What is a Decentralized Autonomous Organization (DAO)?

As blockchain technology is being adopted at a large scale, a unique type of firm or institution has gained fame within the community.

What Is A Decentralized Autonomous Organization (DAO)?

A DAO (or decentralized autonomous organization) refers to a firm that is administered in a decentralized way via smart contracts based on blockchain technology. The concept at the back of creating such an institute is to provide a huge community of participants with the potential to contribute to future development and the governance of the respective firm.

One of the prominent characteristics of digital currencies deals with their decentralized nature. This means no single institution, such as a central bank or government, controls them. Instead, they are divided among several nodes, networks, and computers. Most of the time, virtual currencies utilize this status to achieve greater security and privacy, which is not available in the case of standard currencies or their transfers. The concept of DAO was initially proposed in 2016, and Ethereum blockchain was used for the first DAO.

Comprehending the DAO (Decentralized Autonomous Organization)

As mentioned in the term, being decentralized and autonomous are the main qualities of a DAO. Such an organization operates as a venture capital firm, established on an open-source structure without any conventional board of directors or management code. A DAO is native to blockchains and are designed to be powered using audited smart contracts, eliminating the need for intermediaries. Typical of organizations, DAOs have their tokens and holders can vote on proposals to determine the development path of the project. A DAO does not have any affiliation with some nation-state to acquire a decentralized status.

The stakeholders’ community is responsible for making the decisions dealing with the utilization of the resources and funding. For the acceptance of the rules and strategies, there must be a consensus where most members vote. The very agreement is secured via a decentralized and distributed blockchain, where each DAO sets a certain percentage to get any decision approved.

Criticism over the DAO

A document was published in 2016 to reflect on the first DAO’s performance. It disclosed some security-related issues, warning the investors to stay away from voting any time further until the resolution of the respective vulnerabilities. After some time, in June of the same year, the DAO was hacked due to the problems mentioned above. The hackers took away up to 3.6M ETH (approximately $50M at that time). Following this hack and heated debate, Ethereum hard forked shortly after to recoup stolen funds.

DAO’s future

The DAO interest has increased substantially over the years, pointing toward promising future growth. In the previous year, The Maker Foundation – known as the major platform within the cryptocurrency industry – declared to formally shift its activities to MakerDAO (the DAI stablecoin’s manufacturer) and be dissolved by this year’s end. Though several apprehensions and issues are associated with the legality, structure, and security of DAOs, a few investors and analysts are of the view that these institutions would prevail in the industry in the coming time and even probably substitute the conventional businesses.

Types of Decentralized Autonomous Organizations (DAO)

Protocol DAOs

The most common type of decentralized autonomous organization is Protocol DAO. As the name itself suggests, a protocol DAO focuses on governance through decentralized protocols. Various DAOs avail smart contract protocols to provide DeFi services. MakerDAO, Uniswap, and Yearn Finances are the most famous examples of protocol DAOs.

Philanthropy DAOs

This type of decentralized autonomous organization is slightly less common as compared to protocol DAOs. These DAOs are focused on assisting social responsibility initiatives through the Web 3.0 landscape. The first ever Philanthropy DAO is the Big Green DAO which is a charity organization that works for raising awareness about growing food.

Collector DAOs

Collector DAOs have the purpose of collecting funds so that the community can own blue-chip NFTs. These are also referred to as NFT DAOs. Its members collected some precious non-fungible tokens (NFTs) from digital artists like XCopy, Hackatao, and Pak.

Investment DAOs

Investment DAOs, a common type of decentralized autonomous organization, are used to gather investment for organizations. Sometimes, Investment DAOs are referred to as Venture DAOs as well. These are most commonly used to gather funds for new blockchain and crypto projects.

Grants DAOs

Grants DAOs are similar to Investment DAOs as their purpose is also funding the new projects but these DAOs are restricted to DeFi projects only. The most popular grants DAO is the Uniswap Grants.

5 Examples of Successful DAOs

Uniswap

Uniswap is one of the most famous decentralized autonomous organizations that operate as a crypto exchange on the Ethereum blockchain. Becoming a member of Uniswap is easy as you only need to hold some UNI tokens.

Decentraland

It is an online virtual world that is administered by stakeholders. You can also join by holding its token known as the MANA token. It is gaining popularity rapidly as world-famous brands like Coca-Cola and Adidas have joined hands with Decentraland to reach out to its community in the digital world.