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All about DAOs in blockchain

DAOs are an efficient and secure way to collaborate with like-minded people all over the world.

Consider them to be an internet-native business that its members collectively own and manage. They have built-in treasuries that no one can access without the group’s permission. Proposals and voting govern decisions to ensure that everyone in the organization has a voice.

No CEO can authorize spending based on their own whims, and there is no chance of a shady CFO tampering with the books. Everything is out in the open, and the DAO’s spending rules are baked into its code.

Why do we require DAOs?

Starting a business with someone that involves funding and money necessitates a high level of trust in the people you’re working with. But it’s difficult to trust someone you’ve only ever interacted with online. With DAOs, you only need to trust the DAO’s code, which is completely transparent and verifiable by anyone.

This opens up a plethora of new possibilities for global collaboration and coordination.

Comparison between DAO and traditional organization

DAO A traditional organization
Normally flat and fully democratic. Usually hierarchical.
Members must vote for any changes to be implemented. Changes can be demanded from a single party, or voting can be offered, depending on the structure.
Without a trusted intermediary, votes are counted and the outcome is implemented automatically. If voting is permitted, votes are tallied internally, and voting results must be handled manually.
The offered services are handled automatically and decentralizedly (for instance distribution of philanthropic funds). Requires human intervention or centrally controlled automation, and is susceptible to manipulation.
All activity is transparent and open to the public. Typically, activity is private and restricted to the public.

 

Examples of DAOs

Here are a few examples of how you could use a DAO to help this make more sense:

  1. A charity

You can accept membership and donations from people all over the world, and the group can decide how to spend the money.

  1. A freelancer network

You could form a group of contractors who pool their resources to pay for office space and software subscriptions.

  1. Ventures and grants

You could establish a venture fund that pools investment capital and votes on which ventures to support. Repaid funds could then be distributed among DAO members.

DAO membership

There are various DAO membership models. Membership can influence how voting works and other important aspects of the DAO.

  1. Token-based membership

Depending on the token, usually completely permissionless. Generally, these governance tokens can be freely traded on a decentralized exchange. Others must be earned by providing liquidity or some other form of ‘proof-of-work.’ In either case, simply holding the token allows you to vote.

Typically used to govern broadly decentralized protocols as well as tokens.

A well-known example

MakerDAO

MKR, the MakerDAO token, is widely available on decentralized exchanges. As a result, anyone can invest in having a say in the Maker protocol’s future.

  1. Share-based membership

Share-based DAOs are more restricted but still fairly open. Any prospective member can submit a proposal to join the DAO, usually offering a token or work in exchange for membership. Shares represent ownership and direct voting power. Members can withdraw their proportionate share of the treasury at any time.

Typically used for more intimate, human-centered organizations such as charities, worker cooperatives, and investment clubs. Protocols and tokens can also be governed.

A well-known example

MolochDAO

MolochDAO is primarily concerned with funding Ethereum projects. They require a membership proposal so that the group can determine whether you have the necessary expertise and capital to make informed decisions about potential grantees. Access to the DAO cannot be purchased on the open market.

  1. Reputation-based membership

Reputation is proof of participation in the DAO and grants voting power. Unlike token or share-based membership, reputation-based DAOs do not give contributors ownership. DAO members must earn reputation through participation; it cannot be bought, transferred, or delegated. On-chain voting is permissionless, and prospective members are free to submit proposals to join the DAO and request reputation and tokens as a reward for their contributions.

Typically used for the decentralized development and governance of protocols and dapps, but also well suited to a wide range of organizations such as charities, worker collectives, investment clubs, and so on.

A well-known example

DXdao

Since 2019, DXdao has been a global sovereign collective building and governing decentralized protocols and applications. It uses reputation-based governance and holographic consensus to coordinate and manage funds, ensuring that no one can influence its future.

How do DAOs function?

A DAO’s smart contract serves as its foundation. The contract establishes the organization’s rules and serves as the group’s treasury. Once the contract is live on Ethereum, only a vote can change the rules. If anyone tries to do something that is not covered by the code’s rules and logic, it will fail.

Because the treasury is also defined by the smart contract, no one can spend the money without the group’s approval. DAOs, as a result, do not require a central authority. Instead, the group makes decisions as a whole, and payments are automatically authorized when votes are passed.

This is possible because smart contracts on Ethereum are tamper-proof once they go live. Because everything is public, you can’t just change the code (the DAO’s rules) without anyone noticing.

Ethereum and DAOs

Ethereum is the ideal foundation for DAOs for several reasons:

  1. Ethereum’s consensus is widely distributed and well-established enough for organizations to put their trust in the network.
  2. Even the owners of smart contracts cannot change the code once it is live. This enables the DAO to follow the rules that were programmed into it.
  3. Smart contracts can send and receive money. You’d need a trusted intermediary to manage group funds if you didn’t have this.
  4. The Ethereum community has proven to be more collaborative than competitive, allowing for the rapid emergence of best practices and support systems.

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