funding to deploy, all decisions are made through a consensus vote. This means that all DAO members get to decide the future of the DAO, including how the funds would be spent.

Why do we need DAOs?

Agency Problem – Principal-Agent Problem

DAOs are structured in a way that removes the principal-agent problem which often arises in traditional organisations. The principal-agent problem comes up where there are misaligned goals between the agent, i.e. the individual with the responsibility to make decisions on behalf of the principal. In such cases, the agent starts to make decisions in its best interest, and not that of the principal.

Decentralisation

DAOs open many possibilities to give more responsibility to the people rather than a specific organisation or set of people like leaders. A leader can decide on behalf of the people, and sometimes the consequences become severe even though the people might be unaware. Since it is open-source and self-executing, DAO can help reduce such cases by giving users more decision-making responsibilities and informing them of changes rather than relying on one central authority.

Transparency

DAOs are open source which means all activities are recorded on the blockchain. Anyone can review these transactions, and this gives room for transparency. This matters a lot when you think about the fact that starting an organization requires a lot of funding, and you need to trust those you are pooling your resources together with.

How easy is it to trust people you’ve only met on the internet? Not that easy, I guess. It is why we need DAOs because you don’t need to trust anyone else who is a part of the organization.

All you really need to trust is the DAO’s code or smart contracts which do not execute based on external influences. Therefore, with DAOs, it is easier to work or start a business with like-minded people without thinking too hard about trust.

Wrap-Up

DAOs are member-owned communities with no centralized leadership and remain one of the best ways for people who don’t know each other to collaborate and pool funds together for a common cause. With the look of things, DAOs have the potential to replace several functions in traditional organizations, which will no doubt go a long way in the development of these organizations.