In this article, you will learn what is a DAO in crypto and how DAOs work. DAOs differ from traditional organizations managed by boards, committees and executives. Rather than being governed by a limited group, DAOs use a set of rules written down in code and enforced by the network of computers running a shared software.
What is a DAO in Crypto?
A DAO, or “Decentralized Autonomous Organization,” is a community-led entity with no central authority. It is fully autonomous and transparent: smart contracts lay the foundational rules, execute the agreed upon decisions, and at any point, proposals, voting, And even the very code itself can be publicly audited.
Ultimately, a DAO is governed entirely by its individual members who collectively make critical decisions about the future of the project, such as technical upgrades and treasury allocations.
Generally speaking, community members create proposals about the future operations of the protocol and then come together to vote on each proposal. Proposals that achieve some predefined level of consensus are then accepted and enforced by the rules instantiated within the smart contract.
Familiar hierarchical structures seen within large corporations give way to community collaboration under this framework. Each individual member of the DAO oversees the protocol at some level.
Part of the elegance of this framework is the alignment of incentives. That is, it is in the individual's best interest to be forthright in their voting and only to approve proposals that serve the best interest of the protocol itself.
A healthy, robust protocol will garner more usage, and in turn, increase the value of the tokens of which each DAO member is in possession of. So as the protocol succeeds, so do the token holders.
How DAOs Work
DAOs rely heavily on smart contracts. These logically coded agreements dictate decision-making based on underlying activity on a blockchain. For example, based on the outcome of a decision, certain code may be implemented to increase the circulating supply, burn of a select amount of reserve tokens, or issue select rewards to existing tokenholders.
The voting process for DAOs is posted on a blockchain. Users must often select between mutually-exclusive options. Voting power is often distributed across users based on the number of tokens they hold. For example, one user that owns 100 tokens of the DAO will have twice the weight of voting power over a user that owns 50 tokens.
The theory behind this practice is users who are more monetarily invested in the DAO are incentivized to act in good faith. Imagine a user who owns 25% overall voting power. This user can participate in bad acts; however, by doing so, the user will jeopardize the value of their 25% holding.
DAOs often have treasuries that house tokens that can be issued in exchange for fiat. Members of the DAO can vote on how to use those funds; for example, some DAOs with the intention of acquiring rare NFTs can vote on whether to relinquish treasury funds in exchange for assets.
Bottom Line
If you're interested in learning more about DAOs, you can check out some of them for yourself. Here are some of the most popular DAOs: MakerDAO, DAOhaus, MolochDAO, RaidGuild. The role of DAOs is important in the blockchain and crypto field , so you should learn about DAOs and here is about what is a DAO in crypto and how DAOs work.
