The major principle for the popularity of bitcoin and other crypto currencies is their decentralized way of functionality. The Dao (Decentralized Autonomous Organization) is an extension of this principle, it was created to promote decentralization and to give decision making power to a group of members instead of a centralized network.
Almost all major DeFi exchanges and many open-source organizations now use Dao to give voting power to their supporters. This creates an environment where the members gets more involved in the operation of the organization and as a result there is no centralized control. But how Dao works overall?
A simple question: how Dao works? Decentralized Autonomous Organizations follows a democratic process, here the members are given voting power according to their holding of the specific token released by the organization.
Anyone who is a member in the community and who holds a share in token holdings can initiate proposal for the benefit for the organization. The proposal can be anything that the member thinks that would be good to the progress of the organization.
To understand more about how Dao works, we have to first understand the method in which the proposal gets passed in an organization.
The proposal can even be a proposal to remove the CEO or other important people from the organization. After publishing the proposal in the Dao community, it gets voted upon by the community members. The voting process and proposal acceptance works according to the rules laid in the smart contract. Almost all Dao communities have their rules written upon a smart contract, in most cases these rules are set by the founding members of the organization.
For the proposal to pass in the community, it needs a consensus among the members of the organization. If there is no consensus the proposal gets discarded, this makes sure that the organization moves in a direction according to its members interests.
And one more important part of how dao works: anyone, at any point of time can share or sell their tokens to their preferred members and can pass on the voting power.
When we start to know about the functioning of how Dao works, we can appreciate the complete benefits offered by Dao to an organization. From automating the process to increasing the efficiency of the processes involved in an organization, Dao comes with a lot of benefits.
How Dao works: by distributing the governance power of an organization through voting power to the members of the organization. This gives the benefit of understanding the interests of the members and helps in striding the organization towards those interests. Let us see in detail on the benefits offered by using to both individuals and as well as to the organization.
So what are the benefits of Dao? The structure of Dao is very simple and straightforward. Not only companies and organizations, but even a group of people can also implement this structure in between them to follow a decentralized process in decision making.
If you take the example of Constitution Dao, we can see how a group of people with a common goal of purchasing the constitution formed together and started their own Dao. Although the project was not able to attain its goal, we can easily understand how dao works through this project. With the help of Dao the group raised capital, formed their own rules and worked in a structured way to attain their goal. The community also released its own tokens called $people tokens, which made the fund collection easier. We can also expect many more projects like this with the help of Dao in the near future.
The major problem with centralized control is there is a hierarchical structure and there is no room for automation. With Dao, all rules are written in a form of code and the decision-making process is completely automated. This makes the whole process faster and dependable. If you look closely on how Dao works, the most important part of the whole process is the automation of the functionalities. If you see the example of Singularity Dao, we can understand how with the integration of AI functionalities with the Dao ecosystem can automate the processes and functioning of the organization.
Here the Dao focusses on investing on crypto portfolios and the crypto tokens to invest are chosen on the basis of the AI algorithm. Through this Dao project, investors can find out crypto projects that are worth investing in, this also helps the whole Defi eco system to grow.
Not only for decision-making process, Dao can also be used to get funding from the community members – another advantage of how Dao works. If any of the members have any idea that he/she thinks would be beneficial for the community as a whole, can submit a proposal for the community members. If the proposal passes the vote, the member gets funding automatically to the specified address and the idea can be made a reality.
We can also see that getting good investment is also a part of how Dao works, the possibilities with Dao are endless. Let us take an example of Dao.vc, the project focusses on creating an ecosystem where venture funds and high net worth individuals can find good projects to invest on. This platform gives an opportunity to entrepreneurs, start-ups and crypto enthusiasts to propose their idea to the community members. It also gives an opportunity for freelancers to find work by reaching out to the offers posted by the community members.
Another important thing to know about how Dao works: Dao uses blockchain to store its data and execute the functions. This makes the whole process transparent and almost all codes related to Dao are open source. Anyone can audit these codes and data at any point of time. This helps many kinds of organizations like charitable organizations to showcase their transparent funding process.
