The DAO: Where Democracy Is The Only Leader

DAO, short for decentralized autonomous organization, is often referred to as the next generation of organizational structure. As its name indicates, it is "decentralized" meaning that no central authority dictates the rules or monopolizes decision-making. It is also "autonomous" because of the smart contracts and encoded transactions on the blockchain. Usually, the DAO model in DeFi applications (more info on DeFi here). So, what is a DAO? How does it work? And why is it important?

What is a DAO?

Decentralized autonomous organization is an entity governed by a community, rather than a CEO and a board of directors. As mentioned above, no single party has the exclusive right to make decisions. To picture it more clearly, think of it as a group of people who came together online to achieve a common goal. In order to facilitate the cooperation and the management process, they set certain rules that they pledge to follow.

One successful example is MakerDAO on the Ethereum DeFi space. It is an organization based on a peer-peer lending platform the Maker Protocol. Through the platform, users can mint and manage the DAI, a USD-pegged stablecoin. Both, MakerDAO and Maker Protocol employ a governance token named Maker. Thus, these two tokens give users all the power and control. Today, the Maker is one of the oldest projects on the Ethereum blockchain. Nearly 800 projects are importing some of its elements into their services, or even they are using the DAI.

How to acquire tokens?

Members can simply buy their way into the organization; they purchase a token that allows them to sit at the big table. In other terms, this token gives them a voting right to influence crucial decisions such as upgrades and payments. By holding a token, members advance proposals, then proceed to vote on them. Once the majority approves on a proposal, it becomes a rule embedded in a smart contract.

Another way to acquire tokens is the usage of protocol. The members of the DAO allocate tokens as a reward to other members . But only if they considered that their contributions and performance are valuable to the community.

Furthermore, users who frequently interact with DAO platforms receive an airdrop. In short, airdrops are giveaways of free tokens that are open to members. Sometimes, members have to follow some instructions and achieve tasks to receive the awards. Such a marketing measure urge recipients to engage more with the platform. For instance, Uniswap, a leading crypto exchange, granted tokens to anyone who used their platform.

How does it work?

The rules of the DAO are written into codes via smart contracts. They automatically operate when specific actions take place : if "x" happens, then "y" follows. Since Ethereum is a public blockchain, codes are visible to verify and audit.

After implementing the rules onto the blockchain, the DAO needs to raise funding for its treasury. Hence, the issuance of new tokens. Holders of tokens enjoy voting rights that usually commensurate their contribution.

Next comes the deployment phase. When these smart contracts are live on the Ethereum blockchain, any alternations in codes requires the majority's permission.

Why is it important?

DAO has brought many advantages to the management structure. Here are some advantages that can improve the way that we do business:

- Enhancing transparency: potential members have access to smart contracts to verify them. In addition, all action taken within the organization are recorded.

- Eliminating human errors: Instead of sticking to the "human" bureaucratic and hierarchical structure, the DAO is turning to algorithms. These algorithms rarely fail, work quickly and more efficiently. 

- Collectivity prevailing over individuality: members are all traveling on the same boat so they would not want it to sink. Thus, it is in their best interest to vote for projects that they deem successful.

- Encouraging innovative ideas: By eliminating the hierarchy, democracy reigns through the voting system. Everyone has the opportunity to present their ideas. The group will either adopt the ideas, forsake or improve them.

Impressive right? Who wouldn’t want their voice to be heard? Decentralized autonomous organization is still in its earliest age and still has a long way to come. It has a variety of features that can improve the efficiency of a company's processes. Smart contracts are transparent, immutable, and trustless, making the DAO model ideal for many organizations. While many legal and security questions remain unanswered, people believe that this type of organization will eventually replace the traditional structure of businesses. To conclude, It is safe to say that the future looks promising for the DAO.