What are DAOs in the cryptocurrency market?
DAOs are an effective and safe way to work with like-minded people around the world.
Think of them as a native Internet company that is owned and managed collectively by its members. They have built-in treasures that no one has the authority to access without group approval. Decisions are governed by proposals and votes to ensure that everyone in the organization has a voice.
There is no CEO who can authorize spending based on his own whims and no chance for a dishonest CFO to manipulate the books. Everything is exposed and the spending rules are incorporated into the DAO through its code.
Why do we need DAOs?
Starting an organization with someone that involves funding and money requires a lot of trust in the people you are working with. But it is difficult to trust someone with whom you have only interacted on the internet. With DAOs, you don't have to trust anyone else in the group, just the DAO code, which is 100% transparent and verifiable by anyone.
This opens up many new opportunities for global collaboration and coordination.
A comparison
| DAO | A traditional organization |
|---|---|
| Usually flat and fully democratized. | Usually hierarchical. |
| Voting required by members for any changes to be implemented. | Depending on the structure, changes may be required from a single party or voting may be offered. |
| Votes computed and results implemented automatically, without reliable intermediaries. | If voting is allowed, votes are counted internally and the result of the vote must be handled manually. |
| The services offered are automatically treated in a decentralized manner (for example, distribution of philanthropic funds). | Requires human handling or centrally controlled automation, subject to manipulation. |
| All activities are transparent and totally public. | The activity is usually private and limited to the public. |
DAO Examples
To help make more sense, here are some examples of how you can use a DAO:
- A charity - you can accept memberships and donations from anyone in the world and the group can decide how to spend the donations.
- A freelance network - you can create a network of contractors who pool their funds for office space and software subscriptions.
- Ventures and concessions - you can create a venture fund that gathers investment capital and votes on ventures. The refunded money could later be redistributed among members of the DAO.
DAO Association
There are different models of association with DAO. The association can determine how voting and other important parts of the DAO work.
Token-based membership
Usually entirely permissionless depending on the token used. These governance tokens can usually be traded without permission on a decentralized exchange. Others must be earned by providing liquidity or some other 'proof of work'. Either way, simply holding the token grants access to voting.
Usually used to control the broad and decentralized protocols and / or tokens themselves.
A famous example
MakerDAO - MakerDAO's MKR token is widely available on decentralized exchanges. Thus, anyone can purchase voting power in the future of the Maker protocol.
Share-based membership
Share-based DAOs are more allowed, but are still quite open. Any potential member can submit a proposal to join the DAO, usually offering a tribute of some value in the form of tokens or work. The shares represent direct voting power and ownership. Members can leave at any time with their proportional share of treasury.
Usually used for more united and human-centered organizations, such as charities, workers' collectives and investment clubs. You can also control protocols and tokens.
A famous example
MolochDAO – MolochDAO is focused on funding Ethereum projects. They require a membership proposal so that the group can assess whether you have the necessary experience and capital to make informed judgments about potential beneficiaries. You cannot simply buy access to the DAO on the open market.
How do DAOs work?
The backbone of a DAO is its smart contract. The contract defines the organization's rules and maintains the group's treasury. Since the contract is active on Ethereum, no one can change the rules, except by vote. If someone tries to do something that is not covered by the rules and code logic, they will fail. And since the treasury is also defined by the smart contract, this means that no one can spend the money without the approval of the group. This means that DAOs do not need a central authority. Instead, the group makes decisions collectively and payments are automatically authorized when the votes pass.
This is possible because smart contracts are counterfeit-proof as they come into operation at Ethereum. You can't just edit the code (the rules of DAOs) without people realizing it, because everything is public.
Ethereum and DAOs
Ethereum is the perfect base for DAOs for a number of reasons:
- Ethereum's own consensus is distributed and established enough for organizations to trust the network.
- The smart contract code cannot be modified once live, even by its owners. This allows the DAO to be executed according to the rules with which it was programmed.
- Smart contracts can send / receive funds. Without this, you would need a reliable intermediary to manage the group's funds.
- The Ethereum community has proven to be more collaborative than competitive, allowing best practices and support systems to emerge quickly.
