What is a DAO & How Does it Work?

March 14, 2022
Dappradar , Guides

Learn about decentralized autonomous organizations

The DAO is one of the latest innovations in the crypto space, short for “Decentralized Autonomous Organization.” Essentially, a DAO is a virtual community-led entity without any central leadership. All the decision-making and treasury management happen by consensus-based votes carried out on the blockchain.

Traditionally, organizations operate behind closed doors, with only a select few having access to finances or any say in decisions that affect everything and everyone in the organization. It’s finally time to let go of the old constraints, eliminate hierarchies, and introduce true democracy into the decision-making process. The best way to do this is through a DAO.

The rules and regulations of a DAO are written in the source code. Whereas traditionally written on paper, thousands of nodes execute these rules and regulations together through a consensus-based algorithm. They are always open to change, should the community decide to vote in favor of it.

The origins of DAO

The first DAO was launched in April 2016 on the Ethereum blockchain by a team of developers using the open-source code written by Christoph Jentzsch. This DAO relied on crowdfunding through token selling, making those who bought the tokens the organization’s investors. The idea was a big success, and over 11,000 token holders flocked to it after only a month, raising the equivalent of $150 million in ETH.

Sadly, this DAO experiment failed in June 2016, when hackers exploited its vulnerabilities and made off with $50 million of the DAO’s assets. The attack was reversed and assets restored thanks to the hard fork on the Ethereum blockchain, but this incident seriously undermined the community’s trust in the concept.

After relative silence on this front, DAOs began to experience a renewed interest thanks to the decentralized finance (DeFi) boom. Today, the concept of a decentralized autonomous organization is applied in many crypto projects, from NFT collections like Nouns DAO to DeFi-centric platforms like KeeperDAO.

Introducing democracy to organizational decision-making

Cryptocurrency wallet addresses on a blockchain represent DAO members. These addresses can belong to humans, robots, IoT devices, or other DAOs. To become a member of a DAO, you need to own a specific amount of the native tokens for that project, which are called governance tokens. These tokens can be purchased, received as a gift, or earned for involvement in DAO-related tasks. The more people want to join a specific DAO, the more the real-world value of its tokens increases.

Becoming a member typically gives you access to a paywalled Discord channel, where you can communicate with other members. Communication is critical in DAOs, and often the governance process begins on Discord. For example, if you’d like to have a say in the governance of the DappRadar platform, you can join DappRadar PRO, which gives you access to exclusive governance discussions on Discord.

Members get voting rights based on how many relevant tokens they own. In other words, the more tokens a blockchain address has, the more control its owner has over the DAO. It’s similar to shareholders in a traditional organization, as tokens represent shares of the DAO.

A DAO’s member can submit proposals and vote on decisions such as selecting or dismissing its leadership, hiring a service vendor, paying bonuses, and so on. For instance, in a gaming DAO, the community can vote on new features or updates to the game, the choice of graphic designers or voice actors, and more. A member can also delegate their voting power to someone they trust more, similar to voting by proxy in a traditional organization.

Voting is facilitated by a decentralized voting system (such as Snapshot). DAO members use tokens as votes in a group poll, and the more tokens you own, the more votes you get to cast.

Thanks to smart contracts automating much of the decision-making process and reducing human errors, DAOs do not need third parties. Useful in funding situations, such as automatically dispensing funds when a certain percentage of members agree to fund a project.

The changes are approved only when a certain threshold of members vote for the change, encouraging more significant input from all members and guaranteeing unfettered cooperation within the organization. This is achieved with members not knowing or necessarily even trusting each other. Moreover, there’s no need for trust.

Everything that occurs is fully transparent, and members connect to standard consensus rules in an environment where all transactions are recorded on an immutable ledger.

Bridging distances and differences

The concept of DAO is fascinating, with the potential to forever change how organizations and companies operate. It doesn’t matter where on the globe its members are, their number, education level, or their background – they can all tap into this new paradigm. That said, DAOs are still in their infancy, and a lot of work awaits success in the long term.

If you want to get the latest scoop on all things blockchain, follow DappRadar on Twitter. You can also join the exclusive DappRadar PRO community, participate in Discord discussions, and benefit from the most up-to-date DeFi stats.

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