This article presents a conceptual and factual dive into the world of DAOs, their merits, and the types of DAOs
Picture an organization with no leader or management, autonomous, yet still manages to improve, make important decisions and even pay its members their due. “Impossible!” might be the first word that comes to mind.
DAO, fully known as Decentralized Autonomous Organization, can be described as an open-source blockchain protocol governed by a set of rules encoded in smart contracts. These rules are carefully written, placed, and repeatedly tested by the developers to ensure they work. These rules would technically make decisions on the DAO going forward with little or no human interference and are very difficult to change once committed.
The people who made these rules are compiled by mutual understanding even when they don’t own the DAO. The ownership of DAOs is given to the buyers of the project; hence DAOs usually have a native token or cryptocurrency. This community thus gets voting rights in terms of price action, decision making, etc., depending on how many tokens they have.
Using the rules set in the smart contracts, the DAO runs itself. It manages participants’ behavior and executes automated consensus. Some DAOs have rules that even make improvements, such as hiring developers to make changes as technology improves—all these with limited to no human interference. Cool right?
How Secure are DAOs?
While reading the above, one thought that might have crossed your mind would be, ‘what about our internet trouble-makers, HACKERS?
That might be a good time to add that this is one of the disadvantages of the DAO system. Because of its open-source nature, everyone can see the codes, principles, etc. In addition, hackers can reverse engineer the system if they are smart enough.
Unfortunately, this happened with the first DAO created in 2016, also known as “THE DAO.” Although, as explained through Coindesk’s article, millions of dollars worth of Ethereum was carted away from the Ethereum network, the hack caused the creation of the DAO. The hard fork Ethereum stopped it, which resulted in another variant known as Ethereum classic today, via which the funds were returned to the owners.
But it all worked out in the end, then? Maybe not for THE DAO, but at least the owners got their compensation.
Merits of the System
Regardless of the concerns, the system has tons of advantages. They include:
You don’t need to trust any CEO or group of management with your funds or decisions. Hence, there is little or no fear of mismanagement.
You always have access to the research, decision-making process set, the codes, and even payouts; hence there’s absolute transparency.
Cannot be shut down.
Unlike traditional institutions, DAOs are created to keep going regardless. So nothing can shut it down except some group of people with a huge amount of its token, otherwise called voting rights, decide it is best to do so.
Time will fail us if we keep talking about the merits but think about running an organization independently and delivering as expected. I’m sure you can come up with some advantages of your own.
Starting 2020, many yield farming and decentralized exchange (DEX) platforms like yearn.finance (YFI), Compound (COMP), and Uniswap (UNI) are dependent on them for governance; hence we could say it is fast securing its space in the crypto world
Types of DAO
There are tons of DAOs created for various purposes, and as such, classifying them can be very difficult. Still, they can broadly categorize them into 2: Technically- oriented DAOs and Social-oriented DAOs.
Technically-Oriented DAOs tend to focus on building the crypto space and managing governance in the process, e.g., Maker DAO. In contrast, social-oriented DAOs tend to bring groups of people together and help find ways for them to interact. E.g., Friends with Benefits(FWB).
This large spectrum is further divided into subgroups: Protocol DAOs, Social DAOs, Investment DAOs, Grant DAOs, Service DAOs, Media DAOs, Creator DAOs, and Collector DAOs.
Regardless of various concerns and possible problems as it affects legality, structure, and security, many believe that DAOs have the potential to replace traditionally structured business, as it has proven its worth through its completely transparent processes. As a result, investors and developers believe that DAO will eventually catapult itself to prominence is only a matter of time.