Decentralized autonomous organizations or DAOs are digital organizations that do not have a managing individual, instead, all the members of the corporation own and manage the operations. DAOs work on smart contracts with the help of the blockchain which makes them automated, transparent, tamper-proof, and provide equal validation to all the members.
What are DAOs?
Within the blockchain ecosystem, there are many components that have separate utilities. Recently one of the components has been getting a lot of eyeballs because of some of its unique and attractive features. Yes, we are talking about DAOs.
What are DAOs you may ask?
To answer that, ‘Decentralized Autonomous Organization’ or ‘DAO’ is a decentralized form of a company that is owned by the members of the network. Now just because the name is a mouthful, it does not mean DAOs are complicated. To understand this in simple terms, imagine a digital company owned and run by all its members. No single individual or group has the advantage to carry out decisions or complete authority over the company. All the decisions of the company have to be approved by the group members, only after which they may be implemented. Every member has their own voting right in the decisions and other operational activity in the company which makes it decentralized and democratized.
Because all the rules and regulations are coded within the blockchain network, one cannot manipulate or hack them to their own advantage. This additionally allows the functions of the business to act autonomously with the help of Smart Contracts on the blockchain.
Advantages of using DAOs
1. Removes Hierarchy
In a typical organization, various levels of hierarchies create friction in the process of communication and also distort the overall agenda of the topic. Whereas in a DAO, there is a flat level of hierarchy where every member has the same value and power to take a minute or major decision
2. Require approval of every member for any changes
As DAOs work in a decentralized manner, every member has a say in every decision. Members of a DAO have a voting right in every decision which makes it not dependent on a select few individuals (like directors, managers, investors, etc) to rule the whole organization.
3. Provide automated services
A traditional organization requires manual intervention in various operations which makes it lengthy and prone to manipulation in multiple places. Whereas in a DAO most of the actions (financial/non-financial) are automated with the help of smart contracts, which are immutable and tamper-proof by nature.
4. Transparency to users and public
Built on the blockchain network, which is a public ledger, all the decisions and activities of DAOs are completely accessible by the common public. Nothing can be hidden in such an organization, unlike traditional organizations where the majority of the decisions and activities are private and kept secret from the public.
How do DAOs work?
The main operational principle on which DAOs operate is ‘Smart Contracts’. By using smart contracts, these organizations can automate multiple functions of the overall organization. Another advantage of using a smart contract is, once it is put to work, it is impossible for anyone to hack it or change it. The only way to change any given instruction is by a combined voting mechanism.
This ensures that the operations of the organization are not compromised, and also that the total and available funds in the treasury cannot be spent without approval and vote from the entire group.
To provide an example, Bitcoin is considered to be one of the oldest functioning DAO, that works on the consensus protocol. All the rules and protocols are completely automated and work on a consensus basis. It also maintains an incentive system that rewards miners who help to run the network with fractions of the proprietary token.
Such an organization helps you not rely on human management when it comes to money management and other transactions. DAOs eliminate the necessity of a trustworthy individual by providing tamper-proof networks, completely transparent, and fully automated processes that take care of all the high-value monetary transactions.