If we want to answer the question of how Dao works, then there is no way we can bypass the feature of transparency. All the data involving the Dao is stored in the blockchain supported by that Dao. This means that anyone, at any point of time can audit these data and there is also no third-party involved, so we can safely say the whole process is transparent.
The best example for the transparent process is Daostack through which any one can start their own Dao within few minutes and the code is also completely opensource. This helps in Dao to reach a wider audience and this als increases the credibility of Dao projects.
Anyone from any part of the world can form a part of the Dao process by buying the token. There is also no KYC requirement, so members can also safeguard their privacy and can participate in the process anonymously. The focus point of the process of how Dao works is its ease of use, anyone can start using the within a short span of time. There is no need for them to prove their identity and there is no centralized structure to give permissions to the members.
There is also no need for the community member to be afraid of any centralized authority. With the help of Dao the whole supporting community gets involved in the decision making process. The best example for this is Uniswap, the exchange follows Dao to govern its exchange and we can see that anyone can start using the exchange without any KYC process.
Another key feature of how Dao works: compared to the traditional governance structure, Dao’s are also highly efficient and can be initiated within a short span of time. Since everything is dependent on code, it is hard to change the status quo without the consensus of the community.
Understanding how Dao works cannot be fulfilled without knowing how efficient the whole process is. The decision making process is smooth and the proposals that are submitted gets accepted or rejected within a short span of time. Since there is minimal manual work involved, there is no room for error. The data collected is highly credible and there is no way to alter this data.
The best example for this is Beetsdao, The Dao focusses on collecting the best NFTs in the market, using Dao makes the whole acquisition process easier. Focused work helps in improving the efficiency of the whole organization.
Dao’s can help in building up communities with common purpose, for example there are many Dao’s focused on specific projects like whale dao and bitdao. These kinds of projects invest in specific projects according to their purpose. This purpose can be anything like investing in crypto projects or accumulating NFTs etc.
It is not everything green with Dao, when we understand how Dao works we can see that there also some shortcomings and pitfalls for people who use Dao. Everything has some kind of negative aspect to it, like that Dao also has some disadvantages. If you are planning to start your own Dao, then it is important to know how Dao works and also about the hurdles that you need to cross while using Dao.
The greatest benefits and hurdles are based on the same nature of how Dao works: for Dao is its ease of membership, this comes with a risk of collusion among the members to pass specific proposals. If there are investors with the largest share of tokens and if they collude together and form a majority. They can control the decision-making process. So, member of the community should make sure that the tokens are evenly split among the members and there is no collusion among the members. We can find more about the limitation of Dao through Wulf Kaal’s article.
Any project related to crypto faces this hurdle, there is no solid regulation to control the Dao process. Anyone can start a Dao community at any point in time without any proper regulation. The decentralized nature of how Dao works makes it hard to make anyone accountable and considering long term, a proper regulation is required for safe transactions within the Decentralized Autonomous Organization network. For further info about the lack of regulation of Dao in Waceo’s article.
Dao term actually originated from the first Dao project called “The Dao”, the project got hacked and led to the split of the Ethereum network. You can find more about the attack here: The Dao Attack analysis. Since the Dao functions on the basis of code and also the code is open source. There is a high risk of the code getting hacked and this can tumble the whole organization.
Since the code for many Dao organizations is open source, anyone can read the code and can find vulnerabilities within the code. When vulnerabilities were found in a Dao code, then there is a high chance of the Dao getting hacked. So, the organizations following the Dao process should periodically audit their code with the help of credible agencies.
We can see from the above article that the whole motive of how Dao works is to make the governance process easier and decentralized. The process also gives the power back to the community and prevents any centralization. The system itself is also pretty simple and there are now thousands of organizations using the Dao process to manage their governance structure.
In near future we can expect a greater number of companies and organizations that would start using Dao to govern their platforms – we can also expect exciting project launches that would come to life through the help of Dao communities.
More Resources about DAO:
Should we regulate Dao? By Techcrunch
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