Table of contents
DAO is one of the most popular concepts in blockchain technology. But what are DAOs, and why are they important?
DAO stands for Decentralized Autonomous Organization. Blockchain makes it easy to create a “smart contract” that includes provisions for funding, voting rights, dividend distributions, and more. That means that organizations can be completely autonomous without corporate or organizational hierarchies getting in the way.
Whether you’re an organizer of a small event or big company CEO, DAOs give you access to low-cost funds without having to be beholden to regulatory restrictions or rely on investors who might want something in return.
By definition, a DAO is an organization run by rules encoded in computer software and not by humans. The “smart contracts” that contain these rules can be preprogrammed to release funds when certain milestones are met, such as when the majority of shareholders agree on a business decision. They can also hold funds when certain conditions apply, such as when a purchase is made in an escrow account. One of the most promising features of DAOs is that they let you access low-cost capital without seeking out investors who may want to exert control over your business.
One of the basics of any DAO is a token, it’s value is tied to the success and profitability of the project or business. Tokens can be sold via an ICO (initial coin offering) to generate funds, and the profits from these tokens are also shared among investors. Financial institutions can also be DAOs, such as banks that pay dividends to their shareholders through transaction fees.
How Does a DAO Work?
A DAO is entirely autonomous, meaning it doesn’t rely on an established hierarchy or any type of management team or governance structure. It can thus exist entirely within the blockchain, but it also has the ability to control assets outside of the blockchain. In addition, a DAO can operate in something like perpetuity as long as assets are supporting it; if the assets run out, the organization comes to an end.
For example, a DAO might be used to choose where to invest capital or where to open new branches. It can also be used for smaller decisions, i.e the location of an office, the kinds of employees who will work there, or whether to offer a product. Another example is an organization that maintains a certain amount of funds and follows specific rules related to its use and distribution at regular intervals. Such an organization can, for example, pay dividends based on the success of its project and set up escrow accounts for each member of the organization at regular times.
DAOs can help you to maintain control over your assets without having to ask investors for permission. For example, you might create a DAO to hold the voting rights on whether you should accept an investment. If investors want to take control of your company by expanding it, they need your approval first.
Can Blockchain Solve the Problem of Human Control?
DAOs, or decentralized autonomous organizations, are expected to be one of blockchain’s most powerful developments because they give us the ability to transact without any human-based governance controls. As a result, transaction costs are drastically cut because humans don’t need to act as intermediaries or verify that one party is paying the other party just as promised.
DAOs can help their members exchange property rights, voting rights and provide incentives to do the right thing.
But are DAOs really desirable? After all, doesn’t having a human CEO give leaders the power to hire the best people for the job? Moreover, computer programs, even sophisticated ones, can’t make decisions based on intuition. It may be possible to develop codified rules for governing certain organizations or helping make better business decisions, but many decisions will always need humans to oversee them.
How to Launch a DAO
The first step to building a DAO is to come up with the rules of the game. This includes decisions related to how the money will be collected, distributed, and spent. For example, decisions include who gets how much money, which functions members will perform, and at what rate. The use of smart contracts can help dictate these rules so that they’re enforced automatically by the blockchain itself.
To build an effective DAO, you need to determine why it will exist and what it will be designed to do. Decisions made by the DAO may require the participation of human members or even human governance. For example, an organization can be funded for a certain purpose, but it may also need to pass bylaws to help it run effectively.
A DAO template can give you an idea of how this might work. A limited company is one common type of business entity that’s governed according to limited company rules. However, there are some major differences between corporations and companies registered under this model.
For example, a DAO will have a few dozen members or more. Each member will be able to vote on important decisions, such as whether to accept future funding from investors or how to schedule it. Members can also vote on key business decisions, such as whether to expand operations into other countries. The voting rights could be granted according to each member’s amount of money into the DAO or based on their contributions to the project.
DAOs Versus Corporations
According to its proponents, a DAO offers advantages over other organizational models. The main benefit of a DAO is that it’s entirely distributed, which means there are no leaders or employees behind it. Instead, everyone involved must follow the rules that have been set up by the blockchain itself. There are no central points of failure that can be exploited by outside forces looking to take control of your business.
But for an organization to operate successfully, there must always be people in charge. The human members in charge make strategic decisions about how the money will be allocated and enforced policies. There are also people in the chain who need to make sure all the components are working together correctly before you can trust that your organization will continue operating smoothly.
A DAO can work for a small group of trusted people who need to be able to interact with other members and agree on practical details related to running the business. Of course, it’s not ideal for everyone and would only work well in a smaller group where the members can trust each other. But these sorts of situations are precisely why you want to use blockchain technology behind your organization.
How DAOs Will Change Legal Enforcement
One of the most anticipated areas of DAOs is how it could change the way we conduct litigation. The main limitation in our current judicial system is that it’s often very costly and slow—weighing in at more than 10,000 years per process per person.
Digital contract-enforcement mechanisms are already being used to enforce court decisions. These mechanisms are expected to reduce the cost of enforcement for repeat offenders significantly. They may also make it possible for businesses to rely on automated systems rather than contract lawyers who charge high fees to write contracts that are full of legal errors.
Better legal enforcement could also help reduce discrimination against minorities, particularly if it becomes easier for them to enforce their rights in court. Blockchain technology could be used to track the pattern of discrimination and then identify the responsible company or organization so it can be taken offline by a DAO.
Examples of DAOs
MakerDAO uses smart contracts to supervise the stablecoin Dai, which is essential for making loans and other financial services easier to access.
Augur is another DAO whose purpose is to create a decentralized oracle that helps users to invest in or validate the outcomes of events by giving them the ability to bet on these events. Sounds complicated? The entire idea behind Augur is to allow users who’re invested in it to have early access and get rewards if their predictions are accurate.
Automated market makers (AMMs) are a type of DAO that automatically create orders to trade securities without human intervention. AMMs are used to make markets in over-the-counter derivatives, options, and other instruments.
Aragon is a DAO that supports a self-governing community that allows for a more streamlined and secure governance process. The Aragon Network is a successful platform for running decentralized organizations, which include an app store, marketplace, and other functionalities.
Etherisc is another DAO that houses the Ethereum Improvement Proposal (EIP) for insurance. It’s an insurance protocol built on top of blockchain technology designed to help users gain access to better insurance services at lower rates.
As you can see, there are still many unknowns related to how blockchain technology will affect the legal industry—both positively and negatively. However, these platforms offer a way forward for organizations that want to leverage the power of smart contracts.
Blockchain technology is moving at a rapid pace and is going to have a huge impact on the legal industry in the coming years. Your smart contract will be able to save you time and money as well as save you from possible lawsuits down the road.
Read this to learn about how to get started with crypto investment.